The Breakdown - Libra vs. China's DCEP? The Battle for the Future of Money Heats Up

Episode Date: April 16, 2020

This week saw the latest salvos in the battle for the future of money.  Libra announced that it would be moving away from a single currency that was backed by a basket of national currency to a model of numerous individual fiat-pegged currencies. While the original model was akin to a disruptive implementation of John Maynard Keynes original concept for a global basket currency (which he called a “bancor”), this model seems more to position Libra to help existing central banks digitize their currencies.  China meanwhile steamed forward with its digital currency and blockchain plans. Screenshots of an app from the Agricultural Bank of China show how the DCEP digital currency is currently being tested, giving us insight into functionality, geographies and players involved.  China also announced the 71 members of its National Blockchain Council, as well as went live with their Blockchain Service Network. The BSN in particular has potential significance on a world scale as China tries to build and control a key piece of global digital infrastructure.

Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Thursday, April 16th, and today we are talking about the battle for the future of money. It is heating up. What money looks like in the future is almost certainly going to be different than what it looks like today,

and boy, are we living through some accelerated times when it comes to that. So originally, this episode was going to be almost entirely about China. We've had a number of different announcements over the last three days, including the announcement of a national blockchain committee, the announcement of the Blockchain Service Network, BSN, which is set to go live around the world soon next week. And we saw the first screenshots of an app for interfacing with China's digital currency, the DCEP, which I'll call DeSep for.

from now on just for ease. But then this happened. This morning we got news that Libra was making a bunch of big changes. So that's actually where we're going to start. We're going to look at what those changes are and what they mean for Libra's place in this battle for the future of money. So last year, one of the more interesting commentaries I heard around Libra came from Raul Paul, who Bitcoiners are now well acquainted with, the founder of Real Vision,

and an interesting thinker about markets more broadly. What he thought was interesting about Libra was this basket of currency's approach to a global reserve currency where you took the power away from any one single currency like the US dollar and you had it pegged to a variety of assets instead. That to him was the real interesting disruption because it fundamentally shifted the power balance. For those of you finance and monetary historians out there,

you will remember that when the Bretton Woods order was being designed post-World War II, Keynes was not in favor of having a single currency, i.e. the U.S. dollar, be the world's reserve currency. He proposed something that would be a supranational world currency administered by a central bank that represented the whole world that would be called the bankor. Yes, that's where the name bankor of that protocol, of that platform of that token came from, interesting. Anyways, he was convinced that that was the right approach to a global reserve currency. The U.S., however, had just one World War II and was going to throw its weight around being the security apparatus for the entire world, and in that context, the U.S. dollar was always going to be

the world's reserve currency in that new global order, in that new system. Libra, in some ways, proposed to make itself the bank or, but 70 years later. This was one of the most, the most contentious parts of the Libra proposal for the U.S. in particular. For other governments as well, you saw comments from a French finance minister, Bruno Le Maire, very quickly saying that this undermined French monetary sovereignty and they wouldn't allow it. And when you had David Marcus and later Mark Zuckerberg testify on Capitol Hill, this was one of the key sticking points that it potentially undermined the dollar's place in the world in an explicit way. And their answers at first were kind of, well, you know, the dollar still makes up 50% of the basket,

so it's still the biggest, but that's different than having it just be the dollar. This wouldn't have been such an issue if they had just pegged it to the U.S. dollar. By the time Zuckerberg got to Capitol Hill in the fall, if you'll remember, David Marcus went when the Libra was proposed in the summer, there were some indications that they were willing to maybe shift on this particular point, to concede on this particular point. The news we got today is that concede they have done. There now will be, instead of this Libra, this single token that is a basket or backed by a basket of currencies, there are going to be a number of different fiat-denominated stable coins. So there'll be a Libra Euro coin, there'll be a Libra USD and et cetera, et cetera.

The only conception of a Libra that sits across those or is something that is different, than those is actually just going to be basically a digital construct. It would be a smart contract that's weighted but backed by those actual Fiat peg stable coins. So that was the biggest shift. They've backed off what some people thought was the most interesting part of the entire proposal. The other part, which is similarly predictable, I think, is that they will no longer be even considering permissionless participation. It will be only accessible to, regulated crypto firms, KYC, et cetera, et cetera, right? So it's basically going to be even more compliant with FATF-type rules and KYC-AML rules around the world. So two of the big shifts. Now, David

Marcus announced a number of other kind of smaller shifts in terms of how things are operating, but those certainly are the biggest. Let's hold the permissionless participation piece aside for a bit. I think that was most people would have predicted that maybe we'd get there. But the single currency model instead of the multi-currency basket model, I think is pretty big in terms of what Libra might mean in the battle for the future of money. The block, the way that they described it, is that it said to them that the Libra was clearly positioning itself to be a helper to central banks who are thinking about digital currencies. And I think that that's dead on. I think that we've moved from something where the implications were really, you know, no matter what they

said, an asset that operated fully outside of the monetary sovereignty of nations, to something where Facebook is kind of positioning itself now, or I guess I should say the Libra Association, is kind of positioning itself now to be the chief consultant on CBDC projects. You've seen over the last few weeks, months, et cetera, as the coronavirus crisis has happened, as people have seen the need for easier to distribute stimulus and all this sort of thing, a new interest or a growing interest in digital dollars and digital currencies as a mechanism to distribute funds. As that interest grows, it would not at all surprise me if some governments actually say, well, from an implementation standpoint, we can either rebuild this entirely by ourselves

or we can just go work with the Libra Association. So I think on a fundamental level, that is the new positioning. Because really, what this new Libra Stablecoins will do is just make it easier to interact with the traditional fiat. So I don't necessarily think that this was particularly surprising. I think that governments groked pretty quickly the implications for this huge part of their power, which is printing money, which, by the way, we've seen a huge need for, at least in their eyes over the last couple months. So the idea that Libra didn't have that big piece of its proposal go through, I think, is, like I said, not surprising. Still, though, it definitely means that they play a very different role potentially in the battle for the future of money. So something to keep an eye on, something to watch,

but really interesting developments. Let's shift over to China now. So the first thing I want to talk about is related to Libra. When Libra was announced, the country that had the strongest, most immediate response was China. China announced that their digital currency project was being supercharged and was going to be coming out maybe within the year, although obviously that didn't happen. And they were really putting the pedal to the metal on a project that they had initiated five years earlier, right? They didn't start work on this in the wake of Libra. They had started it earlier, but the presence of Libra of a private company potentially invading their monetary sovereignty was something that China was very disinterested in. Now, interestingly, when China started getting aggressive about

announcing its timelines and its plans for its digital currency, that I think in many ways, that reaction more than just Libra being announced itself is what triggered the rest of the world to pay more attention to Libra as a project and to take it more seriously. In fact, by the time that these hearings were happening, especially Zuckerberg's hearing, one of the chief, if not the chief argument to Congress and to the Senate about why this project should be allowed to proceed was that China was doing it and we needed to keep up. So we had some very interesting developments this week on the China digital currency front. on Tuesday, the Agricultural Bank of China shared some screenshots of a test interface for the DSEP

that made it to WeChat. They were flying all over WeChat. They got quickly confirmed as real. And so we got our first look at the potential interface for the Chinese Central Bank digital currency. Now, the Agricultural Bank of China, ABC, is one of four state-owned banks. So this is an official source. And the interesting thing about the actual screenshots is that they showed an application that was being tested currently, right? It's available for download from the ABC website. It offers a registration function but is only allowing whitelisted users and those users are coming from and this test is being carried out in four cities currently, four regions currently. Now, Matthew Graham, who is the CEO of Sino Global Capital, he was on the show about a month and a half ago, I guess,

six weeks ago now, talking about the state of blockchain in China as well as what lockdown looked like. It seems a million years ago because it was before we were locked down and they were just starting to come out of it. But he posted a nice thread on Twitter about exactly this. So I want to pull out a couple of the pieces because he obviously has a differentiated perspective on this. So he says a DeSep wallet application from a test that included the Agricultural Bank of China was inadvertently published. It's important as it's the first time we've seen pictures of the working DeSep wallet application, which is rumored to have a targeted late 2020 release date. The pictures show that progress on DeSep is being made and clarified

some key details about the development process, players, geographies, and functionality of the system. So one key point here that I want to hang on for a second is this idea of progress being made. China has been clearly leaking things and making kind of intimations that progress is being made and things are going well, but as with that sort of source of information around basically anything at this point, everyone takes it with a grain of salt. The fact that we're actually seeing things with our own eyes, I think, is a notable part of this. A couple of the key bits of analysis from Matthew and Sino Global Capital. The first has to do with geographies and showing that four cities represent the test geographies, Shenzhen, Zhang Shen Shoe, and Chengdu. And apologies. I'm terrible at

pronunciation in this case. So his argument is that these are separate areas of China that are tier one or tier two cities, home to tech talent, and that in particular, Zhang Zhen is interesting because it is a newly established development hub for an economic triangle in the country. The point, though, broadly is that it's geographically diverse areas, so they're getting lots of different types of feedback. Functionality, he pointed out that there's a lot of similarities with Ali Pay or 10 cents, WeChat Pay, basically 10 pay. But, It argues that there's a touch offline payment functioning that's interesting because it allows a user to complete a transaction via NFC near field communication even went offline.

Now, in terms of the key players, as I mentioned at the start, it came from the Agricultural Bank of China, which has 300 million customers. But I think Matthew's analysis here is really important. He says, we previously knew that DeSep would be a two-tiered system, tier one connecting People's Bank of China to commercial banks and other financial intermediaries, tier two then connecting commercial to retail customers. Behind the scenes, R&B is sent to the PBOC's DC issuing treasury, digital currency issuing treasury, which then issues the currency to ABC's commercial bank digital currency treasury account at the PBOC. The commercial bank in this case ABC then debits the

customer's DeSep account, ensuring a one-to-one backing with Fiat RMB. This eliminates chance of over-issuance of M-Zero as DSEP is not so much issued as it is converted. This is a really key point, right? And I'm adding this color commentary now. It's not so much issued as it is converted. This also makes the, quote, issuance of DeSpe a bottom-up approach starting from the user's own bank wallet as opposed to top down from the PBOC. So long story short, we have a lot more information than we had just a couple days ago about China's digital currency, and it is very clear that they are moving forward with it. When they do, if they push it out later this year, it will be absolutely the largest scale experiment of anything like it of its kind. What impact that

might have on the US and whether the US feels urgency to get in the digital dollar game, I think is yet to be seen. TBD. Certainly right now we're dealing with a scenario where the US dollar is proving itself to be the one true safe haven asset in the world, which could create some countervailing pressure, I guess, for the need to innovate. But it's going to get weird and it's going to get interesting. And it's very notable that China is pushing forward so aggressively. So two more little bits that aren't about necessarily the future of money per se, but are still about China and its relationship with blockchain. On Tuesday, they announced the National Blockchain Committee, a group that is meant to set industrial standards. It has 71 members, including executives from Baidu and Tencent, as well as representatives from universities.

Notable, Tencent and its affiliates filed the most blockchain patents in 2019, so this isn't necessarily surprising. but another sign of movement on the blockchain front, which was then honestly put to shame by the announcement of the BSN, the blockchain service network. So this is basically a way for blockchain applications to be easier and faster to be built by both Chinese enterprises as well as by individuals, or not just Chinese enterprises, excuse me, but by anyone, right? This is a key piece of infrastructure. And so it is not itself a new blockchain.

It's basically developer rails into a specific set of permissioned and public blockchains, although the public blockchains that it plugs into will only be available outside of China. This is run by the State Information Center, which is a government agency in China. And we have heard about this before. It was first announced in October 2019, a consortium of companies from telecom, finance, and tech. But it is here now, after six months of testing roughly, it is coming. For domestic commercial use, it started being available. yesterday in China, and it is theoretically going to be available international use on April 25th,

abroad, in this case, meaning places like Singapore and Hong Kong first. Now, in their white paper, they basically make a lot of comparisons about how much cheaper it's going to make things. So they use a figure comparison of it costing $14,000, roughly, or 100,000 R&B to build a blockchain local area network now, while BSN would reduce that by something like a factor of 50. They use the terminology of the internet of blockchains. And a specific quote that I pulled was, this will encourage a vast number of small, medium, and microsized enterprises and individuals, such as students, to use the BSN to invent and innovate, thereby accelerating the rapid development and widespread use of blockchain technology. Now, they said that over the beta period,

2000 developers signed up, including one third of those being representing enterprises and another two thirds just being individual devs. But here's really, to me, absolute key line. As the BSN takes hold in worldwide countries, it will become the only global infrastructure network that is innovated by China whose gateway access is controlled by China. So that's from this white paper, from this announcement. As the BSN takes hold in worldwide countries, it will become the only global infrastructure network that is innovated by China, whose gateway access is controlled by China. Let's talk about the significance of this. It would be too easy to just dismiss it as, oh, another enterprise blockchain thing. I think it's much more than that. So what is the

significance of this move, this aggressive push? I think there's a few different pieces. One is the changing perception. China wants to change its perception, technologically speaking, from just a copycat innovator to someone who's actually innovating more broadly. I think that's a meta theme that's been going on for longer than just cryptocurrency, but it is a piece that's worth noting. A second piece, which is really important is this idea of technology diplomacy. We've seen China's Belt and Road initiative where they use infrastructure to go kind of try to get influence in places around the world.

Controlling this sort of key piece of digital infrastructure is a mechanism to go extend their sphere of influence. And I think that that actually is the key piece here in some ways, this controlling a key piece of infrastructure. Again, they literally say it. The only global infrastructure network that is innovated by China whose gateway access is controlled by China. I think part of this, frankly, has to do with preventing a private company like Facebook from

another country from gaining a monopoly on digital currency. I think this is tied up much more closely than we might seem at first glance with the DSEP with this digital currency process. But this is important because this idea of China controlling a key piece of global infrastructure when you're talking about applications that include smart cities that include identity registration, data storage, there's obviously significant stakes in who controls this. I think it's a hugely important to pay attention to, even though it's not money per se, right? It's not money crypto.

It's the enterprise. It's the blockchain side of things. But hugely significant news this week. And again, what you're seeing across the board, whether it's the DeSep or the blockchain service network, is that China is trying to position itself as the world. leader in this technology set and in its implications and money. So it's essential that we keep track of that. I will try to have more guests in the next few weeks, few months who have unique insight to it versus just kind of armchair review and commentary like me. But hopefully

this helped you understand a little bit of this news. A lot came out this week around Libra and digital currency more broadly. So thanks as always, guys, for listening. I'll be back tomorrow with another excellent episode of The Breakdown. I'm very excited for it. We have a really cool different guest. Until then, be safe and take care of each other. Peace guys.