Libra, China’s digital currency should be a wake up call
There was an interesting subtext that came out of the Congressional testimonies around and about Libra that I believe is not getting the attention and focus it deserves. That is — the competitive benefits the US would receive by creating their own digital currency.
While there are real risks to the US of not getting this right, there’s tremendous potential for positive outcome to the US financial system if it is done right. Still, the US government and clearly Congress should be criticized for not being properly prepared, nor forward thinking and for not recognizing that the US will lose its competitive advantage in the digital space if they don’t get their act together. A key focus is on the threat to US hegemony that the government is frantically trying to protect. We can point to the mood of the Libra congressional testimonies, and the comments from the President and the Treasury Secretary as clear evidence. It’s not necessarily a bad thing, and certainly understandable to express concern, especially given the United States massive trade imbalances, debt issuance and deficits, and the need to use their financial power as a tool to apply strategic political pressure.
While the US government may not be completely ignorant about digital assets and blockchain and the benefits they accrue, they’re unfortunately not too short of that. There’s a colossal opportunity that the US will miss because of their ineptitude, typically glacial bureaucratic movement to understand and embrace anything new, and the ability to recognize the importance of a first mover advantage. Let’s also not forget the threats from new systems like Libra that other sovereigns are certainly considering. We know that the US government focuses on dollar hegemony, sovereign debt status, and all the powers that come with being the strongest and highest demanded currency in the world. But with China building its own digital currency, especially and specifically as reaction to Libra, the US must realize that they’re in a digital arms race. And rather than going to all lengths to protect the status and the status quo the dollar, the US should instead focus on creating its own digital currency to sit alongside the dollar. It needs to get out in front of the digital revolution and not watch it pass by.
The US did take a very cursory look into creating a digital asset, but quickly abandoned any serious consideration and instead has taken a standard opposition posture.
First, let’s take a quick look into what China is doing. China’s central bank, the People’s Bank of China (PBOC) is developing its own digital currency. While they first started to look at this in 2014, the Libra announcement no doubt has helped to keep this project on track. China rightfully sees Libra as a threat to its financial system and sees a digital currency of their own not just as a rebuke or perhaps just a hedge, but a plan of attack to counter future competition. It’s part of their long game economic policy. Any digital currency that is closely tied to the dollar that has an immediate target market of about 2 billion people will have major economic and political consequences to China. The PBoC seems to have approval to work with market participants and institutions to create a digital currency of its own.
At a recent conference, China announced an open research initiative on digital finance, pulling from top Chinese universities like Peking University to accelerate the research. It’s interesting to note that WeChat, which now has exceeded 1 billion users, has banned transactions in crypto currency. Is this strictly a function of internal restrictions? Or was there pressure coming down from the Chinese government, or perhaps even an absolute dictum from the Chinese government, that this is forbidden? That would make sense given that the Chinese government is developing its own digital currency.
If that is indeed the case, then the seriousness of the Chinese government to create a digital currency has to be met with a strategy to counter this no differently than the US would have a strategy to combat a strengthening Yuan, or burgeoning trade imbalances. If Facebook ends up with approval to go ahead with the project in whatever form that ultimately takes, whether it’s through some compromise of their business model, adhering to strict regulation, or whatever, then we could find ourselves in a situation in five years where there are at least two more dominant digital currencies in the world, Libra and a sovereign Chinese currency, for example, that pose a real threat to the US. Add to that Bitcoin and other digital currencies, and the United States will lose not just its coveted hegemony, but also its ability to conduct monetary policy like manage deficits and issue debt, as well as conduct political policy, like imposing sanctions. With that, US hegemony will be lost and all of Congress’s bluster can’t change that.
So far, the US government has been responding to these developments in a typically idiotic fashion. They should already have a complete understanding of this emerging landscape. This includes both executive and legislative branches and key players like the treasury secretary, and members of Congress who seemed woefully unprepared and lack of prerequisite knowledge of how these things work. It seems that many have let their disdain and distrust in Facebook cloud any understanding or ability to see the big picture and to see the real endgame, not just maintaining dollar hegemony, but actually making it even stronger and more powerful.
So, what can be done? Well, simply, the United States needs to create its own digital asset. This is to when the US and Russia were in a race to space and a nuclear arms race for nearly half a century. Today, the US and China are in arms race of their own, this time to economic dominance as they’re both chasing shrinking markets that are losing their borders. This also plays out in web 3.0, where technology can run ahead of any sovereign control. And while there are certainly utopian fantasies that we would like to realize, where data, banking, etc., is in the control and ownership of a global citizen, in fact, a real positive outcome would be a world where sovereigns exist alongside this global decentralized citizen. This would certainly entertain some utopian permutations, as it is an evolution of the powers of the individual right, while recognizing the reality that sovereign nations need to sit alongside these structures for the benefit of their citizenry. In a sense, it’s a modern version of the debates we saw in the continental convention between republicanism and federalism.
This is not a replacement mechanism, but rather an adjunct — have some skin in the game, a digital currency and a payment system that sits alongside the traditional market, and then we’re kind of indifferent to whether or not the digital world succeeds. For this to work, and for this to work properly, the United States needs to put in the effort to create its own digital currency. If they build this tied 100% to the dollar, then the world would then have the most absolute truest stable coin. Rather than having a need for Tether or Dai, all existing digital currencies or assets, which would have their own independent use cases and reasons to exist, can be tied to a US digital asset. That could also be tied to a Yuan digital asset, or whatever it is eventually called, and other sovereign assets who follow suit. This creates a purity to a dual existence of a digital and fiat world. The payment system could be built off a new language like Move and a new protocol, like Libra BFT. This is just as an example. It could be built off some existing structure like Ethereum. And just like we see in industries like aerospace and defense, the government can let companies bid on the contract to build the underlying technology.
The Federal Reserve should still have oversight to maintain the non-political aspects and focus on a limited quantity reserve just like you see in Bitcoin. No doubt the devil is in the details and we can sink into any quagmire we choose, like should this be permissioned or permission less, what the validator notes look like etc. But that’s not the point. The point simply is that there is a tremendous opportunity not just to maintain US hegemony, but also be part of the forces that are creating the new digital financial frontier, and to construct it in such a way that is self-serving and sits neatly alongside the current financial system.
This will no doubt upset many in the crypto revolution who want to do away with the current system. But in so many ways a dual coexisting structure has so many more benefits, benefits including but not limited to a government’s need to issue debt, collect taxes, conduct international trade, build their defenses, the military and so on.
This should be an eye opener and a positive recognition of what is possible if properly addressed and then taken advantage of.