The Breakdown - Narrative Watch: 3 Key Battlelines of the Digital Currency Wars

Episode Date: October 22, 2019

The digital currency wars are getting hotter and hotter, but they're not one dimensional. This narrative watch looks at three key battlelines: Nations vs. Private companies - who gets to make digital currencies?  Nations vs. Nations (specifically China) - competition to get their faster and better Pegged vs. Basket vs. Fractional Reserve - the actual composition of the asset matters - as we see from pressure on Facebook to make Libra a 1:1 peg USD instead of a basket Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another narrative watch. What's going on, guys? It is October 22nd, and today we are talking about the digital currency wars. So over the last few months, we've obviously been talking in the broader macro economy about currency wars in the context of the larger trade war between the U.S. and China. But there's also been really since the emergence of Libra, this burgeoning digital currency war. And what I mean by that is a war for the battle of the future of digital currencies, right? right, who's going to have the right to produce digital currencies?

What are those digital currencies going to be able to consist of and be made up of? Who is going to and how are our governments going to interact with them, right? So I wanted to really kind of draw the battle lines for this because I don't think it's as simple as it's not one-dimensional, right? These digital currency wars are more complicated as they are right now with a lot of contestants who are offering a a lot of different strategies. And so this narrative watch is about just a quick hit layout of those battle lines using some of the things we've seen in the news over the past week as context, right? So what's the first battle line to me? I think the big battle line, the one that really is shaping the discourse, is nations versus private companies, right? Who actually gets to

make the money of the future? That is the, in some ways, just the biggest question. And the question that has been brought up over and over again with the emergence of Libra. And so let's talk about a couple things that we've just seen in the last week to see how this conversation is playing out. First, as you can see from Nick here at CoinDesk, the Bank of International Settlements, who is like a central bank or central bank type of an actor, called Stablecoins a threat to monetary policy and financial stability. Basically, they're coming out hard in this report that was a collaboration between the BIS and the G7 on the idea of private companies issuing currencies that could actually be a threat to government's

power to issue currencies. We also saw Bruno Lemaire, who's one of the been the most vocal critics of a lot in crypto. He was very against private, private privacy coins like Zcash as a threat to the ability for governments to secure their citizenry. He came out hard against Libra. And so he actually wrote an op-ed about why Facebook is a threat to national sovereignty, why Facebook's Libra is a threat to national sovereignty. He says, I cannot countenance one of a sovereign state's most powerful tools, monetary policy, falling under the remit of entities not subject to democratic control.

So this is a, his argument wasn't just about Facebook. It wasn't just about Zuckerberg. It wasn't just about some particular thing with Libra. it had to do with the idea of private companies issuing money writ large. And that has been kind of the tone that we've seen in Europe since the Libra Association was announced. You saw it in Germany as well. There's another voice that hasn't been maybe as represented, but you have to think has concerns with this in this nation versus private battle,

as is the smaller countries, right? the countries where they're already facing pressure for their citizens to want a more stable currency, a more liquid globally currency than what they offer, and they're already dealing right. So if you look at Argentina, part of the back and forth struggle there has to do with capital controls and how much money you can move in and out of the Argentinian peso to the U.S. dollar. That's a big source of political. It's a big political football that is continuously in flux. And part of why cryptocurrency has been of so much interest to folks in Argentina

has been that legacy of currency controls and the inability to move money to a currency that is more stable and less likely to be subject to inflation. Now, you have countries all around the world, not just those who are experiencing hyperinflation, who have to be looking at something like a Libra or really any, US dollar stable coin as a potential threat in the sense that, you know, their citizens might prefer that and they might have to resort to that sort of capital controls to keep some amount of liquidity in their own system. So there's that whole thing going on. Now, of course, there's some counterpoints. You have small nations like the Marshall Islands and Bermuda who have been

a little bit more open, right? The Marshall Islands, though, is still thinking about their own digital currency. Bermuda announced that they would accept U.S. DC type of stable coins for tax payment services, et cetera. But by and large, the emergence of Libre onto the scene has made countries nervous. And the interesting thing, though, is that it hasn't, it's on the one hand, it's about Facebook and the idea of a private company. It's not so much about whether digital currencies are a good thing. And in fact, where most nation seem to be landing is this idea that, yes, digital currencies are a powerful tool for the future and they're important to us, but we need to be the ones who are executing against that.

We need to be the ones who are in power. And so let's actually turn to our second battle line to see how those recent op-ed from Francis Bruno Lemaire, who, again, is the economic minister there seems to both embrace this idea of, you know, not no to Libra, no to private, stable coins, yes to digital currencies, and actually adds in a different dimension as well. So nations versus nations is our second dimension, our second battle line, right? And so just reading a quote here, the first part of it kind of affirms the last point we were talking about. So this is Bruno LeMayer writing for the Financial Times. He says, that is why I'm not. I have invited my European partners and G7 members to consider two ways forward.

First, we should develop innovative national and cross-border payment methods, which are faster and less expensive. We expect banks and payment providers to deliver quickly. Second, we should consider the creation of central banks' own digital currencies in the medium to long term. So again, this reinforces this idea of no to Libra, no to private, stable coins, but yes, to digital currencies. However, here's the rub of the second part.

He says, we cannot let China be the only player in this field. Our independence is at stake. France's position is clear. We want financial innovation to respect the sovereignty of states. Neither political nor monetary sovereignty can be shared with private interests. So I want to hone in now in our second battle line on nations versus nations. So Facebook and David Marcus in particular have made the point over and over and over. It has been their biggest kind of narrative through line in some ways that China is in the lead in this space currently.

that if Libra isn't allowed to do this, China will, right? They say this over and over and over again. So just recently, you see this post from CoinDesk again today. Facebook's market says China wins with digital Remembe if the U.S. Nix's Libra. Marcus warned that Washington risks, quote, having a whole part of the world completely blocked from U.S. sanctions and protected from U.S. sanctions and having a new digital reserve currency. This is an interview with Bloomberg News. The future in five years, if we don't have a good answer is basically China rewiring a large part of the world with digital R&B running on their controlled blockchain. So this is a serious point of consternation for countries around the world. You saw Bruno Amer who's maybe been the most vocally against Facebook and

Libra affirming this worry about China. And the question of China and its role in this, I think that people as they're waking up to Libra are also waking up to reports that China after five years of R&D is only a few months away from releasing its own stable coin. You know, obviously the trade war with Trump has highlighted just the challenge of China even more. More recently, we've had all of these kind of questions around what is the proper role of U.S. companies vis-a-vis Chinese censorship concerns. And should the NBA be censoring the political voices of, you know, the managers of its teams and things like that?

So, you know, this is much bigger than crypto. This is part of a much larger global narrative, is my point. For those who are interested in more in this, I would highly recommend Shelley Banjo's thread about her recent trip from Hong Kong to Silicon Valley, which she calls a clear red scare has washed over San Francisco. And it's kind of across the board, right? This is, again, not just crypto-specific, but we're really having this interesting question of what the hell we're going to do about China's role in the global system.

And this idea that they may be able to kind of root around the system to leapfrog and be in a much stronger position vis-a-vis a digital currency and getting to a digital currency faster than anyone else is something that's seriously on people's agenda. So again, to review, battle line number one is nations versus private companies, who gets to actually make digital currencies. Battle line number two is nations versus nations. And I mean, I guess you could say to some extent private companies versus specific nations, i.e. China.

But it's really about this red scare and what China means for the world, as it seems to kind of break into a leadership position vis-a-vis digital currency. But with that, let's move on to the final battle line. So to me, the final battle line has to do with the nature of how these stable coins, actually built themselves, right? This is not yet resolved. And in fact, as we'll see, one of the major issues that Facebook's brought up with its Libra, with its proposed version of Libra, was it kind of bit into a hornet's nest around something that they might not have anticipated being as significant an issue as it was. And this is this idea of pegged stable coins, i.e. a stable coin that's pegged to a specific currency versus a basket kind of approach,

which is what Libra was proposing, where there's a basket of currencies that keep it stable, versus something that's new on the scene and is starting to emerge at this idea of fractional reserve stable coins. So I actually want to throw it over to the Hidden Forces interview with Raul Paul from, I guess a couple months ago now, it's from the end of July, where he's talking about the idea that the central innovation that's so interesting to him about Libra is this basket idea. So I'm just going to put this on for 50 seconds or a minute because he and Dimitri from Hidden Forces really get into this idea. So I'm going to meet myself, turn this on, and we'll listen. You're saying what's groundbreaking about Libra is that a corporation can issue a currency

that's backed by all the other currencies in the world. Correct. Okay, that's interesting. Correct. That is stable. That is incredibly stable. Okay. I see what you're saying. So what does that mean for you? Where do we go from here then? What does that mean? So Libra launch, they put this out there, the genius out of the bottle, as you say. A corporation can launch money that isn't just its own cryptocurrency, but actually is backed by the full faith and credit of all the nation's currencies in the world, right? Or the strongest nation's currency. Correct. Whatever it may be, yes. So what's the big deal about that? Explain to me why that's significant for you. Because then anywhere in the world, you have the same denominator, which is the global currency basket. Call it that. Call it

Globex, right? So that is the world's denominator for every asset. So what you're not doing is then if you're a Venezuelan and Africa, you don't have the disadvantage of your home currency or the advantage of a home currency. What you have is the stability of a globalized currency. So is what you're saying, if I'm following correctly, that the largest companies in the world were sort of developed either explicitly or inexplicitly a de facto protocol of creating their own currencies that are pegged to a basket of all the major currency. and that way they're able to conduct business without the volatility that comes from exchange rates. And without the multiple payment system, without anybody saying it's a swift payment system,

I can cut down swift. There's nothing you can do. You've created money that doesn't annoy governments. Now, again, it doesn't mean that this is its finalized form, but what it's telling you is anybody can create more types of money that have different use cases. So actually, a big part of their interview was about this idea of a basket of currencies. I think that, you know, so Raul here is talking about it as something that doesn't annoy governments. But what we saw with the response to Libra is that, you know, if you watch the first set of testimony in both Congress and the Senate after Libra was announced, this was one of the first questions that they asked was why not peg it to the U.S. dollar?

Why not peg it to the U.S. dollar? Now, the U.S. dollar was supposed to be the biggest, the biggest amount in the basket, right? It was supposed to represent something like 50 percent. However, that still is functionally a kind of a reduction, right? If to the extent that Facebook's Libra becomes competitive with the U.S. dollar as a global reserve or as a global reserve currency in some way or as a global settlement, you know, global payment rail, whatever, it creates potentially less demand for dollars because you're using Libra. I mean, and this is really what it comes down to is what does it do? what does something like Libra do for the demand for the native sovereign currency of any given country? And so this idea, though, I think what Raul Paul nailed here is that this concept was going to be

transformative for people. And it was going to break this conversation about digital currencies into a new dimension. So not too long after at the, there's a Jackson Hole meeting that the Kansas City Fed holds every year. and the Bank of England's Mark Carney talked about the idea that that maybe the central banks of the world should get together and create a synthetic reserve currency that was a replacement for the U.S. dollar as the global reserve currency. And so basically you have the Overton window on what the global reserve currency has now been opened up because Libra brought out this idea of kind of a bad. basket approach, but embedded in a cryptocurrency to the mainstream. And so people like Mark Carney were running into it. And obviously, this continues to raise the hackles of the U.S. government because now people are actively talking and more than just Silicon Valley in places like that about what the future of the global reserve currency is. And so, you know, one interesting

thing that happened just after this is that Binance announced that it was doing something called Venus. And Venus would be a project basically to help local governments or regional government groups create their own stable coins, but that were in fact pegged to specific assets, right? So, one way to look at Binance's actions is to see they're an incredibly competent company that is going to have a particular insight into where the openings are in the market based on what others are doing. So the fact that where they went, immediately was the idea of back to pegged to specific government currencies and, hey, we'll help you. Not that that was particularly novel, obviously there's a ton of companies who are trying to offer

the governments of the world the idea to create a digital version of their own currency. But finance is certainly the biggest to get in that game. And they made the announcement just after Facebook. Now, you know, weeks on, we're seeing, we heard news just recently, Libra could drop basket and issue individual fiat stable coins. This is one of the things that they're considering is a way to address these very fundamental pressures, right, is that maybe Libra just becomes a USD stable coin. So Maddie Greenspan from E. Toro says this confirms it.

The reason Libra was announced prematurely is to collect feedback and react to it. Managing a basket and floating exchange rate just seemed like a huge headache. Tokenizing current Fiat options will no doubt make implementation easier. I will say that it also would make implementation fundamentally different, right? It fundamentally changes the nature of this. And maybe they decide that what they still get is worth what they lose, but it is a fundamentally different approach, that detooths and depowers Facebook in a significant way. You have Pascal Bouvier here.

Libra backed by a basket of currencies was never going to fly with U.S. authorities, as it would have threatened the dollar. Libra backed by the dollar is eminently more palatable to U.S. authorities, less threatening to today's dollar global status, however, teetering. I suspect you countries were against Libra in its original version for, a different set of reasons. The EU is unifying and harmonizing its financial services industry, payments data asset management. A supernational org like Libra would have been challenging, would have challenged UE's EU's initiatives and goals. So again, keeping on this idea of battle lines, we are

seeing that this idea, this question of pegged versus basket, is actually a very significant and meaningful battle line that is kind of at the heart of the debate of Libra right now. And tomorrow we're going to see Zuckerberg testify in front of Congress. I don't know if it'll get to this level of granularity, but, uh, but, you know, it's clear that this is an important, important battle line. Now, lastly, I just want to make note of, uh, of a third type of stable coin. Uh, so former Fed, this is again from Coin desk, former Fed nominee Stephen Moore backs fractional reserve stable coin. So Stephen Moore, he was nominated by the federal, uh, to the federal reserve backed out of the process because he pissed off literally everyone with

comments meant to, I don't know, like it's like he tried to piss off everyone from Trump to, uh, to liberals to anything in between. But either way, he's now backing a, he's involved with a stable coin called Frax, which is a stable coin backed by fractional reserve. And so the idea here is instead of having a one-to-one full reserves, which has always been at the heart of tension around Heather, for example, is whether they had the actual, you know, the full reserve that they promised. This one is explicitly not about that.

It has a certain ratio. And then the rest it loans out and deploys through defy mechanisms. And really what it sounds like it's trying to be is it's trying to take all of these automated defy mechanisms, make money with the part, you know, it's traditional banking, but in a defy way, basically. And so again, this is newer. It isn't alive yet. But I do think it's worth noting that even, you know, even as many as these stable coins as we have, we're still seeing meaningful, like fundamental shifts in debates as it relates to the model. So what's the point of all this? The point is that the digital currency wars are just starting.

They have been ratcheted up to a whole new level because of Libra. They are not limited to stable coins. Obviously there's an entire, we could spend a huge amount of time talking about where assets like a Bitcoin fit into this. But I think that for this narrative watch, where we're focusing it is where we're where the battle lines are being drawn in terms of how people are recognizing their enemies, right? And right now, for better or worse, and rightly or wrongly, governments are pegging their concerns to private company stable coins, not something like Bitcoin. So just to recap the three battle lines that we saw, battle line one is nations versus private companies.

Battleline two is specific nations versus each other and specifically everyone against China. And three is this idea of pegged stable coins versus basket of currencies approach versus this fractional reserve kind of model. Then there's, I mean, there's so many dimensions, obviously. We didn't even get into kind of like algorithmic versus fully bad, whatever, right? The point is that these are all battle lines for people who are competing or for projects that are competing to be the future of money and the future of digital currency. And understanding where those battle lines are, I think will help us understand, where the narrative shifts are happening, where the power shifts are happening,

and what's going on as we see people reacting. So that's it for today's narrative watch, kind of in depth on a topic that I think is really important. So hope you guys liked it. Thanks for listening. If you're listening, thanks for watching, and I will be back tomorrow with another Crypto Daily 3 at 3.

All right guys, peace.