The Breakdown - Will a US Digital Dollar Protect Privacy?

Episode Date: June 16, 2021

The question of digital currencies is a question of power. On today’s episode, NLW explores that power in multiple dimensions: between states, between states and companies and within states with regard to their citizens. NLW looks at recent regulatory announcements, including: The SEC leaving crypto off its regulatory priorities list  A House hearing on the digital dollar -- 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

For those who believe, as I do, that CBDCs are coming, and that, in the U.S. at least, there is some room to shape them. And who believe on top of that, that net net, a privacy-preserving digital dollar is radically better for the world than a U.S. government surveillance coin, then the battle is going to create some unexpected allies and unexpected bedfellows. I think trying to understand where people are coming from rather than just meming their perspectives is pretty valuable in that context. 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.com and bitstamp and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, June 15th, and today we are talking about a U.S. digital dollar and specifically whether a future digital dollar will preserve privacy. Central Bank digital currencies have been one of the key under. occurrence of this show for basically as long as I've been doing it. As I've said before, and I'll say again, ultimately the breakdown is about shifts in power, particularly economic power. The question of central bank digital currencies is absolutely one of power, and that question runs on a few dimensions. There is the question of the power balance between states. The best example of this is China,

whose digital yuan efforts are at least in part an attempt to extend the sphere of influence of their native currency, to internationalize the RMB and claim a larger status as a global settlement currency and world reserve asset. Smaller nations are likely to as well look to digital currencies as a chesspiece and reimagining where they sit. Importantly, this won't always lead them to their own native digital fiatts. As we've seen in the case of El Salvador, there may be compelling reasons to instead look to a non-sovereign, non-aligned, independent money as well. But there's also a key question of the balance of power within states, specifically between state and non-state actors as having the ability to create currencies in the first place. This is a power historically monopolized

by the state. However, private actors, sometimes companies, more often now decentralized networks, are taking on that role in an increasingly significant way. It was, after all, Facebook's ill-fated entrance into the CBD space with its Libra announcement that acted like a global starting gun for every government to take seriously the future of their currency as digital. And of the global powers, no one took that threat more seriously than China. And it wasn't just Facebook that they were concerned with. As digital yuan tests get bigger and bigger, there has been a commensurate crackdown in fintech companies, many of whom were taking on larger and larger financial roles in mainland China. That seems now to be being followed by a targeting of crypto-related companies, although it's not clear yet exactly

how the mining ban and other recent moves add up to something greater. In the U.S., as a new administration gets rolling, there are also new lines being drawn and new questions being asked. The Biden administration is coming into a world in which digital currencies are an inevitable and increasingly powerful part of the economic landscape. It can neither ignore nor hand-wavily ban things. And with those two extremes removed, it must figure out a path that includes them as the force that they are. Part of that discussion inevitably includes not just what to do about Bitcoin and the like, but also questions of a digital dollar. How would it be designed?

How would it function in the world? How would it be maintained? And as I said before, this is in part a question of state versus private power. US denominated stable coins have the eye of the Biden administration without a doubt. But there is another power dimension as well, which is the power that states have vis-a-vis their citizens, specifically the power to surveil and censor their financial transactions. There have been a number of contexts that help us see what the state of all of these conversations are

over the past couple of days. First, the SEC released its 2021 regulatory agenda, and big surprise, there really isn't anything about Bitcoin or crypto. This is downright shocking to some, given SEC Chair Gary Gensler's interest and experience in the space, as well as his comments on it at a variety of conferences and hearings. hearings this spring. He said that investors likely need more protections, particularly around exchanges. But at the same time, he said that those regulations aren't the SEC's job and are something that Congress needs to look into if it cares about it. He seems to have stuck by that idea with these

guidelines. So if the SEC isn't focused on crypto, what are they focused on? Well, a few things. Modernization of market structure, transparency on SPACs and stock buybacks, disclosures on climate risks. This is something that we've seen a lot where the climate concern is entering into the mainstream economic and business infrastructure. And then, of course, a big one short-selling. This is something that has obviously been hugely at play in the case of meme stocks like GME and AMC. So as I said a moment ago, the surprise for many here was simply that they assumed that the SEC would have crypto at the top of its agenda. Other offices like the Office of the Comptroller of the currency seem more actively engaged. The OCC is currently reviewing all of the policies put in place during the Brian Brooks era

that expanded dramatically how banks could interact with crypto. Still, while many in crypto are anticipating more direct regulation from these types of bodies, it would be a mistake to assume that the anticipation is entirely concerned. Anthony Trenchev, one of the co-founders of Nexo, wrote an op-ed this week for Coin Telegraph that argued that regulation was inevitable, but that it isn't something that the crypto industry should fear. In fact, he said, the jurisdictions that work most closely with companies in this space to find pro-innovation lines of regulation will benefit in the global jurisdictional competition for talent

over the next generation. Mark Cuban wrote a piece about Defi with a similar theme, saying that U.S. regulators should get on board, as he believed it could be the next great American growth engine, something he said we've been looking for. So to sum up, there's a lot of anticipation and assumption that more crypto regulation is coming in the U.S., but for now, at least one major body isn't focused there. Today, however, in Washington, D.C., it is the digital dollar-taking center stage. The House Committee on Financial Services Task Force on FinTech is hosting a virtual hearing called digitizing the dollar, investigating the technological infrastructure, privacy, and financial inclusion implications of central bank digital currencies.

There is some reason to think that the increased animosity towards Bitcoin we saw last week from people like Elizabeth Warren was the opening salvo in a campaign to de-legitimate Bitcoin and other private cryptos in the face of an eventual U.S. official digital currency. But if that's what we assume, it's interesting to see who this hearing invited as their guest experts. And what's more, you can get a sense of the focus of each of these experts from their prepared comments. Carmel Cadet is the founder and CEO of MTECH, which she describes as a, quote, U.S.-based financial technology company helping central banks around the world, use modern technology such as blockchain, cloud computing, and data analytics tools to deploy inclusive

and resilient financial market infrastructures. The thrust of her comments are all about financial inclusion and how CBDCs can be a force for providing a formal economic on-ramp to the un-and-underbanked. Dr. Jenny Gessley is a foreign law specialist at the Law Library of Congress. As you might guess, she gives a legal perspective on what it would take to implement a CBDC, as well as a comparative recap of what's happening around the rest of the world. Dr. Nehaan-Norula is the of the Digital Currency Initiative at MIT. She goes deep into design considerations around CBDCs, but also makes this important point. Quote, cryptocurrency and central bank digital currency are not mutually exclusive and will coexist.

One prominent reason people use cryptocurrency is because its issuance is determined by software in a decentralized network instead of a central bank. A central bank digital currency would not replace this preference. She goes on to explain specific innovations that came from cryptos which will aid the development of CBDCs. But the final two speakers, both from very different perspectives, focused on the importance of designing a privacy preserving CBDC. 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 6.9% APR, earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant Nexo exchange. Try the Nexo Wall

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Jonathan Darmapollin is the founder and CEO of E-Ccurrency, which is a company designed to help central banks build CBDCs. He writes, It is both customary and an intrinsic feature of cash that transactions between parties remain private. in a CBDC environment that privacy may not be a given and cannot be taken for granted. It will be essential to consider how privacy is respected and how personal data is protected in a CBDC arrangement. Depending on the design of a CBDC and the extent of the central bank's role in the arrangement, the central bank could have access to an unprecedented scale of granular

transaction information. Possibly transactional data could be available to certain third parties like banks and service providers or in the extreme to everyone. This close linkage between money and data contrasts with physical banknotes, which do not carry with them transaction data that can be connected to a specific person and their history of financial dealings. The legal framework for privacy as it pertains to CBDC would require specific attention. Rohan Gray, who you may remember as one of the authors on and consultants for the Stable Act from last year, also had some extremely choice words about exactly this. Quote, it is not uncommon to hear policymakers claim that the adoption of a token-based digital

fiat currency instrument that could be used anonymously offline in a peer-to-peer manner, without requiring any common ledger or record, would be radical or extreme. I profoundly disagree. Preserving the right to hold currency and make peer-to-peer payments directly, without third-party involvement or approval is a small-C conservative response to the socially disruptive effects of digitization in the Internet. If we do not take active and committed steps to reverse our decline into information in surveillance capitalism, including ending the so-called war on cash that is slowly transforming every aspect of our

transactional lives into a digitized data stream that can be centrally surveilled and censored, we will end up in a world in which token money, and the freedoms and civil liberties that it affords, are functionally extinct. He reinforces this in his conclusion, saying, quote, the right to transactional privacy and anonymity is a bedrock of political freedom and democracy, and should not be abandoned as we transition to a permanently digitally connected society. Instead, policymakers should adopt a do-no-harm principle and commit to preserving currency neutrality in both design and implementation. If you think that this take on privacy sounds like a lot of Bitcoiners, you're not wrong.

However, Rohan does diverge pretty significantly from many of the folks out there on Bitcoin Twitter. He explained that divergence extremely well when Mark Hotstein from CoinDesk retweeted this conclusion about privacy and asked, but Rohan, in light of the Snowden Revelations, 50 years of Growing Bank Secrecy Act, financial surveillance, and recent trend of activist pressure to de-platform pariahs across spectrum, can we trust the U.S. government to make e-cash that replicates privacy and neutrality of the paper stuff? Rohan responds, no, I think you need free and open-source software, hardware, and neutral spectrum to verify. But it's important not to confuse skepticism

towards altruistic expression of government power, with the legitimization of the idea that there's another alternative. The challenge of building privacy respecting public money is real, but it's not impossible. We have literally done it before. By contrast, private monies are, as money, fundamentally not capable of providing a genuine alternative to the full range of functions and social roles public money provides. So to borrow a phrase, in my view, the only way out is through, not to try to blow off society with crypto. Mark responds, is crypto blowing off society or building a better one? Cypherpunks can write code a lot faster than earnest policy wonks can persuade grandstanding politicians to remember the Fourth Amendment. Rohan responds,

It's building a better one in the sense that Trunchbull believed a school without children would be better. It sidesteps all the actual important questions of public governance that money implies. What you're contrasting here, politicians and coders, is a category error. The reason private actors, including corporations, enjoy such hegemonic influence over certain aspects of our lives, is precisely because they are not responsible for the rest. If you define the challenge of building a society so narrowly as to avoid all the actual difficult parts of social governance, then it's easy to fool yourself that crypto represents in all different. But the mistake is baked into the framing.

Now, one more thing if you're ready to cast aside Rohan again as an enemy. Going back to that point where he said you need free and open source software, Mark responded, indeed, free and open source software seems non-negotiable here, no back doors, no skeleton key. National security establishment would balk at this, though, question mark. Rohan responds, yes, f*** them. I don't think we should be taking policy advice about how to design our money from the people who think the Patriot Act was a good thing and that James Clapper is a patriot.

So, I think if I had to sum up Rohan's point vis-a-vis crypto, is that he just fundamentally doesn't believe that working on crypto is a substitute for working through the mechanism of government, messy and frustrating as it is, to try to build a better public money. My point in bringing all of this up is this. As I've said before, I think it's an ultimately reasonable decision to simply opt out entirely and focus on Bitcoin as an alternative, if that's the right decision for you. However, for those who believe, as I do, that CBDCs are coming, and that in the U.S. at least, there is some room to shape them, and who believe on top of that, that net net, a privacy-preserving

digital dollar is radically better for the world than a U.S. government surveillance coin, then the battle is going to create some unexpected allies and unexpected bedfellows. I think trying to understand where people are coming from rather than just meming their perspectives is pretty valuable in that context. Now, speaking of interesting allies, I also want to play a clip from Michael Sings. on CoinDesk TV yesterday. I think the U.S. dollar is going to spread to 5 billion people. I think that this decade is going to see the explosion of the U.S. dollar as the reserve

currency of the world. It'll be the digital currency that will be on every iPhone and every Android phone and every country in Africa and Asia and South America. And it'll move on Bitcoin rails. The Bitcoin Open Monetary Protocol is what allows. the U.S. dollar to spread to billions of people. In an inflationary environment, money breaks down into two forms. There's a medium of exchange. We'll call it the currency, and that'll be controlled by governments and the U.S. currency is going to be the most powerful one. And then you need a

store of value, and that's an asset, and Bitcoin is the most powerful store of value on Earth. There is some very interesting narrative making going on here. To me, it's clear that Sailor is setting up a both and rather than an either-or story for regulators when it comes to Bitcoin and the dollar. In his scenario, the dollar not only remains supreme, but actively increases its hegemony. Bitcoin Rails helps it to do that, and in the meantime, Bitcoin settles into its role not as a payments threat to USD, but as a digital gold that sits under the Profligate U.S. dollar. I don't know what conversation Sailor has had or is having with U.S. officials, but it's very clear that he's trying to preemptively answer as many questions about Bitcoin as possible.

This is right in line with his actions around the Bitcoin Mining Council. BMC is ultimately trying to create a context to address environmental concerns and set achievable goals that can give interested observers a way to check that box off their list. It's also clear what his incentive to do so is. Micro Strategy has filled another prospectus with the SEC to offer up to $1 billion in Class A common stock to, you guessed it, buy more Bitcoin. Saylor obviously thinks that this price for Bitcoin is a steal and wants to load up as much as he can. In the meantime, I continue to find everything that's happening right now vis-a-vis digital money

and digital currency and government bodies a huge fascination. I think it is going to shape the next generation of how people even who have never heard of these things interact with money and the world around them. As I figure it out, I appreciate you listening, guys. Until tomorrow, be safe and take care of each other. Peace.