The Breakdown - Understanding the Coming Currency Cold War

Episode Date: September 27, 2020

This week’s Long Reads Sunday is a reading of “The Currency Cold War: Four Scenarios” by Jeff Wilsner – part of CoinDesk’s Internet 2030 series.  In it, Wilsner talks to experts about four scenarios: A multi-currency scenario, where exchange is abstracted away via digital wallets A China-led scenario A U.S.-led scenario A bitcoin/non-state currency-led scenario In addition to reading, NLW gives his take on which scenario is most likely.

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 Sunday, September 27th, and that means it's time for Long Reads Sunday. One of the most interesting macro conversations to me is the battle for the future world reserve currency. Right now, it is definitively the U.S. dollar that is the world's default reserve currency, and it's been that way for decades upon decades. However, you have new contenders. Certainly many transactions are denominated and carried out in the euro, but that's not really what I'm talking about.

When I think about this battle, what I'm looking at is the digital yuan, for example, which the People's Bank of China has identified as designed to help reduce USD dominance. I also look at things like Libra, or more specifically perhaps, the idea of private monies that it introduces. And of course, I look at Bitcoin, this decentralized network-based money that isn't under the control of any one country or company. CoinDesk has been hosting a series they're calling Internet 2030 that zooms out a decade and looks back to see what the future might hold for crypto and digital currencies and finance as a whole. Jeff Wilser wrote a piece that I'm going to read for you now called The Currency Cold War, Four Scenarios. The year is 2030, and you need to buy some new sunglasses. You browse through your options online.

You use augmented reality to try on a few pairs, you find one you like, and now it's time to pay. You have 17 options for payment, including the digital U.S. dollar, but you'd rather not support the U.S. government and President Ivanka Trump, so you decide against U.S.D. Facebook Libra, but you have reservations about the new Facebook brain implant, so no thanks. Bitcoin, yet you'd rather not part with your digital gold as the price of Bitcoin just hit 500K. Sunglass coin, the native currency of this sunglass website, which gives you a 10% discount. Parity coin, a project that seeks to promote gender wage parity.

Greencoin, a project that works to combat climate change, and on and on. This sounds complicated, but it isn't, as your smart wallet instantly computes all of the exchange rates and it's seamlessly connected to the sunglass vendor's website. Or maybe none of this happens. Maybe the currency of 2030 looks a lot like 2020. Or maybe you're paying in digital Chinese rem and be. The only thing we know for certain about the future of global currencies, there's a ton of uncertainty and many scenarios are in play.

As fintech guru David Birch has framed it, the global powers are engaged in a currency cold war, with China in the United States vying for supremacy. China bolted to a head start with the government-backed DeSep Project, digital currency electronic payment, but we now know the Federal Reserve is experimenting with a digital dollar. And then, of course, we have the wildcards of Bitcoin, the potential juggernaut of Facebook's Libra, and thousands of other current and future cryptocurrencies, all governed in novel ways and sometimes acting autonomously. Which one will win?

And what would the outcome mean for the internet in 2030? We asked a handful of futurists to share some thoughts on a few scenarios, mostly in the name of a fun thought experiment. The real-world consequences are serious, though. This is not just fun, it's critically important, says futurist Ross Dawson. The world of money could change fundamentally in the next 10 years, and the implications could be massive. This is something we really need to be thinking about.

There are an infinite amount of currency scenarios, but for everyone's sanity, we'll consider just four. Loosely inspired by the cheeky red versus blue framework, Birch lays out in his book, The Currency Cold War, with red being a state-sponsored digital currency like China, and blue being a cryptocurrency, like Facebook's Libra, i.e., a private coin. The scenarios. Scenario 1. The U.S. dollar wanes, but no one dominant currency emerges in its place.

We have countless currencies to use for every transaction. Birch calls this the rainbow scenario. scenario two, China's digital currency gains dominance, the red scenario. Scenario three, the U.S. retains dominance with a digital dollar. The green scenario. Scenario four, a non-government-backed cryptocurrency such as Bitcoin gains dominance, the blue scenario. A few obligatory disclaimers. The experts clarify that these are not hard predictions, but rather some possible scenarios

that could unfold. So don't angrily at them in 2030 if you can't buy your beer with Guinness Coin. Also, each futurist speaks only for him or herself, so the speculation of one should not be construed as the consensus of all. So how will money impact the Internet 2030 and how did we get there? The rainbow scenario. The US dollar wanes, but no one dominant currency emerges in its place. We have countless currencies to use for every transaction.

Futurist Brett King, author of the book Bank 4.0, sees the conditions today that would give rise to a system of jumbled currencies. It starts with the protests and the polarization. We've had about a 1,000% increase in protests from 2000 to 2020, King says. You have the highest levels of inequality recorded in U.S. history, and that's very similar for economies in the UK and Australia. He also notes a clear disconnect between the stock market and the economy. How could people protest the inequality?

How could people express their values, desires for change, and demands for social justice? Potentially through other currencies besides the U.S. dollar. You might find people choosing cryptocurrencies or many economies within the global economy, where people say, I'm going to make an ethical choice with this kind of currency or this kind of platform, says King. Other questions King suggests people might ask of their currencies. Is this currency a net carbon-neutral platform? Does this currency fit within an ecosystem that is environmentally sustainable?

Is this currency committed to equality and growth of the middle class? Birch offers a darker twist. He conjures up a scenario where the many different currencies are splintered, yes, but also the virtual world has even greater prominence than today. and that people, quote, withdraw into the virtual world and begin to lose interest in the physical world. Again, he's not predicting this scenario, and he considers himself an optimist, but he suggests this as one possible outcome. Birch says that in this world, we'd see a rise of gated communities in cyberspace, which work

much better than gated communities in the real world. In gated communities in the real world, Birch dryly notes, you need shotguns to keep people out. But online, you just need cryptography. The dominant currencies on the planet? The currency of the communities where I live, says Birch, I don't care about the US dollar anymore because in this scenario I don't pay taxes. I care about the Reddit dollar or I care about the IBM dollar.

In this world, says Birch, the nation state begins to crumble a little bit, and we find ourselves in a constant state of cyber war, where our loyalties are no longer national. The Red scenario, China's digital currency gains dominance. China is making moves. The nation's global yuan payment network, cross-border interbank payment system, already has nearly 1,000 financial institutions, according to the Niki Asian Review, and is making inroads in Africa, quote, due to China's economic clout in the region,

especially with its Belt and Road Infrastructure Building Initiative. And as Ledger Insights reports during June 2019, Africa's payments using China's currency increased by 123% over three years. That said, even as China continues to aggressively make inroads with both currency strength and the DeSep, most of the futurists agree that it's unlikely. that China would gain true hegemony in the next decade, even if the nation continues to gain influence. They broadly agreed with CoinDesk's Michael Casey, who wrote in the Money Reimagined newsletter, quote, to be clear, I see very little prospect of a digital R&B becoming a dollar-like

international store of value for central banks. Rather, the DeSep's programmable qualities could render redundant the very need for a reserve currency intermediary in international transactions, allowing cross-border users to bypass the U.S. banking system. And even if China achieves hegemony, it's entirely possible that the impact would be, on balance, a positive one. Quote, I actually have a positive notion of what China would become, says Professor Michael Sung, co-director of the FinTech Research Center at the Fahai International School of Finance at Fudan University.

He acknowledges the historical baggage of the Communist Party, but notes, quote, if you look at China, they went from real communist to a free market in the space of a decade. It went from the number one polluter in the world to leading the Paris Accord. Sung, a U.S. citizen, has hoped that because China engages in constant experimentation and, quote, micro adjustments, the nation does, quote, care about the local population because it legitimizes their ability to rule. China is not there yet, but it's going to evolve into something like a Scandinavian enlightened social democracy. Futurist Heather Vescent paints a darker picture. Vicent studies cybersecurity and espionage and is the co-author of Cyber Attack Survival Manual.

She points to the likely outcome in a world of Chinese currency hegemony, massively increased surveillance. In Western countries, we have a split between government and the private sector. Not so in China, which is why Chinese espionage supports their private sector businesses. Quote, imagine if Apple was a Chinese company being run globally with the Chinese views, she says. China's not going to change their worldview when they have products in the United States. So how does this change the Internet in 2030? Well, you want to be afraid of surveillance? A scenario of China hegemony would mean surveillance on steroids.

It's not just about the digital currency, Vicent says. It's not just the power of the transaction. It's the value behind that currency. A world in which the Chinese currency eclipses the U.S. currency is a world in which Chinese values eclipse U.S. values. A world of Chinese currency hegemony, she explains, would be the result of other dramatic shifts in power. Again, the futurists do not consider this likely.

Oh, and here's one final cheery possibility about the dominant China scenario. Vesent says that if China has digital currency hegemony, then implies it has made massive strides in quantum tech, the next generation of computing. Quote, we will figure out quantum computing, and that will break the blockchain, says Vescent. The only question is when it will happen and by whom. So in this scenario, the red scenario, assume that China breaks quantum first, and blockchains are no longer secure. What's going on, guys?

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interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. Green scenario, the U.S. retains dominance with a digital dollar. At first, this sounds obvious. This scenario is like today, done. Not so fast. Brett King thinks that given all the competition and headwinds the U.S. could face from other scenarios such as China competition, then if it retains its dominance in the next decade, then it must have done something pretty impressive.

How do you keep the U.S. relevant from a currency perspective? King asks. He then imagines a scenario where the U.S. shows renewed dominance with growth in global infrastructure. First, he considers some basic possibilities. Maybe the U.S. creates advances in autonomous shipping, drone delivery, or supply chain tech. Then he floats what he calls a really out-there scenario, climate change leadership. In the process of all this coronavirus pandemic aftermath, climate change starts hitting, and you've got trillions and trillions of debt all around the world, right? So the U.S. goes to the United Nations and says, we believe that all national debt should be forgiven, but that national debt must be committed to climate mitigation over the next

50 years, and it will be monitored by the global community. King continues on a role. Suddenly, now you've got trillions of dollars of capital that can go towards greening the planet, energy efficiency, and all these sorts of things. So the U.S. is heavily incentivized to go into the Sahara and build massive solar farms that can supply all of Europe as an example. But something like that would make the U.S. increasingly relevant in the system. Blue scenario. A non-government-backed cryptocurrency such as Bitcoin, dominance? What would the internet look like if a private, non-government-regulated currency emerged as dominant? If you could pay anybody anywhere in the world instantly and for free, we wouldn't be so dependent on the advertising model of internet contents, says Birch. Micropayments such as Brave might

finally emerge from niche to widespread. Quote, if I can pay 25 cents to read the thing I want on the New York Times, I don't have to subscribe to it and use credit cards. They don't have to show me disgusting adverts for earwax, so that's kind of a win-win. Then again, he acknowledges that this is class-based, as, quote, the rich can buy themselves out of this cesspit. Birch also highlights the optimist possibilities, as, quote, if you could do business with anyone in the world, hopefully new products and services would spring up to facilitate that trade and interaction. International uncertainty may drive cryptocurrency usage. If we have a stable geopolitical structure, where most people and most nations feel secure,

then that will not encourage a large rise of non-governmental digital currencies, reasons futurist Ross Dawson. Whereas if we have a deep social division in disruption and civil wars in developed countries in the next decade, that's very plausible, depending on how you define civil war. That will fracture societies and trust in government and could lead to wholesale shifts to cryptocurrencies. With apologies to the crypto superbowls, this is not necessarily the Lambo scenario or moon scenario. Dawson imagines a potential world of dueling economies, even within the United States, if a cryptocurrency emerges dominant. One will be the official legal economy that's regulated by the U.S. government like today, and the other an unregulated

shadow economy that's dominated by the cryptocurrency. There will always be national currencies, says Dawson. We're never going to have a time when the government says, okay, we give up. We're not going to do this anymore. He later clarifies that maybe never is too strong of a word, but certainly not in the next decade. So the question is, what's the balance between the shadow economy and the regulated economy? He points to Italy's shadow economy as an example, which by some estimates is more than 12% of the nation's GDP, largely the result of tax evasion. At least in this scenario, Bicketts, coin or some other cryptocurrency is finally not just a store of value or a speculative investment. It could be widely used to buy a cup of coffee, pay your rent, or yes, to buy your pair of

sunglasses. All right, so I don't usually do a section at the end of Long Read Sunday. However, with this one, I had to, for the simple reason that although I love the setup, the framework, the exploration of this piece, I pretty much couldn't disagree more with how most of these people are thinking about the future. On a fundamental level, what almost all of these analyses miss is the role of the free market, as though the future of currency won't be decided in the way that businesses decide to transact with one another rather than in the halls of vaunted government power. That power doesn't exist. I don't believe

you could have a new Bretton Woods in the same way anymore. Markets are too deep and too big and too integrated to go with whatever is proclimated from on high. For more on this, by the way, go check out my conversation with Rao Paul from last week, where we talk about this idea of could a basket-based stable coin system start to chip away at the U.S. dollar's global reserve status? Effectively, the argument is that if that were to happen, it would be because the private market decided it was a useful tool and started to do it, not because some international assembly decided it was the right idea for some reason. Going briefly through each of these scenarios, And if you want more of this content, I could do this as a full episode.

But quickly, the rainbow scenario, I see this as likely but insignificant. And what I mean by that is that it's almost impossible for me to imagine that there aren't millions and millions of private currencies, right? The loyalty programs that we see now are going to be better as tokens in many cases. Because of that, I do believe that you might see a huge Cambrian explosion of sort of single-use tokens that are automatically and effortlessly translated and exchanged, all abstracted away from the user interface and the back end of digital wallets. However, I don't think that necessarily has anything to do. In fact, I'm quite sure it has nothing to do with what people actually consider and use

as money. Now, a different rainbow scenario in which all of these currencies are actually in a Cold War makes a lot more sense to me. I don't think that a decade is a long enough time frame to really see a massive shift. Next up, the red scenario. I do think that China is going to give its all and it's going to use a huge amount of digital yuan diplomacy to try to get people to start to use this thing. It's making a bet that the features inherent

in a programmable money can actually start to peel off percentage from the USD's status as the global reserve. Maybe that's the case, especially when you combine it with the carrot of incentives from Belt and Road. However, I just think that a huge portion of the world is going to be fundamentally skeptical and unwilling to accept a China-based currency as anything other than a short-term currency that they want to get out of as fast as they can. What's more, this idea that China just somehow magically becomes Sweden is ludicrous to me. This was the thinking that got us into trouble

with this at the beginning of the Obama administration when we assumed that participation in free markets would just make China naturally more liberal. It hasn't happened. In fact, it's gone the absolute opposite direction. Turns out, you can have markets without having freedom, and that's not a good combination and certainly not one that we should be encouraging. Third, the green scenario, again, the whole argument that the U.S. needs to have some new technology features to retain its place in the world just ignores the role of markets. The dollar is omnipresent because people demand the dollar. In fact, the shadow dollar system that has nothing to do with U.S. issuance in U.S. rails is so powerful that some like Jeff Snyder argue that it makes Fed policy, monetary

policy from the U.S. almost irrelevant because you can't possibly flood the system with dollars when you have so many trillions of dollars locked up in this totally different system. I think on the scale of a decade, it's nearly impossible to see a scenario in which the dollar isn't still the main global reserve currency other than outright division of the world into a U.S. section and a China section. Or, of course, some massive currency devaluation event, but even that feels more likely to happen over time and slowly than all at once. Finally, the blue scenario. Let's hold aside the fact that they're lumping together everything about crypto and Bitcoin, and instead just focus on Bitcoin. I find it hard to believe that

Bitcoin in 10 years will be the world's reserve currency. At the same time, I find it nearly impossible to conceive of a future in which a non-state, non-sovereign censorship-resistance store of value isn't widely used alongside whatever the combination of global reserve currencies that come from sovereigns is. The idea, the capacity, the ability to have a non-sovereign asset is so fundamentally game-changing on the world geopolitical and economic stage, it's a genie that you cannot put back in a bottle. Whatever combination of Bitcoin and stablecoins it is, there's simply no way that there isn't some separate system that, while certainly able to plug into the main system, functions almost entirely on its own and outside, to some extent, the purview of those

sovereigns. To me, the blue scenario isn't an if. It's just how powerful and how prominent it is. Anyways, guys, like I said, I thought it was a great setup for a really cool conversation, even though I didn't agree with all of the people who are part of that conversation to start. But for now, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.