The Breakdown - Why the Biden Administration Is Increasingly Concerned with China’s Digital Currency

Episode Date: April 16, 2021

On today’s “The Breakdown,” NLW looks at an underreported story from earlier this week. There are increasingly loud whispers that officials across several agencies, including Treasury, National Security and Defense, are growing concerned with China’s digital currency efforts.  NLW looks at: Why CBDCs are about power, not digital efficiency  Why Facebook’s libra was the starting gun China’s possible objectives  Why the U.S. tone on a digital dollar is changing  How Gary Gensler as SEC Chair could portend a broader attitude shift for the U.S. vis a vis digital currencies  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com  

In many ways, China and the U.S. have represented the poll positions. China, the Challenger, has been aggressively researching, building, and now testing and deploying their digital yuan while loudly proclaiming their intentions. The U.S., on the other hand, the incumbent, has, yes, been doing some research quietly in the background, but staying much more muted in its declarations. Indeed, the Standard Party line has been, for some time, we're exploring and we haven't made up our mind. That is starting to shift.

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 nexus.io and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, April 15th, and today we are talking about why the Biden administration is increasingly concerned with China's digital currency efforts. Now, I'm not going to do a brief today, but I think we have to do it. do at least a quick check-in on coin in the wake of yesterday. Coinbase brought some much-needed volatility to traditional markets. When it finally launched after hours of anticipation yesterday, it surged up over $420. Nice. Then back down to about $313, then back up to a little under

$340. It's currently hovering around 33. In the meantime, however, the narrative battles have already begun. Why? Well, the inimitable Kathy Woods started buying. Here's how Eric Balcunis, Bloomberg's ETF guy put it. ARC bought the crap out of coin today. Put it in three ETFs, ARK, ARCF, and ARCW. That's ARC's flagship innovation fund, ARC's Fintech Innovation Fund, and ARC's Next Generation Internet Fund. Balcunis noted another ETF block that also bought coin and said, quote, this has to be

a record for most ETS to hold a stock on day one trading. Even IPO ETFs wait a few days. In total, these arc funds bought about $749,000 shares, $246 million worth of coin, and interestingly, to do this, they sold 240,000 shares of Tesla. So a lot to debate around that. However, as I mentioned, I think the thing to watch now, if you care primarily about Bitcoin or crypto markets, is to what extent people who are watching coin in the NASDAQ are shaping narratives about the crypto space as a whole.

For example, here's what Sam Tribuco from Alameda had to say about it. Many tech IPOs have a predictable pattern of getting overhyped and then crashing. If that does happen, probably that's bad for crypto in the predictable ways. I definitely bet on that. But I am not sure if coins listing will follow that pattern. It's sort of hard to exaggerate just how hype this thing is in a way which makes it seem possibly categorically different from the snaps of the world. For us here on the breakdown, we'll just have to wait and see.

but I'm really excited to get to our main discussion. I have been closely watching the Central Bank Digital Currency space for a few years now, really ever since Libra pushed it onto the mainstream agenda. To me, it has less to do with cryptocurrencies per se, although they certainly overlap with the story, and more to do with the global balance of economic power. CBDCs are a technology that purports to be about efficiency while actually being about power and control. That's why it was Libra that started the global race. Facebook, with its 2 billion-plus users and the tyranny of the algorithm, had an amount of power that governments were already nervous about. Giving them additionally the power to control vast swaths of economic activity with the token they had seniorage over

with a value based on a basket of currencies selected by them and controlled by them just wasn't going to happen. Since then, we've seen most major governments in central banks make at least some mention of central bank digital currency strategy. In many ways, China and the U.S. have represented the poll positions. China, the Challenger, has been aggressively researching, building, and now testing and deploying their digital yuan while loudly proclaiming their intentions. The U.S., on the other hand, the incumbent, has, yes, been doing some research quietly in the background, but staying much more muted in its declarations. Indeed, the standard party line has been, for some time, we're exploring and we haven't made up our mind.

That is starting to shift. First, we're seeing comparatively forthcoming comments from Jay Powell saying that this is the year they really dig into a digital dollar. Second, the Boston Fed announced that by the beginning of the summer, they would be sharing some prototype designs for a potential digital dollar that they had developed with MIT. Third, and the specific context for this show were getting new reports that some within the Biden administration are getting nervous about China's aggressive push for a digital currency. A few days ago, Bloomberg ran a piece titled Biden Team Eyes potential threat from China's digital yuan. It starts, the Biden administration is stepping up scrutiny of China's plans for a digital

yuan with some officials concerned the move could kick off a long-term bid to topple the dollar as the world's dominant reserve currency, according to people familiar with the matter. So who was concerned? Apparently, its officials at the Treasury, State Department, Pentagon, and the National Security Council, so just about everyone. What are they doing about it? For now, it sounds like it's just learning and trying to understand the implications. Of course, none of these officials are commenting on the story, but it sounds like there are two dimensions of concern. The first is more immediately pressing, and is about whether the digital yuan could be used to work around U.S. sanctions. This would, of course, be a very practical

power shift, not about some global balance and reserve currency status, but instead, just about giving China more global financial leeway outside of the U.S.-led system. While this seems like something that might be highly desirable from China's point of view, there is also counter-evidence. China recently established a joint venture with Swift. While details aren't known about it, Swift is the current cross-border settlement rails. So this would suggest, perhaps, that China's digital currency wants to plug into the existing system. Dot-da-dot, question mark, question-mart, maybe. 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% and swap between more than 75 market pairs with the instant nexo exchange. Try the nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. The other concern is about a more fundamental challenge to the structure of the global financial system. The idea that the U.S. dollar may be coming to the end of its reign as the world's reserve currency. Now again, this is not purportedly what China is. is focused on. Official comments from the Chinese have put the target on the back more of private

alternative monies, in air quotes, competing within China. Specifically, China says they want to reduce incentives to use cryptocurrencies, but even more importantly, private sector electronic payment systems like AliPay and WeChat Pay. This is exemplified and validated by moves like forcing Alibaba's ant financial to become a financial holding group which will be regulated like a bank. For more on that, check out the episode I did on Peter Thiel's statements about Bitcoin being a Chinese financial weapon last week. All right, but back to the U.S., what is the actual response if all these officials are getting concerned?

As I said, there's enough bluster brewing behind the scenes for Bloomberg to dedicate some serious digital ink to it, but is there more than that? Well, that same article points out that Congress has been increasingly interested in a digital dollar, bringing it up with some frequency with both Jerome Powell and Treasury Secretary Janet Yellen in hearings. Yellen, for her part, has shifted the tone from her predecessor, Stephen Mnuchin, saying that, quote, it makes sense for central banks to be looking at it, it being digital currencies. What's more, this is clearly a rising narrative. In the recent weeks, both the Financial Times and the Wall Street Journal have written major think pieces about the

threat of China's digital currency ambitions. The U.S. Director of National Intelligence also recently put out a report on global trends and threats over the next 20 years or so that makes mention of this. Let's read the relevant paragraphs titled Uncertain Future of Money. The financial sector is not immune from the technology changes that are transforming other industries. Digital currencies are likely to gain wider acceptance during the next two decades as the number of central bank digital currencies increases. China's central bank launched its digital currency in 2020 and a consortium of central banks working in conjunction with the Bank of International Settlements is exploring foundational principles for sovereign digital currencies. The introduction of

privately issued digital currencies, such as Facebook's proposed Libra, would further drive acceptance of digital currencies. The extent to which privately issued digital currencies will provide a substitute for the use of national or regional fiat currencies, including the U.S. dollar and the euro, to settle transactions, will depend on the regulatory rules that are established. The U.S. dollar and the euro are also likely to face threats from other fiat currencies, the potency of which will depend on changes in the current international financial architecture and the global importance of international linkages. privately issued digital currencies could add complexity to the conduct of monetary policy

by reducing countries' control over their exchange rates and money supply. Now, going back to this line about depending on the regulatory rules that are established, I'm not exactly sure what it means. I guess it means whether governments ban those private currencies out of existence. They're talking a little bit about things like Libra, but to the extent they're talking about things like Bitcoin, I don't necessarily think they have a full grasp on how difficult or near impossible it is to control that type of asset. Which brings us back to another way of looking at this whole thing. In addition to thinking about fighting strictly on the access of central bank digital currencies, it might make sense for the Biden administration to consider how private currencies, especially Bitcoin, could become

political tools. I did a show last week about Peter Thiel's provocation that Bitcoin was basically a Chinese financial weapon. When Teal said that the U.S. might really need to look at how that worked, Bitcoin Baer said he was saying the U.S. needed to regulate Bitcoin more harshly, while Bulls said it was Teal's way of arguing that the U.S. needed to have a proactive and positive Bitcoin strategy. Whatever he meant, the story got an interesting next chapter when, a few days ago, U.S. House Minority Leader Kevin McCarthy appeared on CNBC and positioned Bitcoin in digital currencies as of geopolitical significance. Anchor Joe Kernan reminded McCarthy of a 2019 appearance where he had a, quote, very positive view of Bitcoin and asked,

do you think Secretary Yellen and Fed Chair Powell have a good understanding of digital currencies or Bitcoin at this point? To which the congressman said, well, I think I was right then and I'm right now. I think they tried to ignore it and make it go away. Jamie Diamond will tell you that from the beginning he was wrong. This is moving towards the future. They should not ignore it. They should not only learn more about it, but the basis is going to continue to grow. And this is something that those who regulate, those who are in government that make policy, better start understanding what it means for the future, because other countries are moving forward, especially China. I do not want America to fall behind.

I want the next entry to be ours. That's why I want to look forward, not backwards, and not keep my head in the sand. So, sounds to me, the question becomes, is there a possibility that the U.S. heads in a more pro-crypto direction, where it views these technologies as much as opportunity as threat? It is certainly not determined to be so. There is plenty of energy pushing in the opposite direction. In fact, many of the advocates of a digital dollar want it so that U.S. citizens won't need to mess around with a private version.

But when it comes to the regulations surrounding private digital currencies, the new SEC top cop, perhaps the most significant regulator on that front, would seem to be a comparative boon for the industry. By a 53 to 45 vote, Gary Gensler has been confirmed as the new chair of the SEC. I've discussed Gensler a number of times on this show, notably his time at the CFTC, and his teaching a course on Bitcoin. and blockchain at MIT. I'll only add here what he said at his confirmation hearing. Quote, Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they've also raised new issues of investor protection that we still need to attend to. If confirmed at the SEC, I'd work with fellow commissioners to both promote the new innovation, but also at the core to ensure investor protection.

It's a pretty non-committal answer, but an attitude shift perhaps. Whatever the case, it hasn't stopped anyone from predicting that this is a year of Bitcoin an ETF is approved. SEC Commissioner Hester Purse, who's been on this show, also took this week as occasion to reintroduce a version of her Safe Harbor legislation. As this episode today hopefully demonstrates, I personally think there are bigger fish to fry than an ETF, and I hope that a pro-innovation disposition helps the U.S. advance a number of larger geopolitical axes as it relates to Bitcoin and digital currencies more broadly. For now, though, I hope you are having a great week getting ready for that weekend. It's within sight.

Until tomorrow, guys. Be safe and take care of each other. Peace. We're witnessing the greatest paradigm shift in finance in modern history. Join thousands of newsmakers and influencers talking the future of money at Consensus by CoinDesk. A live virtual experience of leaders, change makers, virtual reality meetups, keynotes from Ray Dalio, Gary Vaynerchuk, and much more. Get an up-close look at the boom in crypto, the surge in institutional investment in Bitcoin, the NFT mania, the breakneck innovation and decentralized finance, and the coming disruption from central bank digital currencies.

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