Central bank digital currency is overhyped & underestimated at the same time...
Digital currency is not that dope and actually kind of creepy. Stop saying that China’s digital currency is threatening the US; only America's own digital currency can threaten the US...
My thesis is due in a week and I’m kinda behind, so this may or may not be the last long email in a while…
Niall Ferguson is a Bitcoiner now?
If you’re interested in reading about central bank digital currency (CBDC), please directly skip to the second half of this email.
Famous financial historian Niall Ferguson published an interesting op-ed on Bloomberg yesterday that I thought I should share with you: “Don’t Let China Mint the Money of the Future.” It has a great synopsis on Bitcoin and a flawed analysis on digital currency.
I disagree with Ferguson on a number of things, especially his views on China’s digital currency, but the article in general is good, and even prominent people in the Bitcoin community like Allen Farrington (quoted by Ferguson in the article) acknowledge it’s well researched.
It is rare to see for a Bitcoiner to praise an establishment academic, and I think this might be a good article for you to read, especially if you’re not too deep into the crypto world and would like a more formal, scholarly overview of topics of Bitcoin, central bank digital currency (CBDC), decentralized finance (“DeFi”), the definition and future of money, etc.
The accelerating transformation of money
Ferguson gives a great synopsis of Bitcoin’s function and the accelerating transformation of money & currency as represented by the rise of Bitcoin and DeFi. He quotes famous VC investor and crypto guru Naval Ravikant:
Bitcoin is an exit from the Fed.
DeFi is an exit from Wall Street.
Social media is an exit from mass media.
Homeschooling is an exit from industrial education.
Remote work is an exit from 9-5.
Creator economy is an exit from employment.
Individuals are leaving institutions.
Yes, I would say this is quite accurate.
Bitcoin is Venice
Ferguson also quotes Allen Farrington, someone you probably haven’t heard of but whom I consider to be one of the actually intellectual voices in the Bitcoin community. (I had a brief exchange with Allen and tried to invite him on the podcast. He declined because he said he didn’t want to leave an audio record and get into trouble later… lol):
What is the right historical analogy for all this? Allen Farrington argues that Bitcoin is to the system of fiat currencies centered around the dollar what medieval Venice once was to the remnants of the western Roman Empire, as superior an economic operating system as commercial capitalism was to feudalism. Another possibility is that the advent of blockchain-based finance is as revolutionary as that of fractional reserve banking, bond and stock markets in the great Anglo-Dutch financial revolution of the 18th century.
Again, you might disagree with Allen, but I would say his original post titled “Bitcoin is Venice” is quite insightful and deserves a read, and Ferguson was right to identify the parallels above.
The clash between new and old money
Are we therefore heading for a collision between the old money and the new? Perhaps…
There is something very old-school about the Biden administration…
It believes in Keynesian demand management and stimulus. It is proposing a massive infrastructure investment plan. The result is that fiscal and monetary expansion triggered by a public health emergency seems set to continue beyond the duration of the emergency. The administration’s economists tell us there is nothing to fear from inflation.
We are in a new era of progressive economic policymaking under what some may call “ultra-Keynesian” consensus. The massive injection of liquidity into the system and the depreciation of dollar’s purchasing power are often cited by the Bitcoin community as the tyranny of the U.S. government and the downfall of the dollar hegemony. Regardless of what side you’re on, the tension between new and old money is indeed there, and I think Fergusion was right to identify it.
China's central bank digital currency is overhyped
The abstract of Ferguson’s article is:
U.S. policy makers need to wake up to the potential of digital currency and electronic payments and the peril of allowing China to dominate them.
So it is clear that he set up all the above analysis on Bitcoin and dollar to evenetually deliver a fatal blow on the Western central banks’ inability to creatively put together their own digital currencies. Indeed, as Ferguson explained in the article, China is moving much quicker with its central bank digital currency (CBDC), and Europe and the U.S. are very behind and seem to be in no rush.
But Ferguson’s analysis on China’s is a bit off. I think China’s CBDC is both a bit overhyped and underestimated. Overhyped in the sense that the West sees it as a challenge to the dollar/Euro hegemony, and underestimated in the sense that I don’t think the West fully understands the true politicality of having a digital currency and what it could mean for social structures. Let me explain more:
Western intellectuals are freaking out about China’s CBDC in the wrong way. A central bank-backed digital currency is just the fiat currency in its digital form, and to think that just because China would digitize its currency that would somehow mean the demise of dollar is a pretty far-fetched concern.
What digital currency actually allows a country to do, however, is to strengthen domestic control. The government can gain a clearer view into people’s banking activities, so you don’t have illegal incomes or dodge taxes; they can control the citizens capital inflow & outflow, which means that it’d be harder for anyone to sneak money out of the country if it’s not allowed.
The ultimate functionality is to increase surveillance, which is bad for Chinese citizens in some sense if they want to have more international financial exchanges, but I really doubt that China’s digital currency will be threatening to the world… The functionality is inward, not outward!
Nowadays if you sell a house in Shenzhen (Chinese city right next to Hong Kong and where many tech companies like Tencent are headquartered), you don’t get Chinese Yuan (CNY) deposited into your bank account; you actually get “e-CNY” – the digital currency and not the actual money…. You think doing more of this will help the “unbanked” population in developing nations or increase China’s reach in controlling international finance? I seriously doubt so.
The social & political implications of digital currency are grave
But that does NOT mean that we shouldn’t be wary of the digital currency. Especially if you’re a political philosopher/theorist who feels strongly about personal liberty and surveillance, or if you’re an economist concerned with the free flow of capital, you should keep an eye on the development of digital currency.
When technocrats talk about digital currency, they think about how it will greatly reduce the “frictions of money” – we no longer need to have IRS send checks or even do direct deposits, since all the stimulus checks and Universal Basic Incomes can be automatically done through digital currency! But this is a really naive way of looking at things (and also why “people don’t respect economists anymore” – as put by some of my friends lol…)
There is something creepy about having the government directly reaching into your wallet and knowing your assets. Even though they already have such capabilities when they want to, the feeling that all your assets will eventually be forced to take up one shape or form is not good – would you want to be the Shenzhen homeowners who can only receive sale proceeds in the formal of e-CNY?
Even in China, a lot of people don’t feel entirely comfortable about this idea of digital currency even though they already conduct most of their daily transactions using WeChat Pay or some other form of fintech application. The immediate thought after hearing about CBDC is usually: “Is this just another way that the government is taking money away from me?” In other words, “I don’t know how you’re screwing me, but yes I have a feeling that you’re screwing me…”
Imagine you roll that out in the U.S. and what Fox News is going to say… Or your grandma’s Facebook feed…
The Federal Reserve and Jerome Powell are right to be hesistant in moving forward with this project, not because they’re against fintech innovations, but because money does occupy a central role in our society’s function, and at least in the West it is impossible to force the citizens to accept an entirely new form of money or transaction system.
Bitcoin is very, very different from CBDC. Having more people buy and treat Bitcoin as a store of value is a bottoms-up, anti-establishment movement. Telling everyone to adopt CBDC is a top-down technocractic policy. They will be received very differently by the American public.
At least in today’s fragmenting social environment, I don’t see how a CBDC can be rolled out smoothly without some massive populist revolt or political backlash, but I also don’t see how we’re in any urgent need to adopt it. There are 99 problems in the West now; digital currency is just not one of them.
And again, stop saying that China’s CBDC is threatening the West; it’s not… Only the West’s own CBDC is threatening the West…
Cashless society with more cash…
Lastly, as a side note – you would think that in our increasingly more “cashless” society there would be fewer banknotes in circulation. No, we’re seeing an increase in banknotes in circulation in today’s cashless society (see charts below from the Fed and the ECB, originally sent to me from Torsten Slok, Chief Economist of Apollo Global Management):
Surprise huh? This may be indicative of something. I don’t know what it is, but it is certainly not the naive view put forth by some economists that somehow digital currency will just solve our monetary frictions…
Other good reads on Bitcoin quoted in Ferguson’s article:
Designing Money: A Functional Trilemma for the Digital Age
Into The Void: Where Crypto Meets The Metaverse
Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets
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