My weekly Money Reimagined podcast, with Sheila Warren, will continue, however. This week, we feature a conversation with Frank McCourt, the construction magnate, philanthropist and founder of Project Liberty, an initiative aimed at fixing a broken internet. Frank, who is co-authoring the book mentioned above, makes the compelling point that decentralized storage solutions will allow society to break its toxic dependence on large, data-hogging internet platforms.
This is not to say that CoinDesk is abandoning Web3 content. While, for now, we are paring back our dedicated beat coverage of happenings in the NFT, Metaverse and DAO arenas, we remain committed to covering the technological, economic and cultural developments that underpin the Web3 vision for a new, decentralized version of the internet and creator economy. The sector may have lost some of the hype that surrounded the NFT boom of 2021, but this lull period has seen developers create a range of real-world applications of these exciting new technologies.
But in the grand scheme of things, PayPal’s project is in a far stronger position politically than the universally mistrusted Libra ever was. Republicans are thrilled that the payments company launched its stablecoin, known as PYUSD, at this moment. The bill’s sponsor, Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, called the move a “clear signal that stablecoins — if issued under a clear regulatory framework — hold promise as a pillar of our 21st-century payments system” and made it “more important than ever” to keep moving the legislation forward.
When, as a journalist in Argentina, I covered that country’s decade-long, torturous debt restructuring in the 2000s, I found myself sympathetic to the domestic left’s critique of the U.S.-led IMF’s excessive power. But I also had little faith in the corrupt and dysfunctional Argentine political system, which led me to begrudgingly view the IMF as a necessary disciplinarian. I found Argentine government protestations that Washington was stripping the country of its economic sovereignty to be self-serving, as it was really about protecting a corrupt political class.
For all the criticism it receives, OnlyFans, or more specifically the direct-to-patron model it’s built on, has been applauded by sex work advocates for finally giving performers a safe environment in which to earn income on their own terms. If they can’t adequately prove that they’re human and are outcompeted for clients’ dollars by an army of fake bots, what are their options? Might they have to return to street prostitution, where, yes, they can easily prove their humanity but face the risk of violence at the hands of clients and pimps?
For all the hype, bubbles and burst hopes of the non-fungible token (NFT) market these past three years, this innovation contains an undeniable breakthrough: the creation of unique, one-off digital assets, a construct that was impossible in the everything-can-be-replicated internet that preceded it. NFTs are a building block for a more creator-centric system, since they recreate, in the digital realm, the direct peer-to-peer ownership relationship that fans and performers used to have with LPs, books, films and so forth.
Much like the cruel joke Charles de Gaulle reportedly cracked about Brazil – that it’s “the country of the future and always will be” – predictions of an end to the dollar-based international monetary system seem to belong to a future that will never arrive.
Yet that future is coming, faster than all the prior failed forecasts of the end of dollar hegemony would have you think. In contributing to that shift, Brazil may have the last laugh.
The catalyst can be found in central bank digital currencies (CBDCs), a model for digital fiat money that was, ironically, spurred by governments’ reaction to the 2008 invention of the decidedly anti-fiat Bitcoin protocol. Bitcoin fanatics tend to pooh-pooh CBDCs as centralized tools for government manipulation that local populations will recoil from. In dismissing them, they overlook the massive cross-border shifts these new tools will foster at the macro level.
As key export economies such as Brazil embrace CBDC-based direct settlement with their trading partners, it will spur a trend of de-dollarization over the next decade. The ramifications for U.S. capital markets, for the global economy, and for geopolitical power dynamics are profound.
Brazil’s central bank is among more than a hundred experimenting with CBDCs. Others that matter for this discussion include the United Arab Emirates, Russia, Singapore and China, which is streets ahead in rolling out its electronic currency, the e-CNY. China, of course, has made no secret of its desire to reduce its dependency on dollars.
Those five economies account for around 25% of global output, but it’s their outsized roles in world trade – as exporters of oil (UAE’s Abu Dhabi), foodstuffs (Brazil), natural gas (Russia) and consumer goods (China) and as a finance and shipping entrepot (Singapore) – that amplifies the international impact of their respective currency strategies.
Things will get really interesting once such countries’ central banks use digital currencies in direct settlement arrangements with each other rather than going through the dollar, which is currently used as an intermediating currency in 90% of all trade finance. There are signs this is moving forward – from Singapore’s DBS Bank recent move allowing direct payments in e-CNY to multilateral institutions such as the Bank of International Settlements, the World Bank and the International Monetary Fund encouraging member countries to collaborate on cross-border CBDC design. So, buckle up.
Cross-border CBDCs are what matter, not retail
People tend to view CBDCs through a retail lens, seeing them as new digital payment units that citizens would use in daily purchases. That somewhat overhyped idea has fueled concerns about state surveillance of people’s spending – to such an extent that opposition to CBDCs is now a campaign position of U.S. presidential candidates, including Republican hopeful Florida Governor Ron DeSantis and Democrat challenger to President Biden Robert F. Kennedy Jr.
While those privacy concerns are valid – see my critique of the European Commission’s CBDC plans last week – they’re a sideshow. The far bigger issue lies in wholesale, cross-border transactions.
I’ve been arguing for some time that protocol-based interoperability for countries to directly exchange digital fiat currencies would have a dramatic impact on the international monetary system.
By cryptographically locking an exchange rate forward-contracts into a decentralized, blockchain-based escrow structure could protect an exporter and an importer from currency volatility over the timeframe of their trade deal without either party having to trust the other, or anyone else, to hold the funds. Voilà, no need for the dollar to sit in the middle.
Under this system, a Brazilian farmer could agree to provide a Chinese hoggery with soymeal feed for its pigs at a real-to-renminbi exchange rate fixed at signing, knowing that a smart contract would automatically deliver those funds upon arrival of the shipment in Shanghai. With the right oracles in place, all this would happen peer-to-peer without either side having to trust the other’s promise to deliver the funds or the goods.
As such, they could eschew the grossly inefficient current system in which a U.S.-regulated correspondent bank typically acts as the trusted third party in the deal, first exchanging the importer’s renminbi into dollars and then converting them into reals for the Brazilian exporter. If such arrangements proliferated, I have argued, it would reduce global trade-related demand for dollars and, by extension, diminish investment in dollar reserve assets such as U.S. government bonds.
Now, after listening to influential economist Zoltan Pozsar on the Odd Lots podcast with Bloomberg’s Joe Weisenthal and Tracy Alloway, I see that it will likely be the collaborating efforts of central banks, rather than direct importer-exporter agreements, that will forge this path toward disintermediated digital settlement.
Pozsar sees CBDC-wielding central banks adopting new roles as clearing agents for their country’s exporting and importing firms and then using CBDCs to settle directly with their foreign counterparts. In this way, they would displace the all-powerful dollar-based correspondent banks of Wall Street, such as J.P. Morgan and Citibank. The upshot is that countries won’t need as many dollars.
Pozsar sees the trend driven by mid-tier trade-heavy economies, those that play an outsize role in the demand and supply of dollars worldwide. Net exporting countries that run trade surpluses will accumulate fewer dollars and so will supply less greenbacks to global foreign exchange markets. And importers that run trade deficits will have less demand for the dollars they previously needed to pay for things.
It’s all part of Pozsar’s “Bretton Woods III” vision, where the dollar ultimately loses its hegemonic status over the next decade. Importantly, he sees a different outcome from that of the British pound’s loss of reserve status in the early 20th century, when the U.S. dollar simply supplanted it. Instead, he predicts a multi-currency world where no one currency is dominant, a result made possible because of CBDC clearing mechanisms, which negate the need for reserve currency intermediation. Negotiating counterparts will need to agree on which of their two currencies to denominate their trade deal in, but they won’t have to default to the dollar, or some other universal standard, for actual settlement.
So China is not destined, as some have argued, to become the world’s reserve currency leader. Nonetheless, it will likely see its global influence grow as more of its trade contracts are listed in renminbi. The trend is already underway, with Russia, Brazil, Argentia, the United Arab Emirates, Egypt and other countries all agreeing to denominate trade with China in its currency. Even U.S. Treasury Secretary Janet Yellen has said a gradual decline in worldwide dollar reserves is to be expected.
Depending on how fast the trend occurs, it will have major implications for the U.S. The debt racked up by U.S. consumers, companies and government entities is in part sustained by the ongoing demand for dollar assets by foreign entities. The inflows prop up U.S. bonds, which in turn depresses their yields and, by extension, keeps broader U.S. interest rates low. Americans’ mortgages are affordable because of foreign demand for dollars. If that demand drops off, the cost of capital in the U.S. will rise – likely significantly.
Don’t fight the inevitable
How should the U.S. respond?
I see this is an “if you can’t fight them, join them” moment. There’s no getting around Wall Street banks’ gradual loss of intermediary status, which will mean Washington can no longer use those institutions as agents for surveilling the world’s transactions. The U.S. should accept that reality and consider how to leverage the potentially fleeting advantage it still enjoys as the issuer of a currency desired the world over. It should lean into the “soft power” aspects of the dollar’s dominance – the open, rule-of-law values that underpin its value – and give up on the “hard power” elements of gatekeeping and control.
The soft-power approach works because it reinforces the diminished but still widely held impression of the U.S. as an open, advanced economy and it gives the U.S. a chance to lead monetary innovation for the benefit of users around the world.
That path forward is the opposite of China’s “panopticon” centralized digital fiat currency. There’s no compelling reason for the U.S. to develop a retail CBDC. Rather, official digital dollars should be reserved for inter-central bank cross-border settlement while domestic-use digital money should be opened up to private players using decentralized models with crypto technology. That’s where the real innovative edge will be found.
Sadly, as readers of CoinDesk will know, the U.S. government’s current agenda seems very far from that crypto-friendly approach.
You see, unlike Olejnik, I think CBCDs, if done right, could bring real economic value. I see the smart contract capabilities enabled by true peer-to-peer monetary settlement bringing new, society-wide efficiencies that bank-intermediated IOU money simply cannot. I continue to prefer a private sector-led stablecoin model and believe bitcoin and other native cryptocurrencies are critical to our financial future. But it’s simplistic to dismiss CBDCs as meaningless. Whether crypto people like it or not, CBDCs will bring the power of monetary programmability to the economy. (Bafflingly, the EC proposal would explicitly outlaw that value-added usage for a digital euro – which, again, prompts the question: what’s the point?)
The big takeaway from this institutionalization thing, then, is that it marks an intensification in the ongoing cat-and-mouse battle between Bitcoin, which wants to defy labels and traditional roles, and the financial establishment, which wants to define it and thereby control it.
The survey was conducted by Laser Digital, the digital assets team at Nomura, a household name on Wall Street and a powerhouse of Japanese finance. The team said its survey covered “pension funds, wealth managers, family offices, hedge funds and investment funds, insurance asset managers and sovereign wealth funds) who collectively manage around $4.956 trillion in assets.”
A draft bill that will soon come before the House sets parameters for how to classify digital assets and circumscribes the SEC’s powers of interpretation of crypto within existing securities law, curtailing its capacity to launch these kinds of enforcement actions. It is co-sponsored by Rep. Patrick McHenry (R-N.C.), the chair of the House financial services committee, who has been critical of Gensler’s aggressive actions against the crypto industry, and Rep. Glenn Thompson (R-Pa.), the chair of the agriculture committee, which has jurisdiction over the Commodities Futures Trading Commission (CFTC), the other big agency vying for a greater say in crypto regulation.
I never gave Google’s “Do No Evil” motto much credence, but even if Alphabet, Microsoft, OpenAI and co. are well intentioned, how do I know their technology won’t be co-opted by a differently-motivated executive board, government, or a hacker in the future? Or, in a more innocent sense, if that technology exists inside an impenetrable corporate black box, how can outsiders check the algorithm’s code to ensure that well-intentioned development is not inadvertently going off the rails?
The trio visited Dresden, NY, home of Greenidge Generation’s bitcoin mining operation, which has become a lightning rod in the wider debate over Bitcoin’s environmental impact and, in particular, the political battles over New York State’s move last year to impose a ban on new mining projects. They found that both sides have made wildly exaggerated claims about the harm or benefits of Greenidge’s operation. New York Assemblywoman Anna Kelles, a Democrat, has repeatedly made the false claim that the facility is heating nearby Seneca Lake and killing aquatic life. At the same time, many mining advocates dramatically overstate community benefits such as the number of jobs created.
What got to me was not that founders are so obsessed with securing venture capital that they’ll glob onto the next “in” thing. (Let’s save that problem of Silicon Valley fickleness for another time.) It was that people see the various elements of the complex new digital economy forming around us – artificial intelligence, blockchain, the metaverse, programmable money, digital identity, cryptographic proofs, quantum computing, IoT and so forth – as unrelated, exchangeable pieces, when they’re really intertwined and complementary.
The creation of Bitcoin-based meme coins using the new BRC-20 standard has driven up Bitcoin fees as they use more data than a basic Bitcoin transaction. But while some developers in the Bitcoin community are proposing a filter to block Bitcoin NFT projects, such censorship could run counter to Bitcoin’s open-source characteristics, CoinDesk’s chief content officer Michael Casey argues.
The recent ambiguous messaging from the Federal Open Market Committee’s meeting, which left markets struggling to interpret signals from the FOMC statement and Chair Jerome Powell’s comments, is typical of the abstruse signals that can be found in central bank policy-setting. But new tools, such as blockchain’s cryptographic verification systems, could guide policymakers’ decisions.
This year’s CoinDesk Consensus event, which will bring key policy and technical debates to the forefront, is especially important. While the withdrawal of a handful of previously agreed-upon speaking assignments undermines full representation on both sides of the issues, non-U.S. jurisdiction involvement will make 2023’s Consensus one to remember.
There’s a wisdom-of-the-crowd advantage, too, that comes from crypto’s permissionless innovation ethos. Non-conforming fringe ideas tend to bubble up more easily than those directed from on high by corporate leadership. OpenAI’s innovation structure is very different from that. Sure, it figured out how to tap into the internet’s massive array of data and how to train an incredibly effective LLM on it. But having abandoned its open-source, nonprofit status, it is now a closed, black box operator, beholden to the profit-maximizing demands of its new corporate investor.
When watching Washington policymaking, it’s worth remembering that governments, like all human organizations, are made up of, well, humans – complicated creatures whose emotions often undermine their capacity for rational decision-making.
Last week, I warned of a dangerous politicization trend in U.S. crypto policy following a barrage of regulatory enforcement actions taken against this industry. I remain concerned about that trend but my view is now slightly more nuanced thanks to the insights of two people with very good D.C. connections. They explained how emotions – specifically anger and embarrassment – played a huge role in driving those policy actions.
It reminded me of the importance of clear, inviolable rules of governance, whether they’re baked into democratic institutions such as the U.S. Constitution, or forged into consensus mechanisms used by open-source software communities, like those attached to blockchain protocols.
Among a string of “Thanks Sam” moments these past five months, this one takes the cake. You can argue that the crackdown against Kraken, Coinbase, Paxos, Binance and others was driven significantly by a desire to punish Sam Bankman-Fried, the erstwhile founder of FTX, whose mind-blowingly rapid collapse in November sent shockwaves through the crypto industry.
This is how one of my sources described the mindset of Biden Administration officials, and of lawmakers from both political parties: “You can’t come into their house, slosh that kind of money around, leave politicians with egg on their faces, and not expect to pay a huge price.” He was referring to the fact that before the FTX meltdown, politicians — mostly Democrats but also some Republicans — had been beneficiaries of more than $74 million in political donations from FTX and had forged connections with Bankman-Fried, who’d wooed progressives with his “effective altruism” commitments. (A CoinDesk investigation found that one third of Congress took money from SBF or his associates.)
Virtually no one in this industry would try to diminish Bankman-Fried’s extensive wrongdoings and most now want tighter regulation. (In fact, the biggest frustration is that SBF’s actions have set back the chance of a clear regulatory framework, leaving agencies like the Securities and Exchange Commission to continue being a law unto themselves.) What’s so galling is the capricious and utterly disproportionate reaction generated by that malfeasance.
Forget regulation-by-enforcement; it seems we’ve entered a newly nutty standard of regulation-by-retribution.
Set aside that millions of investors, employees and developers with a stake in the crypto industry are now paying for the sins of a few fraudsters whose behavior they never knew of, let alone condoned. The biggest issue is that because there are very few physical or geographical reasons why blockchain developers would favor one country over another, the U.S. is about to lose all capacity to shape this inherently borderless technology’s direction. No other developed economy is taking as hostile a stance toward this industry.
There’s the growing view that digital asset and blockchain innovation — now, in the age of artificial intelligence, more important than ever — will depart the U.S. for friendlier shores. And there’s the especially counterproductive concept that if the U.S. wanted to keep the tech away from bad guys in rogue states, it is making that more, not less, likely.
The good news is that this vengeful moment is destined to subside — as most emotion-driven overreactions eventually do. Tempers will surely give way to a more grown-up approach to policy. Still, the damage already done to the United States’ prospects to attract crypto investment, entrepreneurship and innovation could be profound. U.S. industry leaders of all stripes have been warning of an exodus of crypto businesses.
You see, whether this a “war against crypto” or just a deliberate bruising, crypto business people are seeing the slew of criminal and civil charges as a message that, in the absence of clear legislative guidance defining what activity is or isn’t within bounds, it’s now too risky to keep operating in the U.S.
That message was brought home in two ways. The regulatory actions seemed way too well-sequenced to be coincidental. Then the White House released a scathing report on the industry at the very same moment, one that reversed the open-minded executive order it produced a year ago. It didn’t help, either, that Senator Elizabeth Warren (D-Mass.), a figurehead of the Democratic Party’s progressive wing, launched a political campaign that celebrated a Politico headline stating that she’s forming an “anti-crypto army.”
Who’s governing the governors?
“D.C. is Veep. It’s not House of Cards.”
So said my Money Reimagined co-host, Sheila Warren, who is also CEO of the Crypto Council for Innovation and my second source for this story (the other will remain anonymous), during this week’s podcast recording.
On the one hand, it’s comforting to know that we’re not really at the mercy of some cynical uber-conspiracy orchestrated by the likes of Frank Underwood, the political villain played by Kevin Spacey in House of Cards.
But on the other hand, it’s sad to know that human fallibility leaves our governing institutions prone to absurd moments like these, as if we’re permanently subject to the self-absorbed decision-making of people like Vice President Selina Meyer, Julia Louis-Dreyfus’s comically flawed lead character in Veep.
These human failures, both evil and farcical, led French philosopher Montesquieu to conceive of the “separation of powers” doctrine, a principle of governance designed to protect society’s interests from the mistakes or corruption of its leaders. Those ideas were then enshrined in the U.S. Constitution and helped shape the Westminster System, with its three, independent branches of government.
They also inform the blockchain idea — initially identified in the Bitcoin whitepaper — that we need a system for managing money, assets and information that’s not beholden to “trusted third party” middlemen. Having to trust intermediaries and representatives will always leave us vulnerable to the problem that they are run by humans, not math.
I’m no radical advocate of replacing the nation-state with some kind of digital “network state,” but it’s interesting to think how these new technologies offer people the option to exit into alternative, decentralized economic systems and how, indirectly, this could put pressure on our politicians to lift their game.
It’s worrying that the “war on crypto” puts the U.S. and its model of market democracy at greater risk than ever of losing economic and technological leadership. But we can at least take heart that the technology itself might impose a self-correcting force on the political system to avoid the worst outcomes.
With crypto exchange Coinbase (COIN) last week receiving a Wells Notice signaling impending action from the SEC, and with the CFTC this week suing Binance, another crypto exchange, it feels like the crypto industry is at war with the U.S. government. This could get bad.
The core issue is not that people’s deposits are at risk from there being too little federal insurance or bailout money to go around, though the problem that there’s a natural limit to that important backstop is another argument for bitcoin. It’s the concentration of banking power that fearful depositors are now enabling by pulling their funds out of small regional banks and funneling them into a few behemoths: Citibank, JPMorgan Chase, Bank of America, Wells Fargo, et al.
The recent collapse of three high-profile banks – Silicon Valley Bank, Silvergate Bank and Signature Bank – has caused worrying outflows at hundreds of regional banks. Now, with the U.S. Federal Reserve creating a new backstop facility reportedly worth $2 trillion and Switzerland’s central bank bailing out Credit Suisse to the tune of $54 billion, the echoes of prior crisis in 2008 and 2013 are loud.
The idea that blockchain technology and native tokens can represent off-chain assets – financial securities such as stocks and bonds, or commercial rights such as trade receivables and fractionalized real estate or art – has been around for a while. The concept tends to find favor around market crash moments, when a public backlash arises against native crypto tokens like bitcoin and ether – as happened after the bursting of the initial coin offering bubble in 2018 and, now, in the post-FTX era. At such times, a mindset emerges that it’s more palatable to the mainstream to convert familiar, relatively stable, pre-regulated assets into blockchain-based digital assets than to bet on pure crypto.
The news that Ian Allison and Tracy Wang are joint recipients of a Polk Award, one of the most prestigious in journalism, for three November scoops that led to the unraveling of FTX’s empire is a source of immense pride for all of us at CoinDesk.
Over time, I see a situation emerging in which Bitcoin functions as a kind of uber-anchor for everything. Its role will be to be a kind of ultimate “layer 0” record of truth. Meanwhile, Ethereum and other smart contract platforms could take on higher-level functionality, with each specializing in different types of transactions and data-processing that the rather clunky, limited-function Bitcoin blockchain is not built to perform. It will need greater cross-chain operability, but there are plenty of people working on that.