The Breakdown - Sorry, Uncle Sam, We’re Entering the Era of Private Money

Episode Date: September 7, 2020

On this special Labor Day edition of The Breakdown, NLW is doing a reading of Nic Carter’s most recent essay “The Crypto-Dollar Surge and the American Opportunity.” In it, Carter argues that rather than fight the tide, the U.S. government should accept and take advantage of its unique position in the emerging world of global crypto monies.

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 crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? It is Monday, September 7th, Labor Day, but also my birthday. And every year, I think because back-to-school, Co-in-School, sided with my birthday, I kind of feel like this is New Year's to me much more so than January 1st in the middle of winter. Because of that, I've always gotten really reflective around the beginning of September and thought about what the future, what the next year might hold. I think when we look

back at this year that we've seen going back to September of this time last year, one of the big trends is going to be a change in and a sea change in, really, are expectations about where the United States fits in the world, and specifically where the US dollar fits in the world. That conversation has gotten louder and louder and more and more important. It is inextricably linked to monetary policy, be it Fed intervention in markets or fiscal stimulus, and it certainly is something that has a role in people's day-to-day lives, even who live far away, as they try to decide whether they're going to keep their wealth in local fiat regimes or try to get into U.S. dollars.

Part of what has made the conversation so much more dynamic this year is not just that policy side of things, although that's certainly a big part of it, but also a new mechanism in the form of USD stable coins for people to opt out of their local monetary regimes and into a different version. Because it's a holiday, I needed to record an episode in advance because I hate skipping episodes as a whole. And so I decided that since I've gotten really great feedback on the Longreed Sunday article reading episodes, that I would do another one for you. And luckily, last Thursday, Nick Carter stormed in with the perfect thing to have as the topic. So this is going to be a reading of Nick's most recent essay called The Crypto Dollar Surge and the American Opportunity.

Stable coins are a hot commodity. Over 16 billion of them circulate in the wild today up from 4.8 billion to start the year. Mostly, these are issued outside of the U.S. and so are largely unaccountable to financial regulators. If they keep growing, U.S. policymakers, in particularly those in the state of New York, will have to stomach the loss of their dominance. over dollar clearing. But because stable coins represent a powerful neutral financial instrument, the U.S. should welcome their ascendance regardless. It's no secret that banking is highly politicized, often in informal or hard-to-apprehend ways. The overt politicization of the New York-based corresponding banking system represents a tax on all users. Embedded in each transaction is a

slight risk of censorship. Dependence on the system means submitting oneself to an American agent. The harder it is to extract yourself, the more you are subject to the demands of the administrator. Banks and payment processors have also become more politicized, as they have begun to de-risk, re-de-platform, individuals and industry sectors with whom they disagree politically, or where they considered implied compliance costs too significant to be worth the hassle. In February, I wrote that U.S. regulators should embrace the potential of stable coins as continued instruments of dollar dominance. I stressed the potential welfare benefits of allowing savers in countries with inflationary regimes to engage with currency substitution without relying on the

banking sector. Since February, the outstanding supply of stablecoins has grown from around $5.5 billion to $16 billion, and their daily settled value has grown from $1 billion daily to $4 billion daily. This phenomenon is no longer localized to the crypto industry. It has begun to cause geopolitical reverberations. First, Stablecoins makes for an excellent tool to avoid capital controls and oppressive monetary regimes. Chainalysis has reported that Tether is extremely popular in China, even recently exceeding Bitcoin's usage in the region. It's important to understand that the popularity of stablecoins or crypto dollars

is not solely due to their digital nature, but because of the transactional freedom they offer to users. China's financial system is highly digitized already. Crypto dollars like Tether offer a fundamentally different value proposition from Alipay or the state digital currency, DSEP, because they are bare assets not subject to the same level of surveillance or transactional restrictions. Their digital nature isn't what sets them apart. It's the fact that you can permissionlessly accept or send any quantity of crypto dollars

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Today, crypto-dollarization is in full swing in places like Venezuela. Recently, Venezuelan president in exile Juan Guaido has begun promoting the usage of Air TM, a crypto-focused remittance company to send U.S. dollars seized from the Maduro regime by the U.S. Treasury to health care workers in Venezuela. Startups like Value are offering users digital access to the U.S.D thanks to establish crypto-financial infrastructure like local Bitcoins. Crypto-Dolars makes sense because U.S. banks do not serve as Venezuelan users, even if regular Venezuelans are not formally sanctioned.

Crypto-dollarization works because Stablecoins are, for the most part, unencumbered by the shackles of the U.S. banking system. The largest issuer tether relies on a network of offshore banks and remains frustratingly outside the purview of the New York regulator, the Department of Financial Services, despite a long campaign to bring tether to heal. Stablecoin issuers treat the IOUs as bearer instruments, and generally do not seek to police user behavior when a transaction does not involve the issuer. Users only need a relationship with the issuer if they are redeeming or creating stablecoins with bank dollars. By granting a measure of transactional privacy and not embedding political conditions into transactions, stablecoins are the closest thing to digital cash we have today. Notably, it is the private sector, not the state, that has delivered on this promise of digitally native cash. Now, U.S. policymakers reading this might feel a profound sense of unease.

New York is the center of the dollar universe. Swift, which the U.S. effectively controls, is unambiguously an instrument of power projection abroad. And the Federal Deposit Insurance Corporation and the Department of Justice have a habit of expressing political prescriptions through informal bank guidance and veiled threats. Touch a dollar anywhere, even in a transaction where neither counterparty is American, and you're obliged to Uncle Sam. But these tools are wearing blunt with overuse. The more the U.S. threatened sanctions, the greater the incentive for its peers, allies included, to seek out alternatives. The more risk-averse and puritanical banks become, the stronger the tailwinds for non-bank alternatives. The more dissidents are deplatform from

U.S. payment processors, the better neutral alternatives start to look. Perhaps catalyzed by the growth of stable coins, or more likely by the announcement of Facebook's Lieber or China's DeSep, various branches of the Federal Reserve are now industriously pursuing a, quote, digital dollar. But would such a project, regardless of its final form, grant transactions the autonomy they deserve? Would a digital cash system produced by the Fed consist of an instant-settling private-bearer asset, as is the case with physical cash? Would an American Central Bank digital currency be able to credibly guarantee that its rich database wouldn't be plundered in real-time by Homeland Security, Immigration and Customs Enforcement,

or the Federal Bureau of Investigation, as Larry White has wondered? Today, the U.S. is still the center of gravity as far as Bitcoin and the crypto-dollar ecosystem are concerned. This is a significant advantage that should not be squandered. Policymakers should be thanking their lucky stars that a putative successor to the U.S. financial infrastructure is a largely American phenomenon. The U.S. can continue to muddle down an increasingly exclusionary path and punish subscribers to its financial infrastructure by burdening them with political dictates, or it can embrace a neutral alternative. Self-disruption would be a significant bullet to bite, but it suits the U.S.

Values like liberty, privacy, free enterprise, and personal autonomy are embedded into our constitution and social fabric. One can hardly think of a better nation to underwrite a shift to a truly neutral payments and settlement infrastructure. While dollar infrastructure is likely to remain dominant far longer than some critics allege, it's undeniable that banking and messaging have been deputized into carrying out the political objectives of their administrative. As relations with the U.S. allies sour and China grows its sphere of influence in Asia, viable alternatives will be created. And if the DSEP is any guide, these alternatives will not encode strong privacy protections for end users. The U.S. is clearly suited to be the steward

of politically neutral payments technology, if our leaders can rise to the challenge. If the U.S. chooses to marginalize crypto dollars and punish their issuers, not only will they suppress a burgeoning American industry, they will also push users into east. even less accountable alternatives. While most stable coins are backed by dollars in bank accounts and are hence somewhat subject to governance, a subset are issued natively against crypto-collateral like ether. These projects are more automated and lack the vectors of control and the linkages to the banking system that characterize convertible stablecoins. While still small, crypto-backed stable coins like die, current supply of $455 million, take a more crypto-anarchist approach

and are harder to surveil or influence. More draconian regulation of crypto dollars would not eliminate the category. Instead, it would push users into these more slippery alternatives. The architects of these public digital dollar solutions should take a leaf from the private sector's book. Users simply crave the qualities of cash this time in a digital context. Far from being a dangerous techno-utopian fantasy, a genuine cash standard on the internet is simply a restoration of what was once ubiquitous and normal, transactional privacy and autonomy.

These qualities are not for criminals, but for everyone. And if policymakers dig in their heels, the private sector will only push back harder by providing the service that users demand, but this time outside policymaker's sphere of influence. All right, guys, thank you so much for listening to the show. And hey, if you want to get me a birthday present, go rate or review this show on iTunes. It makes a huge difference, and we are on a role.

and I want to be able to keep bringing you this excellent and hopefully helpful content. Anyways, cheers everyone. Hope you're having a great holiday weekend. And till tomorrow, be safe and take care of each other. Peace.