Discussion in 'Cryptocurrencies' started by birdman, Oct 17, 2020.
Trader Curt, always a pleasure to read your comments.
I am not a Bitcoin true believer, I don't think fiat based economies are going to crumble and Bitcoin will become the currency of the world.
I have heard the "backed by the US Military" argument but it doesn't really make any sense in terms of what people decide is an asset.
Is Art backed by the US Military?
Is Gold backed by the US Military?
Bitcoin has pretty much just become another asset nowadays. For real world use their are better designed ledgers. But why speculate about what coin could become the defacto world currency when all central governments are in the process of making their own.
Basically, @clockwork71, you and the rest of us will all be using digital currencies in the future. Some backed by armies, and more importantly GDP and fiscal policies, and some not.
So China wants to be first and have people in Africa using the digital Yuan as currency vs their own devaluing fiat or a volatile coin (BTC/Alt-coin) or a stablecoin that is not truly backed dollar for dollar.
But in reality it will end up being people in India using a US Gov created digital dollar to avoid the devaluing rupee. Or everybody in every country whose currency devalues faster than the dollar.
Leaders of global CBDC projects talk shop in panel today
Central bank digital currency interest continues gaining global traction.
"As part of DC Fintech Week, a digital conference on the governmental side of the financial technology sector, several international leaders gathered for an Oct. 19 panel called: Central Banks, CBDCs and Cryptoeconomics.
"I don't see technological barriers in this area, but I do see technological challenges," Cecilia Skingsley, First Deputy Governor of Riksbank, the central bank of Sweden, said on the panel.
"The challenge is not so much technology in itself, but it's more about — we have to choose what sort of policy objectives do we want to focus on, what is the problem we want to solve," she explained. "Depending on what that is, and the purposes we want to serve, then you choose the technology after that."
The panel saw discussion between four separate authorities on various aspects of CBDCs, including the global race toward toward such a currency, as well barriers. In addition to Skingsley, the panel hosted BIS executive committee member Benoit Coeure, Bank of England deputy governor Jon Cunliffe, and former U.S. CFTC chairman J. Christopher Giancarlo.
As far as the Bank of England is concerned, Cunliffe explained cash as a cumbersome part of the economy. "Physical cash is no longer convenient," he said. "It's becoming increasingly inconvenient for people to use in their everyday lives, and the COIVD crisis has accelerated that," he added. "On the other hand, it's becoming increasingly less acceptable to merchants for some of the same reasons, even merchants that are able to take physical cash."
Giancarlo specifically pointed out the competitive atmosphere around launching a CBDC, noting that winning the race is not the most important point — sentiment U.S. Federal Reserve chairman Jerome Powell also recently expressed.
"If there's a winner, I don't think the winner is necessarily who's first and the loser is necessarily who's last," Giancarlo said during the panel. "What matters is, which central bank successfully incorporates its societal values in a successful development of CBDC," he explained. "On the other hand, one can't be too late to the game here," he added.
Mentioning a report from the BIS from January 2020, Coeure reminded the audience that a large number of the world's central banks consider CBDCs a worthwhile research effort. China has notably charged forward with its CBDC development in 2020."
Central Bank Digital Currencies Are All The Rage Right Now
I have been advocating for the United States to digitize/tokenize the dollar for almost a full year at this point. We are finally starting to see some movement on the issue from our elected officials or the Federal Reserve, but they are not doing nearly enough to address the dire situation they will find themselves in.
We saw a Democrat stimulus bill include reference to a digital dollar system being leveraged for delivering stimulus checks earlier this year. Ultimately this section of the bill was removed, but it was a positive development to at least see elected officials considering the possibility. As for the Federal Reserve, there was an IMF press conference this morning where Chairman Powell shared his thoughts on central bank digital currencies.
Powell’s general perspective appears to be the following:
Central bank digital currencies (CBDCs) provide some value
CBDCs will not be a replacement for physical cash, but rather a compliment
There are many challenges with implementing a CBDC, including cyber security, proof of no counterfeiting, potential monetary policy changes, etc.
The Fed has been working on a faster/cheaper payment system (FedNow), but that won’t be implemented and operational for a number of years.
The CBDC idea is merely an idea that is being explored right now and there won’t be any work done on it until the Fed fully understands the pros/cons.
To be fair to Chairman Powell, we don’t have too much information from him to go off of at the moment. With that said, it appears the Fed is intrigued by the idea of a central bank digital currencies but not taking it nearly as seriously as they should.
I laid out the condensed argument for the immediate US action the last time I discussed CBDCs on CNBC.
I went on CNBC almost a year ago and said that the US must digitize the dollar immediately. Nobody listened and now the US is behind China. It ultimately won’t matter though because people will choose Bitcoin.
October 19th 2020
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The argument has two key elements — accessibility and monetary policy competition. Let’s tackle accessibility first. We know that China has been working on a digital currency for a number of years now. They are actively piloting the technology within certain cities and geographic regions within their country. The early reports are suggesting that people are adopting the digital currency and more than willing to use it as a replacement for the legacy system.
This is important to keep an eye on because if China is able to digitize their currency before the United States, the renminbi will be more accessible to people around the world than the US dollar. Here is an example that I use to show this — imagine if you are in a country like Venezuela where the national currency has failed due to hyperinflation. You know you need to get out of Bolivars and you definitely desire to hold US dollars. The dollar is deemed “safe,” but the problem is that it is hard to acquire dollars.
The black market can be marked up hundreds of percent and is physically dangerous to interact with. Your bank and government have put significant capital controls in place, plus you have to worry about the bank confiscating your dollars if you leave them in your account. So you begin to look for alternative currencies to hold. Gold is an option but it is also hard to acquire and difficult to transport, especially if you need to leave quickly. So what are your options? You essentially are going to turn to the internet and ask yourself “what currency can I get my wealth into that only requires an internet connection?”
The answer today is Bitcoin. The problem with Bitcoin for short term holders is that it is highly volatile. There are not many people that like the idea of putting their life savings into something that could be up or down 20% in a matter of days. But if you’re optimizing for security, Bitcoin is a great option. That is until a nation state gets their currency fully digitized. So now you are in a situation where you can buy digital renminbi, but you can’t buy US dollars. Of course, the renminbi is going to be more attractive for short term use than the non-existent digital dollar.
This difference in accessibility may not sound like a big deal right now, but if China has a 2-3 year head start on the US, it is possible that the US dollar’s reserve status comes under immense pressure as renminbi gains adoption. This is the Chinese government’s dream scenario and the US is playing right into it.
But before we all start to believe that the world is ending and China will be the sole superpower, there is a big catch to this entire theory — the monetary policy competition. I personally believe that every fiat currency in the world will eventually be digitized or tokenized. There may be slight differences in the technology stack that each nation state uses, but each currency will end up being leveraged via digital wallets and have similar functionality.
When you get feature parity on the technology competition, the only thing left for nation states to compete on is the monetary policy. The issue with this for nation states is that they all operate fiat currencies. The central banks can only manipulate interest rates or expand/contract the money supply. They don’t have any other levers to pull, nor aspects to compete on. The differences between each nation state fiat currency is just too small to ultimately matter when facing Bitcoin.
People are going to be face a choice — every currency in the world, both CBDCs and non-government currencies, will be digitized. The average citizen will have access to anything they want. Rather than choosing between the lesser of two evils with fiat currencies, they will ultimately choose Bitcoin. The fiat currencies are unlimited in supply, controlled by human decision making, lack transparency, drastically increase government surveillance capabilities, and provide an incredible amount of cybersecurity risk.
Bitcoin is artificially capped in supply, boasts a programmatic monetary supply, has full transparency, decreases government surveillance capabilities, and is the most secure computing network in the world. The choice that will be made by the digitally native generation is so obvious. People are going to choose the digitally native currency, rather than the fiat currency that is merely lipstick on a pig.
You can see this difference playing out in various central banker comments around the world. They continue to say that the CBDCs will be compliments to physical cash, rather than replacements. The central banks are being forced into the innovator’s dilemma. They can’t replace the existing system, because that would require them to relinquishing their power and control. Instead, they will ride the legacy system for as long as possible, but ultimately it will fail and be replaced by the superior Bitcoin system.
This entire transition scares the hell out of me and everyone else I know. It is littered with unknown scenarios and will put governments around the world in difficult positions. Whether we like it or not though, every currency is going to be digitized and the monetary policy competition is going to be insane. This is not a question of if, but rather when.
My suggestion is to start reading up on this stuff. You need to be educated on what is starting to happen. It will likely be the largest shift to global macro markets over the coming decade. It will force central bankers to make wild changes to policy in an attempt to avoid falling behind. They will ultimately be unsuccessful, but they will definitely have an impact across your portfolio in the meantime.
My friend Raoul Pal had a great Twitter thread on these CBDCs over the weekend. I’ll be writing more about them in the coming weeks as well. We are living through extraordinary times. Your best defense is to educate yourself and remember that no one is going to look out for you like you look out for yourself.
Hope your week is off to a fast start. Talk tomorrow.
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