Cryptocurrency is kind of like Bigfoot. We want to believe in it so badly. And every once in a while, that belief is rewarded by evidence that it may just possibly be the real thing.
But for the most part, the full potential of blockchain-based finance remains grainy and speculative.
Granted, cryptozoology and cryptocurrency are not exactly the same thing. For starters, on-chain stablecoin transactions topped $11 trillion in value in 2022. Bigfoot simply can’t command that type of liquidity.
The opportunity underlying crypto is clear. As for the risks…well, there’s still a lot that we have to learn here. And while other nations in the world are exploring the implications of both, regulators at the SEC have spent three years poking and prodding the beast while gaining little understanding of its true nature.
So what exactly is America’s game plan for cryptocurrency, blockchain, and the so-called Internet of Value? Is a Central Bank Digital Currency (CBDC) the missing link? Or would this be like caging some majestic beast that should be roaming free?
We discussed all this and more on this week’s episode of Let’s Talk Markets with our esteemed guest, Chris Giancarlo–former Chair of the CFTC, Senior Counselor at Wilkie, Farr and Gallagher, and Chairman of the Digital Dollar Project.
Well, we didn’t actually talk about Bigfoot with him, but we talked a ton about CBDCs–what they are, what’s at stake if the U.S. establishes one, and what’s at stake if we don’t.
The idea of a U.S.-backed CBDC is a pretty touchy subject, one that invokes a whole lot of well-founded concern over privacy rights, personal freedoms, and the democratization of finance. But our guest this week argues that it could actually be our best chance to protect these cherished privileges.
There’s a lot here, so let’s leave Bigfoot behind and dig in.
Your Connection Is Unstable
CBDC stands for Central Bank Digital Currency.
Like a stablecoin, and as the name implies, a CBDC is a digital currency. Unlike a stablecoin, a CBDC is a token that has the full faith, credit, and backing of a sovereign government.
While a stablecoin may hold value because the issuer is holding dollars, the value of your token is entirely depending on how effectively the issuer retains that value. By contrast, a CBDC has the full credit of the government, which is underwritten by tax dollars. However you, as a taxpayer, feel about that arrangement, it is the fuel that keeps the dollar in business.
America Takes Its Sweet-Ass Time
As Chris Giancarlo points out in our conversation, whether he or anybody else advocates a U.S.-backed CBDC is completely beside the point.
The real point is that more than 130 countries are already actively exploring the idea including 19 members of the G-20. We stand alone in our hesitation.
At the other end of the spectrum, the Chinese Yuan is already in the hands of millions. A digital euro is slated to go live in the next 24 months. The U.K. is targeting the end of the decade for its digital pound.
And a survey from the Bank for International Settlements indicates that, by 2030, there may be as many as 15 CBDCs in circulation for everyday resale transactions and another nine wholesale CBDCs for transactions between financial institutions.
CBDCS are coming to the globe whether the U.S. likes it or not. And they’re coming to the globe whether you like it or not.
And that’s really Giancarlo’s point. A failure to act on the part of the U.S. will not prevent the rise of central banking and sovereign currencies on the digital landscape. It will merely prevent American leadership in this area.
The Bull Tells Us What’s At Stake
On a recent episode of Let’s Talk Markets, we spoke with influential author and commentator Peruvian Bull. He suggested that the Federal Reserve is afraid of Bitcoin. Why?
It’s not because they fear its failure, but because they fear its success…a success so permeating that it could replace the U.S. dollar as a global reserve currency. This, of course, would carry some fairly dramatic consequences for the U.S. economy and its standing in the world.
To an extent, our conversation with Chris Giancarlo picks up where that discussion leaves off. In essence, we find that it isn’t a binary choice for the U.S. between attempting (in vain) to restrict the rise of digital currency or conversely, surrendering the dollar’s privileged status to Bitcoin.
Done correctly, a sovereign U.S. CBDC could be the dollar’s best line of defense. As Chris Giancarlo explains, there are three pretty big ticket items on the line here:
That last one—that’s the big one. As Chris explains, the U.S. dollar is built on the premise of a free market economy, an open society, and all the Constitutional privileges implied by democracy.
(And before you disagree, this isn’t a debate about how effectively the U.S. protects this promise on a day to day basis. It is merely to make the point that this is the premise upon which the dollar is built. And to the extent that its infusion into economies the world over has helped to raise people out of poverty and into democracy, there’s some pretty decent proof of concept there).
Giancarlo’s point is, removed from the political implications, we must have an honest conversation about how to preserve the U.S. dollar in this environment—one that is an increasingly dense stew of both centralized and decentralized currencies.
If we don’t have this conversation, he warns, we will continue to cede leadership to China in this space.
Giancarlo likens our current attitude toward digital currency to our “just say no” stance on nuclear power in the 1970s. While we didn’t outright ban its use, we feared its implications, and therefore simply surrendered our leadership in the field.
France continued to innovate and ultimately built a functional, clean and safe nuclear program that folds into its broader energy infrastructure.
We did not. Rather than lead, we circled our wagons around the old ways of doing things. Today, our dependency on fossil fuels remains total and it requires us to do…terrible terrible things.
We risk repeating the same mistakes today. The U.S. is simply not a part of the global conversation about the Internet of Value. China sits at the head of a table from which we are entirely absent.
This means that leadership in the sovereign crypto space is proceeding without the values that we cherish—freedom, privacy, and Constitutional privilege. If we don’t bring open society values to the conversation, then China can lead uncontested with closed society values.
This is how the worst fears of CBDC critics are ultimately realized.
I Always Feel Like Somebody’s Watching Me
Critics of CBDCs in the U.S. express concerns in two basic varieties: 1) There is no way to create a CBDC while protecting privacy; 2) CBDCs are the province of communist societies seeking to strangle the democratization of finance otherwise promised by cryptocurrency.
And as a final addendum to these concerns, most Americans simply despise central bankers as a matter of principle and wouldn’t trust the Feds with the quarters in their couch cushions. We’re not here to tell you how to feel.
Certainly, these are all realistic fears. But these concerns operate on a few faulty assumptions, namely regarding the current state of privacy and surveillance in Western financial markets.
Since there’s no gentle way to say it, we’ll just put it out there.
You don’t have the privacy you think you do.
A recent White House OSTP report finds that “financial surveillance in the West is more like China’s than many would like to admit.”
And in our conversation on Let’s Talk Markets, Giancarlo suggests that there’s nothing about stablecoins that makes these inherently more protective of your privacy than a centralized coin. You have no way of knowing just how the private enterprises invested in crypto projects might be conspiring with your data.
So what makes CBDC’s any different, if not potentially worse?
Perhaps the most hopeful response is, the U.S. Constitution.
Can I Get an Amend?
As Jim Harper writes for the American Enterprise Institute (AEI), it isn’t up to our policymakers and regulators to determine where the line falls in the compromise between privacy and security. This job falls upon the 4th Amendment of the U.S. Constitution.
It is the job of policymakers and regulators to create regulatory frameworks and consumer safeguards in order to accommodate our transactions in an evolving global financial system. If the system evolves without these regulators, that’s a problem.
To the point, Harper writes that “any U.S. CBDC should comport with American values by allocating people the full measure of financial privacy for all transactions, subject to searches and seizures of what data their transactions produce only when constitutional standards are met.”
In other words, we shouldn’t consider deploying a CBDC until we’ve resolved the whole democracy and privacy pickle. Chris suggests during this week’s episode of Let’s Talk Markets that we’re not too hard at work on that pickle just now. We’ve taken a backseat to the rest of the world.
But our “Just Say No” approach to a U.S.-backed CBDC is more than surrender of global leadership on digital currency. It is tantamount to a surrender of global leadership on freedom and privacy.
In a perfect universe (admittedly, one which we have yet to visit), a CBDC executed with the right philosophy and precision would offer freedom, privacy, and protection that you won’t find in traditional Western financial markets nor with stablecoins.
Critics of CBDCs argue that a centrally backed digital asset can only manifest as a suppressive form of currency. With China so far out in front on this, it’s easy to see why that’s the assumption.
This is why, says Giancarlo, a U.S.-backed CBDC can only succeed if it is built on the preservation of personal and economic freedoms. Even if the future finds the U.S. mired deeply in debt, its economy eclipsed in size by China’s, Giancarlo argues that the creation of a centrally backed digital token with privacy protections against censorship and surveillance would allow the U.S. dollar to retain its status as the aspirational currency for the rest of the world.
Dave Lauer is a co-founder and CEO of Urvin Finance, where he leads the team in building Urvin Terminal. Prior to founding Urvin Finance, Dave spent over a decade advocating for financial market reform after quitting his job as a high-frequency-trader.