How the crypto space can play spoiler in the global fight for reserve currency status.
As currency wars begin to hot up around the globe and fintwit bobbleheads struggle to agree if we will see inflation or deflation, two articles appeared recently that show just how stark the monetary divide is, even between allied nations.
Firstly, to this Bloomberg article where Eurozone central bankers have been shouting at the nearest cloud, concerned with how projects like Facebook’s Libra among others, threaten financial stability in Europe and should come under scrutiny. All ostensibly to protect the poor souls living in Europe who don’t know any better I’m sure. The sheer amount of hypocrisy and doublethink defies belief. French Finance Minister Bruno Le Maire comes out strong, stating “This point is something that cannot be jeopardized or weakened by any kind of project including the so-called Libra project” while referring to how the ECB should be the only organisation allowed to print money. So immediately the truth is revealed, the Euro is so weak that the introduction of a stablecoin threatens the comfy position of those who are at liberty to print a currency into oblivion, at the same time revealing that the one trick up their sleeve doesn’t actually do what they claim and protect you from instability. Instead a haphazard and reactive monetary policy is what causes the instability in the first place. Christine Lagarde similarly laid out her thoughts in this speech, clarifying the perceived threats and reinforcing the message that the ECB is almighty and currency that isn’t backed by a central bank is worthless. Again it is peak irony for someone with their finger on an ‘infinite print’ button to call a 1:1 backed USD stablecoin a threat to financial stability.
Meanwhile in America this article from Electric Capital talks more about the potential synergies between the crypto space and policy leaders in government. It’s interesting because while the US hasn’t been outright hostile towards cryptocurrencies, it hasn’t welcomed adoption with open arms either. It may already be too late for them to ban specific coins and I would suggest it’s unlikely but not impossible, mainly because at this stage there is a whole industry built around the asset class. Particularly with enterprises like Grayscale having billions invested, there will be severe ramifications of a pushback that go beyond the small group of cypherpunks that congregated around crypto in the formative years. What Electric Capital most interestingly point out is that for the US to combat the rise of China’s Central Bank Digital Currency (CBDC), it may be time to join forces with the crypto crowd rather than ignore/regulate the space until it’s too late. Nothing unites two factions faster than a common enemy.
So back to Europe. I want to pick apart one particular soundbite purely to highlight the hypocrisy. At first this type of talk makes me fear for the development of blockchain and decentralised finance. When you break it down however it’s clear the central bankers are just trying to spin a narrative and they either don’t understand, or more likely, do understand what non-sovereign stores of value represent, but are going to do their best to crush the threat regardless. The first comes from the president of Bundesbank Jens Wiedmann, who submits “Many people value cash very highly, and for legitimate reasons. It provides privacy, and its use does not necessarily depend on technical infrastructure”.
So just to be clear, the narrative began back in 2012–14 that Bitcoin is used by drug dealers and child traffickers due to its anonymous traits, when in reality all transactions are recorded on a public ledger for anyone to verify as a fundamental tenet of the technology. But still that was the angle. And now we have Jens saying that cash is used as it provides privacy, and that is a legitimate reason for it’s continued use. So all the extra layers of Know Your Customer (KYC) and Anti Money Laundering (AML) regulation that have been brought in to combat illegal uses of fiat or cryptocurrency were for what exactly? If the privacy cash affords is legitimate then why is my account frozen and investigated when I transfer too much to Coinbase for purchasing crypto? Why am I limited to withdrawing over £10,000 in cash from my bank?
As always it’s simply a case of twisting facts to suit the spin-du jour, and today that means cash good, stablecoins bad. Didn’t you know we were always at war with Eurasia? And don’t forget you should be using cash for your ‘legitimately private’ transactions, try using that line next time you go to the bank. It’s guaranteed that as soon as the ECB has the infrastructure in place, cash and semi-anon technologies like Bitcoin will become the bad guy again, so the digital Euro can swoop in and save the day as the centrally controlled white knight. Have no doubt that the best parts of blockchain tech will be used to spy on and potentially even control your purchases. That is one of the threads being explored by the Federal Reserve in response to the economic slowdown Covid-19 shutdowns have caused. Printing money is no good without spending in the real economy(velocity), what better way to increase the velocity of money than by sending digital dollars to mobile wallets with spending stipulations. This incentivised airdrop would get the population to download the app and the promise of free money (that has to be spent in your local area/specific industry) can be controlled very tightly. It’s a central bankers wet dream.
It will be interesting to see just what comes out of the two day meeting on digital currencies, held in Germany next week. But as it stands the public stance from the two sides of the Atlantic couldn’t be more different. As someone with one foot in crypto and one still in traditional finance it pains me to see old people with a tight grip on power and loose grip on reality stifle innovation just to keep a failing system on the brink of collapse, but soon they may be forced to think again. As Europe starts to split with Brexit and the Italy/Spain bailout being major points of contention, the ECB is doing everything they can to keep the 20+ year Euro experiment from failing. Coming out with strong words against upstart technologies might sound good to their ears, but in the end as China and the US choose to move forward along the cutting edge, dinosaurs like Lagarde might find themselves swallowed up or left behind, and the citizens of the EU will be dragged down into the very financial instability the ECB sought to fight against.