Author: Mr. X
Money and power flower from the top down.
Rahm Emanuel, former mayor of Chicago and former president Barack Obama’s chief of staff, famously said “never let a crisis go to waste.” Plenty of others have said it in their time – it’s close to a universal rule of politics.
Now, it seems that those pushing for a digital dollar are following this rule. The collapse of the FTX exchange and the fall of Sam Bankman-Fried represent an existential threat to cryptocurrency. However, as some have pointed out, SEC Chair Gary Gensler is behind the curve here, despite his warnings about the need to regulate cryptocurrency. The SEC is playing catch-up and any regulatory environment that is imposed on American consumers will be too late.
That said, winning control over crypto might be more useful for the elite’s purposes than crushing it. My longtime contention is that the United States will use bitcoin and cryptocurrency generally as a “support” for the dollar. It will essentially use technology that was meant to threaten the world reserve currency as a way of giving it a further lease on life instead. A Central Bank backed Digital Currency is practically an inevitability given that China is already developing one to threaten the dollar. Of course, you can count Russia as an almost automatic supporter of anything that can be used to displace the greenback.
However, the dollar is hardly hurting. Despite skyrocketing deficits, the dollar has only been growing stronger, crushing onetime rivals like the euro. If anything, far from moving towards a multipolar world, the last year has shown America consolidating its position as the global hegemon. With little debate, and to its own detriment, the United Kingdom and the European Union have followed the American line on Russia. Populations who may be dealing with higher energy costs this winter have simply been marginalized.
In the Pacific, China’s self-defeating zero-COVID policy has made it look foolish and short-sighted. Beijing is already having to reverse course to bail out its struggling property sector. Meanwhile, Iran is on the brink of regime change. Washington DC looks stronger than ever. So it makes sense for the hegemon to start rolling out its digital dollar program now, in a position of relative strength.
Mastercard, Wells Fargo, Citigroup and others are reportedly launching a 12-week “experimental” program with the New York Federal Reserve. The “regulated liability network” lets banks issue “digital money” and then settle central bank reserves on a distributed ledger. The key is to see how digital dollars might function as the stablecoin in a new system of financial settlements.
Obviously, this represents a massive step towards centralization. You are going to see a lot of conspiracy theories surrounding this – and, frankly, most of them are potentially true. Digital dollars could potentially give governments and central banks far more influence over the way people spend their money. When combined with a Chinese-style Social Credit System, it could potentially penalize behavior such as meat eating, buying gas guzzler, or anything else that might conflict with the “Great Reset” or a “Green New Deal.” If accompanied with a ban on cash (something that health concerns would easily justify), it would mean that the System could have almost total control over the way people spend and behave.
However, while such worst-case conspiracy theories might be true someday, we risk getting ahead of ourselves here. A ban on cash would meet a huge public backlash, even if it was justified in the name of health. Public health authorities and the so-called experts are hardly basking in a wave of public good will and bipartisan legitimacy. The new GOP House may even begin digging through the federal government’s COVID-19 policies. Whatever policies a digital dollar could theoretically justify or allow, we won’t see them anytime soon.
Instead, this is a savvy move by a government which can supply what the cryptocurrency market so desperately needs – a reliable stablecoin. Questions about the value of Tether and other coins have been present for years now. The media narrative surrounding cryptocurrency has also changed since the 2007-2008 financial crisis. Whereas crypto was once hailed as an alternative to Wall Street banks and a way to empower citizens, now many journalists are worried about “extremists” getting cryptocurrency or an alternative financial system being built. Cryptocurrency, in short, needs to bend its knee to the dominant media narratives or it will be destroyed. The collapse of FTX would provide the excuse.
Programmable US dollars provide several advantages over the status quo. It removes the need to physically ship dollars from one country to another, an expense in itself but also a health hazard in the opening days of COVID-19. If they are digital dollars, countries don’t need to take the financial (or diplomatic) risk of breaking away from dollars in order to prioritize the yuan. In the current environment, most importantly, the “experiment” will show the cryptocurrency sector and the larger market’s need for a stablecoin backed by the government.
It’s important to realize that the important decision has already been made here. The government is moving forward with a central bank backed digital currency, if only so it can compete with China. However, many underestimate just how difficult this experiment is going to be.
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The 12-week data gathering effort will go a long way towards proving the feasibility of such a system. Don’t ask me – read the words of the New York Federal Reserve itself.
In a 12-week proof-of-concept project—the Regulated Liability Network U.S. Pilot—the NYIC [New York Innovation Center] will experiment with the concept of a regulated liability network (RLN). RLN is a concept for a financial market infrastructure (FMI) facilitating digital asset transactions that connect deposits held at regulated financial institutions using distributed ledger technology.
This theoretical FMI provides a multi-asset, always-on, programmable infrastructure containing digital representations of central bank, commercial bank, and regulated non-bank issuer liabilities, denominated in U.S. dollars.
It’s practically telling the world that this will be the future of international payments systems.
What are the takeaways?
First, it’s doubtful that cryptocurrency as a whole will simply collapse. BTC is driving for $17,000 again as of this writing and ETH is well over $1,200.
Second, the government sees crypto’s weak spot, which is the lack of a stablecoin that all parties can agree has sufficient banking. This experiment will show the feasibility of substituting digital dollars for Tether or other privately controlled stablecoins.
Third, the government will use cryptocurrency technology to its own advantage. While some cryptocurrencies will still be used to remain free of government control, serve as a check on inflation, and protect privacy, the vast majority will be subordinated to a payments system that will be dominated by the Federal Reserve and the federal government.
The conspiracy theories about what the government might do with this power are premature. There are many obstacles it would need to overcome first, and this technical feat is only the first of many. Instead, cryptocurrency investors should take heart that the government seems determined to prop up the space. The bad news is that the government will not leave the space alone after “saving” it – and rather than being an alternative to the dollar, crypto will be just another space where the greenback will reign unchallenged.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.