The Breakdown - No, the Digital Dollar Won't Kill Bitcoin

Episode Date: March 9, 2021

On today’s episode, NLW provides a 101-style overview of central bank digital currencies, looking at: Why governments are interested in CBDCs Why Facebook’s libra announcement accelerated CBDC development the world over Why China’s CBDC efforts are driven by an attempt to shift power in the U.S. dollar-led global economy  How the U.S.’ rhetoric around central bank digital currencies is changing Why CBDCs are likely to be good for bitcoin

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The Breakdown is sponsored by nexo.io and Casper and produced and distributed by CoinDesk. What's going on, guys? It is actually, I have no idea what day it is. This is one of the episodes that I'm recording in advance of being out for a couple days to witness the birth of our new child. so I'm not actually sure what day it's coming to you, but I thought it would be fun to talk about digital dollars and their relationship to Bitcoin, given that we had some new comments from

Jerome Powell, the Fed chair over the last couple weeks, about how a digital dollar is finally going to come to the four of the Fed strategy in 2021. The name of this piece is the same as my TLDR thesis, which is, no, the digital dollar won't kill Bitcoin. To understand, why. First, we need to talk a little bit about central bank digital currencies in general. A central bank digital currency is pretty much exactly what it sounds like. It is the digital equivalent of cash. But isn't money already digital, you say? The difference is that these digital currencies would actually be bearer instruments. In other words, they're not just a digital representation of something that exists elsewhere offline. So when a tether is minted, for example, there is theoretically a U.S.

that exists somewhere that it can be redeemed for. It has no other value other than that dollar that it can be exchanged for. A central bank digital currency, a Fed coin, would work in a way where the digital dollar was itself the thing that had value. It wouldn't correspond to an offline dollar. Importantly, another difference from something like a tether is that it would be completely under the jurisdiction of the issuing government. It would be digital fiat, with a money supply that could be controlled just as it is controlled today, indeed with even more precision. Which gets us to our next question, why are countries interested in CBDCs? There are a number of reasons. First, let's talk about efficiencies, cost, convenience. This one is pretty obvious. Part of the classic

disruption of digital alternatives is that they make things faster, cheaper, and easier. And just to understand how the government might see this, the U.S. spent nearly 900 million. million dollars last year actually printing cash. There is a cost to produce this physical thing, and this would eliminate that entirely. That's not where the efficiencies cost and convenience end, however. Think about things like how much easier it would be to pay or extract taxes if you had an account directly with the Fed. Think about how much easier it would be to distribute stimulus checks. In fact, stimulus checks are part of why a digital dollar came up as a bigger deal again last year. The first COVID-19 relief bill proposed by Democrats actually had a Fed account built into it

as the mechanism to distribute government support. So a second reason that countries are interested in CBDCs has to do with fighting financial crime. This is one of the biggest reasons you're likely to see some version of a CBDC come to pass in the U.S. Since 9-11, the U.S. has been trying to get ever more visibility into and even more control over the flows of money. This won't shock anyone in Bitcoin or crypto, given how frequently the used-in-crime narrative is cited as a major reason to be skeptical of our industry. One of the biggest appeals to regulators in a CBDC world is that they would have dramatically more oversight and insight into the flows of money. This is also why privacy advocates find the idea of CBDCs extremely scary. The temptation to surveil more than elicit

transactions in the name of catching illicit transactions will be too big for most governments to resist. And many won't even try to pretend that this is their intention. A third reason that some governments are interested in CBDCs, and one that I find far too under-discussed, is the new era of monetary policy they enable. CBDCs, in effect, reduce the barriers between monetary and fiscal policy and expand the monetary policy toolkit. They reduce those barriers because the conduit through which fiscal changes can flow into the money system is radically changed. They expand the monetary policy toolkit because regulators have much more precision control to tweak the knobs. Different groups could have different settings. It's totally possible that this could create benefits from the system

we have today. One of the things we talk about a lot is how Fed action has increased inequality. Now, the Fed doesn't admit that, but what they do admit is that what matters more to them than asset price inflation is full employment. That's the part of their mandate that they're really focused on. To take a generous interpretation of their actions, asset price inflation and the corresponding increase in inequality are an externality of their policy to get to employment, and this isn't caused by malintent, but by the general bluntness of the instruments they have. The ability to have more micro-control over monetary policy decisions could change that. The count counterpoint to all of this is, of course, that more precision control creates more discretionary

power for individuals around monetary policy. And I think a lot of Bitcoiners would argue that the discretionary power that individuals have around monetary policy is part of what's created the situation that we're in today. A fourth and final reason governments are interested in CBDCs has to do with a larger geo-strategic game. But we'll get into that in just a minute. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%,

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First, let's talk about why CBDCs are coming up now. These aren't new concepts. So what is the reason that they've become? a bigger part of the conversation. I've argued numerous times on this show that Libra acted like a starting gun for the nations of the world when it came to central bank digital currencies. Let's go back to 2019 when Libra was announced. Facebook is persona non grata with governments for a variety of reasons, not least of which is that

they have twice the number of users as any country in the world has people. In the U.S., there's a sense among liberals that Facebook caused Hillary to lose the election, while, meanwhile, Republicans think they're being de-platformed as conservative, so all in all, it is a total mess. And from here, Zuckerberg rolls up and tells them he wants to print his own money, to which, of course, he got a collective and highly bipartisan, oh hell no. To be honest, though, it wasn't really just the announcement of Libra that got regulators really paying attention. If you watch the first Libra hearing, only about 5% of the questions and discussion are specifics of stable coins and the Libra currency itself. The rest is about Facebook.

book and Zuckerberg in general. But then something happened. China took Libra as an extreme threat. They radically kicked up the speed of their digital currency efforts. They announced that they were going to be the first major power to launch a digital currency. And it was, in fact, China ramping up their efforts that got other countries really paying attention. So what the hell got into China? This is a really important piece of understanding the geopolitics and what it might mean for Bitcoin. Over the last couple years since the Libra announcement, China has absolutely been the fastest mover among major economies. They have been doing live trials in multiple cities, giving away millions in digital yuan in small chunks to people to spend at both local and digital stores.

They've included ATMs in recent trials, and they keep increasing the size of these trials overall. For China, CBDCs are about creating an alternative to the U.S.-led financial order. Despite about 10% of the world's trade involving China, only about 1% of transactions are settled in Chinese R&B. What's more, the main rails of the global system, the SWIFT system, are used by the U.S. as a political tool, which is, of course, for China a huge liability. CBDCs are a pathway to create an alternative system. It's a system that, while starting in China, can be exported and it can be especially efficiently exported along the lines of the Belt and Road Initiative. So the question comes up, where does Bitcoin fit with this discussion? On the one hand, you might think it seems extremely competitive,

and that's why China has historically been antagonistic to Bitcoin. In point of fact, they have much bigger fish to fry. For China, the biggest issue is the rise of fintechs. FinTechs like AliPay have been scooping a large and growing portion of transaction volume and expanding the types of banking-style services that they offer. Although regulated, they're not regulated in the way the banks are. given that regulated is kind of a euphemism here. We all got a preview of just how big a deal this is, when on the verge of Ant Financials would have been biggest IPO in history, the Chinese Communist Party

shut it down, and Jack Ma went quiet for about three months. And has now resurfaced and has totally restructured along lines that give the Chinese government much more insight and control. So now when we come back to Libra, the picture is starting to make sense. An external fintech like Facebook doing something like Libra is a much scarier force to the Chinese government than something like Bitcoin is. Besides China, there are a huge number of experiments happening with CBDCs. Some smaller nations are even farther along than many of the bigger ones. The Bahamas actually has a fully functioning CBDC called the Sand Dollar right now. In terms of the big players, Europe has been getting increasingly vocal about a central bank digital currency over the last year.

with Christine Lagarde discussing it frequently, saying it will be here within the next five years, and saying that it will exist as a complement rather than a replacement for cash. The U.S. has been more hedged about its discussion about central bank digital currencies and a possible digital dollar. Although last year, we did discover that they've been researching with much more intensity than perhaps they were letting on. As I alluded to earlier as well, in recent comments Fed Chair Jerome Powell said that this is the year they will bring a digital dollar to Congress. and that it's becoming more of a priority. If you're interested in learning more about the U.S. and a digital dollar, go check out Chris Giancarlo's Digital Dollar Project. Giancarlo, who's sometimes known as Cryptodad, is the

former head of the CFTC, and his argument for the U.S. to have leadership when it comes to a digital dollar is that the alternative of China is way scarier. He makes the argument that actually the Constitution protects from some of those surveillance issues that privacy advocates are so worried about, at least compared to how the other players might implement a CBDC. So let's go back to the original question. What does this all mean for Bitcoin? Part of my motivation for this show is when Powell made those comments, I saw a number of fin-twit accounts say something to the effect of a digital dollar is the end for Bitcoin. And I think, frankly, this is just an uninformed opinion. So let's discuss how it could be bad for Bitcoin. There are two main ways that I see. The first is that if

nations and central banks see Bitcoin as competitive, perhaps there would be banning efforts alongside the introduction of a central bank digital currency. We're kind of getting a preview of this logic in India right now. I can see regulators trying to make an argument along the lines of, look, even if there is value in this type of digital currency, we're creating that value in an official sanctioned way, so we can ban this because you don't need it anymore and it only has all of these bad externalities. So increased justification for a ban on Bitcoin. Bitcoin could be a negative that comes with CBDCs. The second one, I suppose, is that there's some subset of customers who might have used Bitcoin as a convenient internet-native currency who will not

because they use their central bank digital currency instead. But that sort of presupposes that the main purpose of Bitcoin is transactional, which historically hasn't really been the case. Let's discuss now how it could actually be good for Bitcoin, because I think these are really important counterpoints. First, any sort of digital dollar that involves digital wallets, is going to create not only consumer familiarity with these new types of tools and these new types of interfaces, but likely on-ramps and off-ramps into Bitcoin that are much easier than anything we have today. In other words, people who start with their Fed account or Fed Coin probably will have an easier time jumping into something like Bitcoin than today's consumers do already. I think the second

and most important, and really this is my belief about how this is going to play out, is that it creates an even clearer raise on debt for Bitcoin, specifically the part of Bitcoin that is about the firmness and immutability of the monetary policy. Remember, central bank digital currencies are simply digital fiat, if anything, they create more monetary policy discretion than anything we've seen before. To the extent that you are looking for a pathway out of extreme monetary policy discretion, wouldn't that mean that something that creates more of that discretion is just more of an inducement to use the alternative? It's not even just a matter of these things being able to coexist, although they can. It's that the major forces and trends driving people to adopt Bitcoin

only get more amplified in a CBDC world. So no, not only will a digital dollar not kill Bitcoin, it might create the greatest advertisement for Bitcoin that's ever existed. Anyways, guys, I hope this was a helpful little primer. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.