Cai Weide: Digital currency war: thinking from the perspectives of national security and the market

1.  Introduction

The world started the digital currency competition on June 18, 2019, and the digital currency war started on August 23, 2019. On the same day, former Bank of England Governor Mark Carney proposed at the Fed that “synthetic CBDC replaces the US dollar as the world’s reserve currency”. This view shocked the US government and the financial community. Therefore, on November 11, 2019 (Chinese Double Eleven), Professor Kenneth Rogoff, a professor at Harvard University, first proposed the “new currency war”, and believed that technology, market, and supervision are the three major arenas of the new digital currency war. This shows that although this new currency war was initiated by the United Kingdom, it is the United States that has the greatest impact. Therefore, in order to protect the U.S. dollar and prevent the country’s economy from being hit, the United States has started this new digital currency war.

For the “new digital currency war”, various organizations have held conferences and discussions. For example, on November 19, 2019, Harvard University in the United States held a simulated White House national security conference to discuss the “digital currency war”. Participants included the current U.S. SEC Chairman Gary Gensler and an important member of the U.S. Biden team, and the former U.S. Secretary of the Treasury Lawrence Summers, former Secretary of Defense Ash Carter, and scholars from the Massachusetts Institute of Technology. In response to this discussion, Harvard University also compiled a conference report and made it public in January 2020, and the theme of the report was “Digital Currency Wars: Simulation of National Security Crisis Management.”


Figure 1: Harvard University Report in January 2020: Digital Currency Wars

Since then, articles and discussions about the “digital currency war” have been endless. Including articles from the Federal Reserve, the U.S. Department of the Treasury, the International Monetary Fund, the European Central Bank, the Bank of England, JPMorgan Chase Bank, Morgan Stanley, Black Rock and other important institutions, as well as some independent private think tank Digital Dollar (Digital Dollar) project reports , Plus research papers from Harvard University, Massachusetts Institute of Technology, Princeton University, University College London, University of Berkeley and other universities. Among them, the article “Digital Currency Wars” co-written by Vinod K. Aggarwal and Tim Marple of the University of Berkeley attracted attention. This article was published in the Global Asia journal in December 2020.

Digital currency wars have always had no shortage of competitors. The first to appear was the competition between digital stablecoins and fiat currencies, which took place on June 18, 2019. But after November 2020, there is another competition, the competition between digital tokens and fiat currencies. In October 2020, the report “The Impact of Cross-Border Digital Currency on Macroeconomics” issued by the International Monetary Fund did not discuss the competition between digital tokens and legal currencies, only the competition between digital stable currencies and legal currencies.

In fact, the competition between digital tokens and fiat currencies is more important, because the risk of digital stablecoins is “in the future”, while the risk of Bitcoin is “now”, and the volume of Facebook stablecoins is now zero, and liquidity is also zero. ; And the market value of Bitcoin is larger than that of JPMorgan Chase Bank, with liquidity exceeding 98% of the country’s legal currency, and at one time it exceeded 99%. This creates incalculable world financial risks.

The distinguishing feature of Berkeley’s “Digital Currency Wars” article is to present a multi-dimensional analysis, not just a single-dimensional summary. Although the original text is only 4 pages, many points of view are the result of the author’s deliberation, which is refreshing. In addition, unlike other articles, their point of view is not to analyze the reasons after the fact but to propose possible scenarios in the future. These were written 8 months ago. Looking back, most of their predictions are correct. Although some scenarios have not yet been realized, we need to pay close attention to those unrealized predictions.

Here we mainly discuss Berkeley’s views from two directions, namely, national security and the market. In Sections 2 and 3, we discuss the views of Berkeley Professor Aggarwal and others; in Section 4, we discuss their ex-ante predictions, and in Section 5, we present our analysis.

1. National Security: Four Considerations

Obviously, Professor Berkeley was greatly influenced by the remarks of the former Bank of England Governor, and at the same time he fully accepted the view of Professor Rogoff of Harvard University that digital currency can affect national security, and the theoretical basis is also based on Princeton University’s “digital currency zone” theory.

1) World reserve currency : CBDC can be used as a reserve asset or threaten the status of the US dollar as a global hegemonic reserve currency, especially the high liquidity of the new sovereign CBDC, and the market has more confidence in it. (Note: This is the view of the former Bank of England Governor in 2019) The consequences of the loss of the US dollar as the world reserve currency will be unbearable, because the US dollar is the world reserve currency, and the US has “exorbitant privilege” when importing domestic currency products. [1] Once the U.S. dollar is no longer the world’s reserve currency, privileges will disappear, and U.S. domestic consumption and military expenses will make the U.S. bear more debt. Although many observers pointed out that the threshold for abolishing the status of the US dollar as a hegemonic currency is very high. Nevertheless, “excessive privilege” may still be challenged. Even regional hegemonic digital currencies will impose restrictions on the U.S. dollar and begin to grant “excessive privileges” as well.

2) Cross-border payment : Since CBDC does not go through the SWIFT system, the SWIFT system will be useless. SWIFT is a tool of US monetary policy to sanction other real economies (such as countries). Therefore, the establishment of a sovereign CBDC operating outside the SWIFT network has weakened the ability of the United States to enforce sanctions and increased the tools for some countries to resist U.S. sanctions.

3) National debt : CBDC provides a new method of international debt valuation. With growing dissatisfaction with dollar hegemony, countries may become increasingly interested in alternative lenders and tools. The transition from the dollar-denominated global debt market to markets including CBDC will weaken the ability of the United States to implement strategic priorities through loan programs.

4) Internet attack hit : CBDC require some degree of Internet-based communication between members of the network digital currency, which is bound to introduce a new currency in political attacks. That is, the possibility of a cyber attack on a country’s currency system, which is the most directly related part of digital currency and national security.

2. Market: Promote digital currency through economic governance

Here, the author discusses how the government promotes digital currency from 5 viewpoints:

1) Technical art features : The main features include dual use (dual use), and external applicability:

  1. Dual-use : Some digital currencies that appear to be commercial enterprises will have an important impact on national security. (Note: Facebook stablecoin is another example. Bitcoin is another example.)
  2. Externality : Externality is a spillover effect, which refers to a situation in which the activities of an external organization or group damage or benefit other organizations or groups. Currency is the lifeblood of the country and the global economy, so technological development in this field has obvious spillover effects on the real economy.
  3. Applicability : Digital currency technology is now easy to replicate and can be innovated again. This means that the design of digital currency can be more “centralized”, making it easier for the country to supervise digital currency (Note: it is the opposite of the idea of ​​”decentralization”). This also means that the government can develop digital currency technology that is beneficial to the country. Such technology can maintain the government’s monetary monopoly and can regulate monetary policy. Development in this area is promising.

2) City field characteristics : focus on competition, security of supply, barriers to entry and economies of scale.

a.  Competitors : The compliant digital currency market has gradually become a private and government arena, which requires the government to learn and manage cryptocurrencies, thereby enhancing private market supervision.

. b  supply should be safe : Efficiency is an important driver of currency encrypted private digital currency development, but the authors now see that governments are increasingly concerned about the safety and control technology associated with these digital currency system.

. c  into the wall of the base : Despite the low barriers to entry basic digital currency, but more complex version requires a lot of knowledge and capital.

d.  Compliance mold economy : significant presence and social media software products. We found that different types of digital currencies will produce significant network externalities, which means that the competition and economic conditions between different digital currencies are different. In addition to complete bans, distributed digital tokens such as Bitcoin leave almost no loopholes for regulators, but the market density between digital currencies will generate internal competition from low thresholds to entry. Although the competition between private digital currencies is determined by a country’s internal regulatory standards, sovereign digital currencies have more anarchic conflicts in the technical design of a fixed group of related participants-central banks of various countries Race to achieve various policy priorities.

3) Domestic knot structure : the relationship between the government and private domestic structure and focus. Bitcoin and other digital tokens reject government supervision, so different digital currencies will appear in different countries, different regulations, and different market environments. Therefore, we should not only rely on the private governance of digital currencies by companies, but expect a strategic public-private dynamic, that is, specific companies will either gain power because they are aligned with national priorities, or be at a disadvantage. 

4) State the international system : now all over the world began to study how to monitor the global digital currency, but the first digital tokens so that existing regulatory rules lagged. If there are no international rules for the generation and regulation of digital currency, the world is still in the “WildWest” era of the market. Because there is no international or regional regulatory mechanism, some countries will use government economic means to gain an advantage in competition. By the same token, some countries may increase the interoperability of CBDC and other CBDCs to increase their currency advantages, and CBDC interoperability ultimately determines the winners and losers of the digital currency war.

5) global system node configurations : authors believe that private digital currency is likely to continue to develop and CBDC.

1. The future of digital currency competition

The University of Berkeley proposed 4 important approaches to digital warfare:

1) Countries will continue to intervene in private digital currencies : events such as digital token transactions and ICOs. Not only can we see the regulation of digital currencies by various countries, but also the cooperation of many countries in digital currency governance and regulation, and these cooperation will become closer and closer. (Note: The author uses the word “intervention”, which is stronger than the word “supervision”)

2) Intensive discussions : There will be intense discussions among countries on global or regional digital currency governance and supervision. As most of the rules are currently being formulated, or have not yet been formulated. (Note: Even if it has been formulated, such as the formulation and implementation of FATF travel rules, it is still in the experimental stage as a whole, because not all signatories are implementing this rule.)

3) In the face of conflict, the digital currency camp has emerged : Many countries in the world will participate in the discussion of digital currency. Even if this country does not develop its own CBDC or digital currency, it is still interested in this topic. Because they must face these foreign digital currencies that are near the city, and these digital currencies have their externalities and the exchangeability of their legal currencies and digital currencies. Therefore, these countries must consider how to have a balance under multiple digital currency challenges, such as joining a digital currency camp. (Note: Just as the “digital currency camp” proposed by the International Monetary Fund in October 2020 report, a neutral country needs to consider which countries’ digital currencies will interact with and not interact with other countries’ digital currencies. So the world currency market Partition).

4) Co-opetition relationship : Countries have strengthened their supervision and restrictions on privately issued digital currencies. Since the government is relatively slow in its actions, it needs to cooperate with enterprises and at the same time impose strong supervision on enterprises. Therefore, 2 extreme phenomena may appear:

a. Some private digital currencies have greatly developed due to cooperation with the government;

b. Some private companies retreat because of cooperation with the government and fail to develop. 

2. Our analysis

The views of this Berkeley article are consistent with some of the theories we have mentioned in the past:

  • CBDC or digital currency will have an impact on the entire country’s real economy, even including world reserve currencies, claims, cross-border payments, etc.;
  • The government will also seek to cooperate with technology companies to develop related technologies while supervising private digital currency issuance;
  • The emergence of digital currency will force the world financial market to split into multiple “digital currency zones” (campas). Even if a country does not develop its own digital currency, it will be forced to join one or more digital currency camps because of other digital currencies.

The following points can be analyzed in detail.

5.1.  New centralized blockchain design

First of all, the author believes that the design of digital currency needs to be ” centralized” to make it easier for the country to regulate digital currency . In this way, each country can develop digital currency technology that is beneficial to the country (instead of developing digital currency that is detrimental to the country). Such technology can maintain the government’s monopoly on currency issuance, and can also use digital currency to regulate macro-monetary policies . 

Secondly, the design of the entire blockchain system needs to be comprehensively corrected to design a digital currency that conforms to the national interest. This view coincides with our proposal in 2018 that China can only develop a supervisable blockchain system. Therefore, those who yell “decentralization” on the one hand, and on the other hand require the centralized government to fully accept the idea of ​​”decentralized” technology is an impossible task.

The Federal Reserve, the Bank of England, etc. have coincidentally proposed similar concepts. This is the opposite of the traditional digital token system’s goal of avoiding supervision. The new digital currency system must put supervision in the first place, and can only engage in transactions and protect privacy in a regulatory environment.

5.2. There is  no need for zero-sum competition to have an impact

The author proposes that even the emergence of regional hegemonic digital currencies will have an impact on the U.S. dollar. The hegemonic currency in this area can also enjoy similar “excessive privileges.”

This means that the digital currency war will have a phased process. Even if the world cannot establish a new reserve currency, a region can begin to have its own reserve currency. This proves the realization of the “digital currency zone” theory.


Figure 2: The path of digital currency competition

Since small countries may not have technology or assets to compete with big countries, when other countries’ digital currencies are approaching, they will consider joining the currency camp, leading to the establishment of multiple digital currency zones in the world soon. There are several options:

1. Waiting for the next world reserve currency to appear, the former Bank of England Governor said that there are two options:

a. Use a powerful legal currency to become the world’s reserve currency;

b. Or propose to use a basket of currencies (such as the SDR of the International Monetary Fund) as the world’s reserve currency.

2. Form a regional reserve currency, each camp has its own reserve currency, and issue state-owned regional “excessive privileges.”

If you choose a regional reserve currency, what scenario would this be? How many regions will the world be divided into? What interaction will there be between districts and districts? How to control digital currency exchange and interaction? The following are possible scenarios:


The size of the digital currency zone is actually determined by the ideas in Section 5.3.

5.3.  Interoperability determines the winners and losers of the digital currency war

Enterprises or participants will interact with multiple currency transactions because of a digital currency platform. This shows the importance of CBDC or digital currency interaction. The more interactivity, the larger the scale of the platform.

How to make multiple currencies (whether traditional currencies or digital currencies) voluntarily join the camp? Because traditional Internet-style platforms have the asymmetric advantage of flounder, some countries or regions will require greater rights of speech and privacy.

In this way, traditional digital currency platforms need to be reformed. For example, the platform can charge service fees, but cannot collect customer privacy data, and most of the data is encrypted, and these data can only be stored on the server of the data owner or an encrypted third party storage. This is the concept of interlink network. The platform party can provide services, but cannot have data.


Figure 3: Interactivity and privacy determine the size of the digital currency camp

5.4.  Interchain Network refuses to monopolize and protect privacy

Recently, the monopoly of Internet companies and the betrayal of privacy are not uncommon. The European Union and other countries have strong views on the monopolistic behavior of Internet giants. If such monopolistic behavior appears on digital currency, which will lead to personal or corporate transaction data being tracked, then the private information of individuals, society and even the country will be exposed to the public.

How to enable a country to use a foreign-developed digital currency platform without obtaining transaction data? At present, only the Internet technology provides such a service, because all the information of its client is encrypted, and it is encrypted layer by layer. The first proposal of the interlink network was around 2017, when the science and technology prophet George Gilder proposed the cryptocosm idea (cryptocosm) in the United States and the interlink network we proposed in China.


Figure 4: Logic diagram

After May 2021, the interlink network is no longer just a concept, as related companies are successfully listed. This means that more and more people accept that the Internet is the future. 

5.5.  Digital currency is in the era of expanding wasteland in the western region: the formulation of regional rules takes precedence

The author believes that the current era of digital currency is the era of expansion in the western United States. This era is not the beautiful cowboy stories shown in Hollywood movies, but the hard, cruel, and wasteland days. This era has lasted 30 years. It is an era of enclosure, cowboy era, gold rush era, jungle rule era, hero era, and wrong technology is considered to be an era of truth, but it is also an era of overnight wealth. And now the development of digital currency is also experiencing a similar scenario.

Therefore, the author believes that the formulation of international rules is the most important. As mentioned earlier, in international or regionally recognized regulatory mechanisms, some countries may use economic means to gain an advantage in competition. This does not require a global system or global rules, only regional rules. This also means that the digital currency war may start from the region.

5.6.  Inaction after the emergency meeting of the U.S. supervision led to a surge in Bitcoin

Recently, foreign analyst Grant Williams released a research report, pointing out that USDT is a huge amount of money laundering, its scale and history are surprising, and it is “made out of nothing” to produce stable coins, which is equivalent to the central bank of the underground market in the United States. According to the analysis of the United States, every time Bitcoin rises, USDT is the driving force behind. Moreover, USDT does not use the blockchain system and only issues digital stablecoins, which is purely an “empty chain” (different from Facebook stablecoins). These reports attracted the attention of the U.S. Treasury Department and urgently convened five major regulators (including the Federal Reserve) to discuss the regulation of digital stablecoins on July 19.

After the meeting, the U.S. Treasury Department announced that it is studying how to manage digital stablecoins. It will announce how to manage digital stablecoins in a few months, and requires that regulatory agencies require very rapid research.

However, the outside world believes that the US regulatory agency actually “do nothing” this time. The emergency meeting was held on such a large scale. Before the meeting, it was loudly said that it would act immediately, but the action after the meeting was “immediate and rapid research.” So Bitcoin immediately rose sharply.

The problem with USDT was not known in July this year. Many well-known analysts and banks issued reports pointing out frauds many years ago, but the United States has not acted. Earlier this year, JPMorgan Chase Bank also issued a report stating that USDT was the reason behind the surge in digital tokens. This meeting has reached the highest decision-making class in the United States, and it has decided to take a “research” action. Why? Not the rules of the jungle as Berkeley University said?

Since June 2019, the international community does not know how many meetings have been held to discuss the impact of the Facebook stablecoin on the world. But the impact of Facebook’s stable currency is “in the future”; the problem now is USDT, which is also a stable currency. However, it has adopted a moderate attitude towards USDT International, and USDT is not discussed in important international conferences. And we always think this problem is more serious. 

Hope this incident is an important turning point, let us wait and see the research report from the United States.

[1] The term “excessive privilege” that describes the special status of the U.S. dollar as the world’s reserve currency is usually attributed to Valery Giscard D’estaing, who served as President of France from 1974 to 1981. In fact, he was quoting Raymond Aron, a financial reporter. Aron used this phrase as early as 1965 when he published an article in the French newspaper Le Figaro. U.S. residents pay relatively low interest on debt to foreigners, while the return from foreign assets is relatively high. This positive “excess return” of net foreign assets-known as the “excessive privilege” of issuing international currencies-is conducive to the sustainability of large-scale negative external positions.


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