Currency ‘Cold War’ Takes Center Stage At Pre-Davos Crypto Confab (#GotBitcoin?)
The United States may be entering a second Cold War, according to some investors, who seem mildly curious but otherwise unconcerned about the prospect. Currency ‘Cold War’ Takes Center Stage At Pre-Davos Crypto Confab (#GotBitcoin?)
“It’s a kind of Cold War, but not just for crypto,” said Multicoin Capital’s Beijing-based partner Mable Jiang. “Currency is the leverage.”
Jiang said China’s goal is to leverage the rise of cryptocurrency, including both domestic bitcoin mining and a state-issued digital currency, to supplant the dollar and become the world’s leading economic power. Such rivalries feel lightyears away in the frosted Swiss alps, which are teeming with high-net-worth individuals soaking up the last few days of politician-free ski slopes before the World Economic Forum in Davos.
Roughly 250 people gathered at the Crypto Finance Conference St. Moritz conference this week, hosted in a luxurious mountain getaway at 6,000 feet, for a series of talks that largely revolve around embracing strict compliance standards. (Cameron and Tyler Winklevoss took a break from skiing to argue that thorough regulatory standards could help the U.S. retain its leading role in the global financial system.)
For crypto conference regulars who recall the post-2017 token boom correction, this gathering might feel like falling into a time machine, complete with security token sales and closed-loop stablecoins. Meanwhile, the World Economic Forum (WEF) worked with 38 central banks around the world in 2019 to develop digital payment or asset strategies, according to Sheila Warren, the WEF’s head of blockchain and distributed ledger technology.
From Cambodia to Colombia, many emerging nations plan to launch operational stablecoin projects, beyond pilots, in 2020.
“There’s this sense that they [emerging economies] could actually benefit from pegging a stablecoin to a basket of currencies in a way that they can’t currently do if they issue paper money,” Warren said.
Today, most global commerce relies on dollars in some fashion. Warren said there’s “certainly an interest” among emerging economies in developing systems that don’t pass through New York clearinghouses. That’s where Jiang said the Chinese plans for a digital RMB currency come in.
“It’s not actually for people who live in China. They have WeChat or AliPay,” she said. “It’s another global settlement currency, including for developing countries around the world, which they [the Chinese] are friends with.”
Warren said the U.S. would likely resist systems that circumnavigate the dollar, adding Chinese government officials are actively participating in talks related to the WEF’s blockchain initiative. ConsenSys, the Ethereum Foundation and the Ethereum Enterprise Alliance are among the companies consulting leaders in those emerging economies, she said.
However, Warren added, the WEF doesn’t make those introductions nor recommend any country issue a digital currency. It merely offers guidelines and support to decision makers in emerging economies. Carmen Benitez, CEO of the Switzerland-based startup Fetch Blockchain LTD, heads yet another firm consulting countries eager to issue a cryptocurrency.
“They approached us,” Benitez said of her clients in the Colombian president’s office, which is setting up a bank-managed stablecoin for government projects in 2020. “They want a coin … they like the idea of keeping [the economic flow] as closed as possible with the coin.”
Cypherpunks might argue a state- or bank-issued currency with strict limitations imposed by the issuer bears little resemblance to “cryptocurrency.” But that doesn’t deter the blockchain fans gathered at St. Moritz.
Benitez said using a blockchain-based currency would provide better transparency and automation than Colombia’s current, paperwork-heavy system. Likewise, most attendees appeared more excited about fitting tokens into a traditional banking framework than they were about innovations like the Lightning Network, for example.
“Stablecoins and central bank digital currencies will be [widespread] in just a few years,” said Cyrus de la Rubia, chief economist of Hamburg Commercial Bank. “Even if Libra doesn’t come true, there will be another privately issued stablecoin backed by fiat currencies.”
To many of these attendees, bitcoin offers a welcome diversification of investment options. Indeed, Grayscale director Michael Sonnenshein said the firm garnered more assets in 2019 than all previous years combined, leading to a total of $2.4 billion worth of crypto under management. Bitcoin products are still the most popular, although altcoin dips don’t deter investors.
“We saw stronger inflows into our ethereum product last year,” Sonnenshein said. “Investors are looking at more than just bitcoin.”
Generally speaking, self-custody isn’t a priority for such institutional, European clients. This bothers Pascal Gauthier, CEO of hardware wallet company Ledger, who said there’s scant focus on secure custody as Europe is regulating bitcoin-related activities “very heavily, very quickly.”
European regulations like AMLD5 require all companies involved with money transmission, potentially including lightning liquidity providers, decentralized finance (DeFi) products like Compound and custodial wallets, behave more like banks in 2020 by collecting know-your-customer (KYC) information. This even applies to small startups working with microtransactions. Plus, the Financial Action Task Force established new rules that may force exchanges to collect more information related to addresses that users send crypto to in 2020.
Although no one knows for sure how these rules will play out, as they appear difficult to enforce, veteran bitcoiner Joseph Weinberg, co-founder of the Shyft Network, said he worries this approach may be regulating away censorship-resistance.
“Lightning applications may be accepting micropayments but acting as hubs, so if you think about being a payment channel provider, you’re effectively involved as an intermediary,” he said. “At the end of the day, this is all about sanctions.”
WEF’s Warren agreed dominant economic players, like the U.S., are now tightening the reins on activities with the potential to circumnavigate sanctions.
Some digital fiat advocates believe blockchain technology could even make sanctions more effective.
Former Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo, who recently became co-founder of the Digital Dollar Foundation to advocate for a central bank digital currency (CBDC) from the U.S., said the term Cold War was a wee bit “strong” for disparity between the U.S. and China. Yet he generally agreed the economic rivalry was reminiscent of “the race to land on the moon.”
“Many other global powers are looking to assert their own currency as an important reserve currency,” Giancarlo said. “A digital dollar allows for a more scalpel-like approach to sanctions.”
On the other hand, de la Rubia said it would take a long time for any digital currency to rival the U.S. dollar’s global dominance. He argued that the European Union (EU) would love for Saudi Arabia to price oil contracts in Euros, yet the EU has been unable to contradict the dollar’s supreme liquidity.
“Bitcoin will always be volatile, with supply well-defined and demand moving,” he said. “As long as China has international capital controls, it will be hard for the yuan to take over, even as a digital currency.”
When asked about bitcoin, Giancarlo preferred to compare Facebook’s Libra project to his own Digital Dollar aspirations and the yuan.
“Only one of those three [currency issuers] would be constitutionally prohibited from mining that data for any purpose other than illicit use,” he said. “A digital Yuan will absolutely be monitored by the government for many purposes … a commercial venture absolutely will mine that data to say whether you are shopping at Nordstrom or at Target.”
Giancarlo said he wants to dedicate the rest of his career to modernizing America’s financial infrastructure, and he sees a blockchain-based fiat currency as a part of that.
He would not say what role bitcoin might play in that future. Instead, he said there’s an increasing interest in exploring “legitimate and positive use cases.”
Currency is, after all, a tool for political leverage. And although “blockchain” is on the tips of everyone’s tongue this time of year in Switzerland, few people at St. Moritz acknowledge the role a decentralized cryptocurrency might play beyond an investing hedge.
Those who are bullish on bitcoin, not just blockchain, are left wondering how bitcoin can be a geopolitical hedge if most conduits for moving money around the ecosystem are essentially banks.
Davos Needs To Wake Up To The Ills Of Centralization
As the world’s most influential and self-entitled gather in Davos, Switzerland, for next week’s World Economic Forum, a predictable set of problems are on their minds: climate change, political polarization, trade tensions and cyber-attacks top their list of worries, according to the WEF’s just-released Global Risks Survey.
Those are weighty issues. But if we look at them through the decentralization mindset encouraged by cryptocurrencies and blockchain technology, it’s hard not to conclude that elephants in rooms are being overlooked. It’s with those issues, the ones not being talked about, where the real important stuff lies.
The disintermediating, fragmenting and decentralizing impact of the internet has made the 21st century’s political and economic structure profoundly different from the previous one. But the Baby Boomers who run our governments and companies still tend to apply 20th century assumptions about centralized money and power. They fail to see how our outdated political and economic institutions are out of touch with this new reality, and how that explains society’s ever-waning trust in them. It’s a myopia that also means they often fail to recognize, much less understand, the alternative decentralized models quietly emerging from the developers building cryptocurrency, blockchain and digital identity technologies.
So, as I head to Davos with my CoinDesk colleagues for a week of reporting and speaking engagements, I want to contemplate some of the issues “Davos Man” might be missing.
It’s worth remembering the people for whom these issues most matter are not those cocktail-sipping elites but regular Joes and Joans. This year may well mark the most divisive U.S. election in decades. If our bickering leaders aren’t focused on these big themes, where does that leave us in four years’ time? We need these issues on the ballot.
China’s Digital Yuan
China is expected to launch a digital currency sometime this year. The question not being asked enough is: As this project grows – and likely many others from other countries and companies – what will it mean for the dollar-centric global economy and its multitudinous stakeholders?
How will digital fiat currencies impact global trade and capital flows? Do they pose a competitive threat to the dollar and, by extension, to U.S. economic power? What would such a transformation mean for how the international community tackles the big-ticket issues Davos elites worry about: petrodollar investments in carbon-rich assets, for example, or global trade tensions?
The digital yuan might seem like a superficial change, akin to a more advanced banknote or a state-run version of a mobile banking or payments app. But while China’s centrally managed approach to digital-currency technology is in some respects the antithesis of the decentralized model behind bitcoin, it is nonetheless a radical change.
Two things matter: One, a digital fiat currency will circulate without banks managing the flow and, two, it is programmable, which makes it much more powerful than analog currency. Marc Andreessen says “software is eating the world.” Money-as-software might just devour it.
A digital currency will enable the Chinese government to directly manage and monitor its users’ spending patterns. Putting aside the terrifying surveillance prospects behind this “panopticon” vision, this information-gathering power will greatly aid China in its international aspirations. Its economic response machine will be run by a far superior data-analytics system than anything employed by any other country.
A “programmable” yuan will provide the missing payment component that hundreds of Chinese blockchain and smart-contract projects need. It will enable autonomous machines, micropayment infrastructure management systems, smart cities and other ideas the West will struggle to keep up with.
As I’ve argued elsewhere, currency programmability, when interoperable with other countries’ fiat digital currencies, could also enable Chinese companies and their foreign partners to do a direct runaround of the dollar-based trade system.
Currently, the yuan occupies an immaterial amount of cross-border trade and reserve asset holdings. But as this technology poses alternatives to the dollar and if China aggressively inserts its version into investment projects in Africa, for example, or into its 65-country Belt and Road Initiative, its international usage could grow rapidly.
Recently, a Harvard-MIT simulation game found that digital fiat currencies could quash America’s capacity to impose sanctions on rogue states. But the issue goes wider: If non-dollar digital fiat lets anyone bypass the intermediating U.S. banks that U.S. regulators lean on to catch international criminals, why will anyone use banks for cross-border money movements at all? Where does that leave Wall Street, that engine of American economic power?
Some people, including former U.S. Commodity Futures Trading Commission Chairman Chris Giancarlo, have recognized this threat to U.S. economic leadership. But Chinese digital currency dominance does not appear to be on many leaders’ radars – it’s certainly not featuring in the Democratic primary presidential debates.
So, come on, Davos, let’s talk about it.
To be fair, privacy in the internet age, defined as the threat to our online personal data, will probably get a decent examination at Davos 2020.
The Cambridge Analytica story, Edward Snowden’s unveiling of the NSA’s citizen-snooping system and the growing awareness that Silicon Valley behemoths such as Google are managing our lives, has put this issue front and center. It deserves to be.
The problem is the structural factors behind this dangerous surveillance capitalism system are poorly understood.
Most political reactions to the drumbeat of stories about data abuse by Facebook and Google amount to leaders tut-tutting at these companies, occasionally fining them and demanding they just stop being bad. Few realize that, essentially, they can’t stop being bad. These centralized entities, with their closed, non-interoperable “walled gardens” of data, have built their entire business models – and therefore their shareholders’ profit expectations – on surreptitiously and systematically extracting information about human lives.
The other problem is the ad-hoc efforts to change these businesses’ behavior clashes with other demands placed upon them.
Witness the contradiction in lawmakers’ critiques of the Facebook-founded Libra digital currency project. On the one hand, they demanded it protect users’ privacy but on the other they demanded it maintain all the monitoring necessary to prevent money laundering. Or look at how Facebook’s critics simultaneously demand its social media platform remove disturbing hate-speech content and that it also cease arbitrarily censoring and “de-platforming” users. Without understanding the problem, people can’t see how holding both of these positions is untenable.
There are two approaches to this issue: a political one, such as an antitrust order to constrain the internet giants, or a technological one, in which social media platforms move to a decentralized structure of user control (one potentially where zero-knowledge proofs or other advanced forms of encryption enable verification without revealing identities).
Let’s discuss these options, Davos.
You thought fake news was a problem. You ain’t seen nothing yet.
As Arif Khan writes in this pre-Davos opener for CoinDesk, fake news is going on steroids.
With people such as Jordan Peele using clever stunts to highlight the problem, “deepfakes” – in which image manipulation technology is making it increasingly difficult for people to detect reality-altering changes to a digital video or image – are starting to get people’s attention.
Yet, the full extent of how much society depends on the glue of trustworthy information is greatly underappreciated. The foundation of our democracy, of our legal system, of our business relationships and of everything else in between is at stake when the truth cannot be verified.
How do we get ahead of this when artificial intelligence is progressing so rapidly and when information is no longer delivered to us through central filters?
A solution will require a combination of tools like AI detection software, watermarking and blockchain-based tracking of digital media provenance.
It also requires stakeholders at technology companies, media organizations and government bodies to jointly establish standards for those technologies so we can all agree on how we’ll re-establish the integrity of the information we rely on.
This is an urgent problem, one tailor-made for a mountain-town gathering of money and power.
Let’s look outside the bubble. Let’s become inquisitive. Let’s abandon rigid, outdated ways of thinking. Let’s say goodbye to know-it-all Davos Man, because clearly he doesn’t.
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