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Permission-less turned on its head.
As we unwind the myriad bubbles traceable to the massive (and well-justified) fiscal and monetary stimulus deployed to rescue the global economy from covid, including the spectacle of debt monetization and negative rates, consider alternatives that a new kind of blockchain-based digital money might provide. Note that this new kind of digital money does not need to be in the form of a central bank digital currency — it could be any fiat currency proxy in a blockchain wrapper.
What if the stimulus arrived in the form of a digital token worth ten thousand dollars that was subject to a spending expiration date. A ten thousand dollar distribution to your phone tied to a smart-contract caveat enforced by code that it must be spent on merchandise or services at least four times within fourteen days before converting to stable cash. And traceable each step of the way. A hot potato! High-velocity money. Talk about Black Friday! That’s a more direct stimulus route than an asset-inflation wealth effect. We have been dealing with the unintended consequences of those bubbles repeatedly since at least Greenspan. And that technology could be incredibly useful in many other contexts, like providing immediate direct payments to residents in the path of a hurricane, for example.
But altruism is not embedded in deployment of blockchain. It could be intrusive in an unparalleled way. A digital token could be used to mandate that five percent of your existing cash holdings over $20,000 held at banks or brokerages must be spent on certain categories like travel and leisure within thirty days, or the money would expire. Or tied to a rule that paper currency will no longer be valid. That all your wealth must be recorded as tokens on the blockchain - traceable in the electronic universe - and subject to surveillance and control, or a wealth tax. Or a rule that any spending outside the country would be subject to a 30% sales tax. Or that you cannot convert it to another currency or spend it outside the country at all.
China is going down this path. Capital controls are central to the premise of its signature brand of authoritarian, expansionist mercantilism. China has started the process of deploying tracking and control with a digital Yuan student card used to track spending by children. That seems innocuous enough. Except that the Chinese government considers itself the parent of all its citizens. Parents already can supervise spending by giving their child a debit card. So the incremental surveillance is at the government level by virtue of control over the currency. China controls the kids.
And what kind of control would China like to exert over its trading partners? The Ukraine-war weaponization of the US dollar pales in comparison to the power of digital currency reserves among trading partners. Those can be frozen or cancelled at will. They stay on a leash. China or Russia could literally cancel the liquid wealth of any political opponent.
The United States rightfully fears ceding this new monetary super-power to China, so we are actively considering our own central bank digital currency and engaging MIT in the development of the underlying code. This is what Federal Reserve Vice Chair Lael Brainard told Congress this week:
“I don’t think we can take the global status of the dollar for granted,” said Governor Brainard. “And in a world where other jurisdictions move to the issuance of their own digital currencies, it is important to think about whether the United States would continue to have the same kind of dominance without also issuing. It’s possible, but it’s a very important question.”
That prospect gets libertarians all fired up, like Congressman Warren Davidson:
Davidson concluded, “if you turn a central bank digital currency into this creepy surveillance tool and don’t preserve the permissionless characteristics of it, it literally is what China is developing. And we shouldn’t imitate them. We should protect America’s way of life.”
Sure. Let’s not be China. Who disagrees with that? This application of blockchain technology exposes our eternal conflict between self-sovereignty and mutual dependence. President Clinton hit on this balance at the recent Crypto Bahamas conference which we hosted with FTX. And it is not one or the other.
There is a reasonable argument that a regulated, fully-collateralized private-sector blockchain instrument — or instruments — could compete well against Chinese government tokens. US dollar proxies dominate DeFi without any US government participation. And private competition would be dynamic. It would subject the Chinese government to competition from the ongoing well-funded innovation of the private sector. Circle is fighting that rear-guard action in Congress as we speak. But that is not a given. And let’s not forget that the private sector is known to wander off the ranch, and that regulation has been known to wane in the absence of a crisis catalyst. The GFC should be near enough to remind us not to be too pollyannaish about the financial sector. Not to mention the Terra Luna debacle. Poorly managed private sector digital dollars would be the mother of all too-big-to-fails.
But the blockchain horse is out of the barn. Money is changing. Blockchain is changing it. The nature of the participation of the US government may be in question, but ninety countries are considering deployment of central bank digital currencies. The implications of blockchain technology will be explored and exploited by governments for good and bad globally in the coming years. And bad is on the shorter path. Another reason for the US government to be engaged.
The anathema of blockchain facilitating greater government control over money will likely solidify the need for non-sovereign blockchain alternatives. Thus, our continued conviction on Bitcoin. And just as importantly, mandate the preservation of checks and balances on governments associated with vibrant democracy, under assault on every front. A principal obligation of us all.