On June 30th, 2020, the Senate Banking Committee held a hearing on the future of the digital dollar. The pressures to create a digital USD are mounting as China recently began testing its own digital currency – the DCEP, which will be included in popular applications like WeChat and AliPay. Of particular concern is widespread adoption of a digital yuan in emerging markets and in international trade.
The idea of a dollar-backed digital currency gained mainstream media attention last year during the Libra congress hearings, where Facebook introduced a new type of digital unit backed by a basket of currencies and commodities.
Although David Marcus insisted that Libra users will not have to put their trust in Facebook and that Libra was a decentralized currency, regulators weren’t buying it and expressed concern over the long-term threat to the traditional financial system. On July 9, 2019, regulators requested a moratorium on the project.
In December, Libra released a new roadmap, proposing several digital-fiat currencies deriving their values from the USD, British Pound, Swiss Franc and others, thus creating an efficiency layer on top of the current financial system. Users would be able to access these digital currencies through a wallet installed on their phone, and potentially through WhatsApp chat and Facebook Messenger.
Distribution issues of the $1200 COVID stimulus checks, created new momentum for the digital dollar (and a more efficient financial distribution machine). It is no secret that many are still waiting for their stimulus checks, while $1.4 billion in stimulus was sent to dead people.
Most recently, Congresswomen Rashida Tlaib (D-Mich.) and Pramila Jayapal (D-Wash.) introduced a new stimulus proposal of $2,000 per month to residents through the Automatic BOOST to Communities Act (ABC Act). Under the ABC Act, Congress would authorize the Federal Reserve to create “FedAccounts,” or “Digital Dollar Account Wallets,” which would allow U.S. residents and business to access financial services through an app on their phone.
Building on this momentum, the Senate Banking Committee continued the discussion of the digital dollar yesterday.
Some highlights from the hearing include:
- Senator Tom Cotton (R-Ark.) stated, “The U.S. needs a digital dollar…The U.S. dollar has to keep earning that place in the global payments system. It has to be better than bitcoin … it has to be better than a digital yuan.”
- Chairman Mike Crapo (R-Idaho) expressed concerns of regulator oversight for stable-coins.
- Charles Cascarilla of Paxos testified advocating for stable-coins, stating that they address the “antiquated plumbing” of our financial system as well as financial inclusion. “Blockchain based stable-coins allow everyone access”.
- Nakita Cuttino, visiting assistant professor of law at Duke University, discussed the friction in the current payday cycle and the rising demand for costly advanced-payment apps which could be resolved with digital currencies. “In the absence of public policy addressing open access payments and real-time payments, low-income and moderate-income Americans will continue to have limited resources needed, whether by traditional fringe services like payday loans or some novel fringe service.”
- Former CFTC Chairman Chris Giancarlo and head of the Digital Dollar Project, emphasized the “social and national” benefits such as increased speed, lower costs and issues of financial inclusion. “Darwin said the most adaptable survive. And I think that is true when we transition to a new architecture. To adapt to it, will help bring benefits to the society at large.”
It is unclear how soon the digital dollar will come into existence, although increasing competition from China may be the push U.S. regulators needed.
Carney: A new virtual currency could ease reliance on US dollar
The High Stakes of the Coming Digital Currency War
Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. The real challenge for the United States isn’t Facebook’s proposed Libra; it’s government-backed digital currencies like the one planned by China.
Libra Crypto Curreny: The Spanish Prisoner
Seven or eight years ago, I was on a commuter flight, sitting in an aisle seat. Two rows ahead of me, across the aisle on my right, a guy was arguing with his wife/girlfriend. It wasn’t a ferocious argument, but any sort of personal disagreement is noticeable in these circumstances, and it had been simmering since I noticed them boarding the plane.
There were two other things I noticed when they sat down. The wife/girlfriend had the husband/boyfriend’s name – Randy – tattooed on the back of her neck, and Randy had the letters T – R – U – S – T tattooed on the fingers of his left hand. I remember smiling to myself when I saw this. Obviously these two were from a very different background than me, but I really appreciated the public display of commitment they had made by getting these tattoos. I remember thinking to myself that I bet their relationship was a strong one, even though the disagreement seemed to simmer throughout the flight.
The plane landed and we all stood up. And then I saw the letters tattooed on Randy’s right hand.
N – O – O – N – E
All of a sudden, I was pretty sure this guy’s name wasn’t Randy. All of a sudden, I was pretty sure this relationship wasn’t likely to last.
I feel like I have TRUST NO ONE tattooed on my hands today, and if you’ve been working in finance for more than 10 years, I bet you feel exactly the same way.
Used to work for Bear? I know you feel this way.
Used to work for Lehman? I know you feel this way.
Used to work for Citi? I know you feel this way.
Used to work for Merrill? I know you feel this way.
Used to work for Deutsche Bank? I know you feel this way.
Yeah, we’ve all got these tattoos today. We have them as a reminder, as a figurative reminder (or literal in the case of “Randy”), that we really really really shouldn’t trust anyone AGAIN.
Because we need a reminder. Because we want to trust again.
Jimmy Dell is the con man in the 1997 David Mamet movie, played by Steve Martin in his finest dramatic role. In lines like above and below, Jimmy builds a personal trust with the mark by calling his attention to the lack of trust in business relationships. Effective consultants do this a lot, speaking of confidence games.
Jimmy Dell: Always do business as if the person you’re doing business with is trying to screw you, because he probably is. And if he’s not, you can be pleasantly surprised.
That’s the thing about the Spanish Prisoner con. It doesn’t work on saints. It doesn’t work on people who forgive and forget, who turn the other cheek and have an unending reservoir of faith in their fellow humans. It also doesn’t work on sociopaths. It doesn’t work on people who truly trust no one, who can lie to themselves and others without consequence or remorse.
The Spanish Prisoner con works best on smart and accomplished people who think they have TRUST NO ONE figuratively tattooed on their hands, who think they’re too clever to be fooled again, but end up only being too clever by half.
The Spanish Prisoner con works best on coyotes.
Too Clever By Half
Who is a coyote? A coyote is a clever puzzle-solver who really has the best of intentions. Who really wants to be successful for the right reasons. Who really wants to accomplish something of meaning in the world. Who is smart and aware and nobody’s fool. Who has been beaten up professionally a bit and has a healthy skepticism about the business and political world.
And who is just a little bit on the make.
The defining characteristic of the Spanish Prisoner con is that the mark believes he is doing well while doing good. The mark believes that he is doing the right thing, that he’s the good guy in this story. And if the liberated Prisoner is financially grateful, or if the Prisoner’s sister is grateful in her own way if you know what I mean and I think you do … well, that seems only fair, right?
Now the Spanish Prisoner doesn’t have to be an actual person that needs rescuing. That’s a con for the rubes. The Spanish Prisoner is what Alfred Hitchcock called a MacGuffin – anything that serves as an Object of Desire for the mark, anything that motivates the mark and furthers the narrative arc of the con.
In fact, the most effective MacGuffins are rarely simple signifiers of wealth like an rich Spanish dude. No, the most compelling Spanish Prisoners are Big Ideas like social justice or making America great again or resisting the Man. That’s what gets a coyote’s juices going. Especially if there’s also a pot of gold associated with being on the right side of that Big Idea.
The most successful con operators are the Nudging State and the Nudging Oligarchy. Why? Well, partially because you’ve gotta have some heft to credibly commit to rescuing a Big Idea from the clutches of whatever Big Baddie has it now. But mostly because running the con for money is just thinking waaaay too small.
The Nudging State and the Nudging Oligarchy don’t need your money. They already have it!
The con here is to gain your trust – again – so that you willingly hand over your autonomy of mind. So that you accept without thought or reflection the naturalness of your current relationship to the State and the Oligarchy.
You’d never fall for this con if it were part of a straightforward commercial arrangement like a job or a purchase. Please! You’re much too savvy for that. You have TRUST NO ONE tattooed on your hands, remember?
But for the chance to help rescue a Big Idea …
But for the chance to make a few bucks or enjoy yourself a bit more as part of doing the right thing …
There’s not a coyote in the world that can resist that bait. And that’s why once you start looking for the Spanish Prisoner con, you will see it everywhere.
Libra, the cryptocoin promoted by Facebook, is a Spanish Prisoner con.
What’s the Big Idea? Why it’s banking the unbanked. It’s facilitating cross-border remittances. It’s bringing the benefits of crypto to the global masses. ALL OF THIS IS TRUE. So far as it goes.And if it facilitates e-commerce along the way? if it’s possible to make a few bucks or enjoy some greater conveniences as part of Facebook and its partners executing on this Big Idea? Well, what’s wrong with that?
What’s wrong is that this is how Bitcoin dies.
This is how a censorship-embracing coin replaces a censorship-resistant coin. This is how the State and the Oligarchy co-opt crypto. Not with the heel of a jackboot. But with the glamour of convenience and narrative.
And in a few years it will all seem so natural to you.
Using government-approved electronic money will be the water in which you and your children swim. You will not be able to imagine a world where a censorship-embracing coin is not everywhere.
Libra was designed to co-opt Bitcoin.
Libra was designed to allow government oversight over your economic transactions.Libra was designed to provide a transparent regulatory window and control mechanism over your money.
Libra was designed for Caesar.
“Boo, terrorists!”
A year from now, the narrative story arc regarding “criminal activity” through cash transaction networks AND censorship-resistant transaction networks like Bitcoin will be louder, not softer. In three years, it will be deafening.
Libra and its e-commerce convenience, together with its Big Idea skin of helping The Poors … that’s the carrot.
The “Boo, terrorists!“ narrative … that’s the stick.
Will Bitcoin itself be outlawed? Maybe. But I really doubt it. It’s too useful as a societal steam valve, now that we’ve got Libra and (soon) other Oligarchy-sponsored and State-supported cryptos in circulation.
What does Bitcoin become in a world where state-approved e-money is in wide circulation?
It becomes an act of effete rebellion, like a non-threatening tattoo on your upper arm that you can cover up with a shirt if you like.
Bitcoin becomes a signifier of Resistance rather than a tool of Resistance.
Owning Bitcoin will make you a Bad Boy! or a Bad Girl! … a safe malcontent that the Nudging State and Nudging Oligarchy are delighted to preserve.
What’s my message to the true-believers who continue to see Bitcoin as a tool for Resistance?
For the next fifty years, you get to play the role of the grumpy old man yelling at clouds.
You know, the role that gold true-believers got to play for the past fifty years.
It’s a miserable way to live.
It’s a miserable way to live for two reasons.
First, and most crucially, this role that the Nudging State is laying out for you is steeped in negative energy. You will find yourself rooting for catastrophe. You will find yourself hoping for decline and collapse. You will find yourself conflating justice with loss and comeuppance. You will take on sadness and schadenfreude as your resting psychic state. Trust me when I say that I know of which I speak. Negative energy is deadly. That is not a figurative statement. It will literally kill you.
Second, you’ll be infested by raccoons, which will be tolerated if not encouraged by regulators, in exactly the same way they are tolerated if not encouraged by regulators in gold-world. Sure, you’ll have the occasional show trial of egregiously aggressive security frauds and Crypto-Funded Criminals ™, but the run of the mill hucksters and con men will walk with impunity.
Because this is what ALWAYS happens.
The money quote from Too Clever By Half:
And that brings me to what is personally the most frustrating aspect of all this. The inevitable result of financial innovation gone awry, which it ALWAYS does, is that it ALWAYS ends up empowering the State. And not just empowering the State, but empowering the State in a specific way, where it becomes harder and harder to be a non-domesticated, clever coyote, even as the non-clever, criminal raccoons flourish.
That’s not an accident. The State doesn’t really care about the raccoons, precisely because they’re NOT clever. The State — particularly the Nudging State — cares very much about co-opting an Idea That Changes Things, whether it changes things in a modest way or massively. It cares very much about coyote population control.
It’s all about coyote population control. It always is.
Is there a way out of this for Bitcoin? No. Co-option by the State and Oligarchy was the Doom of Bitcoin from the beginning.
I mean … I say “Doom” like it’s going to be hurled into the fires of Mordor, but that’s not it at all. There will still be true-believers and raccoons alike generating tradable narratives. You’ll still be able to make money by trading Bitcoin on these narratives (and altcoins, too, I’d expect, although I have no idea how you generate a compelling altcoin narrative these days).
It’s not like Bitcoin is going to go away.
But Bitcoin is going to be permanently diminished in its social importance by the adoption of Libra and other Oligarchy-sponsored and State-embracing crypto currencies. Bitcoin will never again mean what it used to mean.
You know … just like gold was permanently diminished in its social importance by the adoption of Oligarchy-sponsored and State-embracing fiat currencies. Just like gold will never again mean what it used to mean.
I wrote this note six years ago. It was the first Epsilon Theory note to get widespread recognition. You’ll see hints – more than hints, actually – of all the big ET themes over the past few years, particularly The Three-Body Problem.
How Gold Lost Its Luster, How the All-Weather Fund Got Wet, and Other Just-So Stories
The core of this note is a quote by Bob Prince, Bridgewater’s co-CIO and an actual prince of a guy. I just think he’s wrong when he says this:
The relationships of asset performance to growth and inflation are reliable – indeed, timeless and universal – and knowable, rooted in the durations and sources of variability of the assets’ cash flows.
I think Bob Prince is wrong in exactly the same way that JP “Jupiter” Morgan was wrong when he said this:
Gold is money. Everything else is credit.
If you get nothing else from Epsilon Theory, get this:
There are no timeless and universal relationships between asset performance and ANYTHING.
The only determinant of price for a non-cash-flowing thing is Narrative. Actually, the only determinant of price for a cash-flowing thing is Narrative, too, but we can save that argument for another day. And what I am saying about these non-cash-flowing things is this:
The introduction of Libra changes the Bitcoin narrative in exactly the same way that the introduction of fiat currency changed the gold narrative. And by change I mean crush.
That makes me sad. That makes me angry. I am convinced that it is part and parcel of a Spanish Prisoner con game. But I refuse to give into the negative energy of that realization AND I refuse to give up on the Big Ideas that I believe in.
So what do I do?
I con the con man.
I know what Mark and Sheryl and all the other Davos-going Team Elite sociopaths are about.
I see what they are offering me and I TAKE it. Without hesitation. Without remorse. I take it just as they are trying to take from me … in full sociopathic bloom.
And what do I give them in return?
NOTHING.
Do I care about banking the unbanked and cross-border remittances? Yes, I do. Very much. So I will TAKE the protocols and the KYC procedures and everything else Libra offers, and I will USE all of that to further the social justice goals that I maintain. And they will get NOTHING from me in return. I will keep my autonomy of mind. I do NOT forget what they are trying to steal from me. I do not ALLOW them to steal that from me.
I refuse to give them my trust.
And I will look for every opportunity to destroy their Little Kingdom.
Seriously.
Do I really have TRUST NO ONE tattooed on my hands? No.
I trust lots of people. I trust my pack.
But Mark and Sheryl and Christine and Jay and Donald and Barack are not in my pack. And they never will be.
Trust no one? No.
I just don’t trust THEM.
SOUTH BEND – Facebook CEO Mark Zuckerberg was at least half right when he recently told the United States Congress that there is no US monopoly on regulation of next-generation payments technology. You may not like Facebook’s proposed Libra (pseudo) cryptocurrency, Zuckerberg implied, but a state-run Chinese digital currency with global ambitions is perhaps just a few months away, and you will probably like that even less.
Perhaps Zuckerberg went too far when he suggested that the imminent rise of a Chinese digital currency could undermine overall dollar dominance of global trade and finance – at least the large part that is legal, taxed, and regulated. In fact, US regulators have vast power not only over domestic entities but also over any financial firms that need access to dollar markets, as Europe recently learned to its dismay when the US forced European banks to comply with severe restrictions on doing business with Iran.
America’s deep and liquid markets, its strong institutions, and the rule of law will trump Chinese efforts to achieve currency dominance for a long time to come. China’s burdensome capital controls, its limits on foreign holdings of bonds and equities, and the general opaqueness of its financial system leave the renminbi many decades away from supplanting the dollar in the legal global economy.
Control over the underground economy, however, is another matter entirely. The global underground economy, consisting mainly of tax evasion and criminal activities, but also terrorism, is much smaller than the legal economy (perhaps one-fifth the size), but it is still highly consequential. The issue here is not so much whose currency is dominant, but how to minimize adverse effects. And a widely used, state-backed Chinese digital currency could certainly have an impact, especially in areas where China’s interests do not coincide with those of the West.
A US-regulated digital currency could in principle be required to be traceable by US authorities, so that if North Korea were to use it to hire Russian nuclear scientists, or Iran were to use it to finance terrorist activity, they would run a high risk of being caught, and potentially even blocked. If, however, the digital currency were run out of China, the US would have far fewer levers to pull. Western regulators could ultimately ban the use of China’s digital currency, but that wouldn’t stop it from being used in large parts of Africa, Latin America, and Asia, which in turn could engender some underground demand even in the US and Europe.
One might well ask why existing cryptocurrencies such as Bitcoin cannot already perform this function. To an extremely limited extent, they do. But regulators worldwide have huge incentives to rein in cryptocurrencies by sharply proscribing their use in banks and retail establishments. Such restrictions make existing cryptocurrencies highly illiquid and ultimately greatly limit their fundamental underlying value. Not so for a Chinese-backed digital renminbi that could readily be spent in one of the world’s two largest economies. True, when China announces its new digital currency, it will almost surely be “permissioned”: a central clearing house will in principle allow the Chinese government to see anything and everything. But the US will not.
Facebook’s Libra is also designed as a “permissioned” currency, in its case under the auspices of Swiss regulators. Cooperation with Switzerland, where the currency is officially registered, will surely be much better than with China, despite Switzerland’s long tradition of extending privacy to financial transactions, especially with regard to tax evasion.
The fact that Libra will be pegged to the US dollar will give US authorities additional insight, because (at present) all dollar clearing must go through US-regulated entities. Still, given that Libra’s functionality can largely be duplicated with existing financial instruments, it is hard to see much fundamental demand for Libra except among those aiming to evade detection. Unless tech-sponsored currencies offer genuinely superior technology – and this is not at all obvious – they should be regulated in the same way as everyone else.
If nothing else, Libra has inspired many advanced-economy central banks to accelerate their programs to provide broader-based retail digital currencies, and, one hopes, to strengthen their efforts to boost financial inclusion. But this battle is not simply over the profits from printing currency; ultimately, it is over the state’s ability to regulate and tax the economy in general, and over the US government’s ability to use the dollar’s global role to advance its international policy aims.
The US currently has financial sanctions in place against 12 countries. Turkey was briefly sanctioned last month after its invasion of Kurdish territory in Syria, though the measures were quickly lifted. For Russia, sanctions have been in place for five years.
Just as technology has disrupted media, politics, and business, it is on the verge of disrupting America’s ability to leverage faith in its currency to pursue its broader national interests. Libra is probably not the answer to the coming disruption posed by government-sanctioned digital currencies from China and elsewhere. But if not, Western governments need to start thinking about their response now, before it is too late.