Washington’s Choice on the Digital Dollar

As more and more people move money around the world bypassing the U.S. banking system, Washington may have no choice but to work with this movement, not against it.

Congressional hearings on the digital dollar in the past two weeks have been seen as an opportunity to advance financial inclusion.

It’s a noble goal, but let’s be realistic: In the end, it’s a matter of power. President Biden’s call at last week’s Group of Seven (G7) meeting for an alliance to counter China’s “One Belt, One Road” trade plan is directly linked to Washington’s growing interest in the digital dollar. The Chinese central bank’s digital currency is central to its international ambitions, and some fear it could pose a threat to the dollar’s status as the world’s reserve currency. Many in Washington believe that the dollar’s dominance is reflected in the enforcement powers it gives to U.S. regulators. U.S. regulators are able to track and control the inflow and outflow of money from U.S. banks, giving them the unique ability to sanction rogue behavior and deter criminal activity. The problem is that this approach to oversight of monetary powers is antithetical to financial inclusion. This model, centered on identification and tracking, places a heavy burden on the poor, who often cannot use identification systems, credit scores and other means to prove their eligibility for banking services. Moreover, as speakers at the hearing highlighted, there are legitimate concerns about broader privacy violations when there is a central bank digital currency managed through a single central ledger that allows governments to monitor and control everyone’s transactions. It is therefore notable that two individuals have expressed support for digital dollars: Christopher Giancarlo, former chairman of the Commodities and Futures Trading Commission and founder of the Digital Dollar Foundation, and Rohan Gray, a professor at Willamette University School of Law, have called for strong privacy protections in any digital dollar solution developed in the United States. Gray wants a cash-like digital dollar that acts as a bearer instrument that can be passed between users without the need for a third-party records administrator to confirm the payer’s legitimacy, balance or right to conduct the transaction. Giancarlo believes that constitutionally protected privacy will make the digital dollar more attractive to global users than China’s digital yuan. The Chinese government is expected to monitor the digital renminbi closely.

Open Source Currency

How do you build such an assurance into a government-led program that has been shown to monitor its own citizens? Gray believes such a model would require free and open source hardware and software, as well as technology-neutral spectrum licensing. Others question how a U.S. intelligence agency that has built a ubiquitous financial surveillance system could allow an open-source approach that it cannot control. While Gray acknowledges this challenge, he maintains his position that public funding is ultimately the purview of the government, not a decentralized protocol like Bitcoin. In his words, “It’s important not to confuse skepticism about altruistic expressions of government power with the legitimization of the idea that there is an alternative, like Bitcoin.” Gray says that only the government can afford to take responsibility for the difficult governance that comes with issuing a currency, and we would be better off lobbying Washington for a more open and pro-privacy approach.

Time is running out.

The problem is that developers of Bitcoin and open-system stablecoins are moving forward anyway. As this process continues, and as more and more people bypass the U.S. banking system to move money around the world, Washington may have no choice but to work with this movement, not against it. Earlier this week, MicroStrategy Michael Saylor told CoinDesk TV that he believes the dollar will spread to 5 billion people in a digital form that appears on every Apple phone and on every Android phone in Africa, Asia and South America. Only, this more ubiquitous world reserve currency will follow the Bitcoin track. If you’re a fan of U.S. financial regulation, that last point is a tough one to swallow. The Bitcoin track means that the open Bitcoin protocol will become the settlement network for the cross-border movement of digital dollars, in the form of privately issued and DeFi-based stablecoin tokens, rather than as an official U.S. CBDC. this could eventually mean that the government will no longer be able to identify users. This would make the SWIFT network, a bank-led communications organization currently used for clearing and settling international interbank currency flows, redundant. If these digital stablecoins are never converted into banking system-based dollars when they are in circulation, then a long trajectory of transactions will occur without people ever having contact with banks. This model could be huge for enforcing the “soft power” of the United States. Having digital dollars everywhere would naturally benefit U.S. companies, which would be free of exchange rate risk and would drive demand for U.S. financial assets, including government bonds and treasury bills held by reserve-based stable currency providers. On the other hand, it would mean giving up the “hard power” of being the world’s financial policeman, which would have far-reaching implications for Wall Street and the corporate interests associated with the system. But while this soft power/hard power dichotomy appears to be a trade-off, it does not mean that U.S. policymakers necessarily have to choose the outcome. The Seiler situation could happen on its own, without Washington’s support, as cryptocurrency developers around the world choose dollar-stabilized coins and integrate into the cryptocurrency business. Members of the U.S. Congress are talking about these things, which is good, but while they are talking, a new cryptocurrency model is being established.

The mess left by the U.S. government

The Fed’s extremely important Open Market Committee meeting on Wednesday signaled that the era of very low interest rates is coming to an end. With the economy rebounding from the epidemic and inflation risks suddenly on everyone’s mind, the consensus now is that rate hikes will begin in late 2023, meaning the central bank will soon slow its quantitative easing. Are these FOMC members noticing the elephant in the room? Namely, trillions of dollars of newly issued epidemic debt. How to address the drag on the economy from this future debt (both government and privately issued) is the trillion-dollar question facing the FOMC. Since the “tapering panic” (taper tantrum) in 2013, we have known that the market is addicted to the Fed’s money. But now we face an even greater risk of a “sudden stop”: a shock to the stock and bond markets that triggers an economy-wide bust. Will the economy grow fast enough for debtors to be able to afford sharply higher interest rates? This is why many people are investing in bitcoin. Skeptics argue that the government will have no choice but to absorb this debt and that the Fed will be forced to monetize it because tax revenues will not be sufficient to service it. This will be a reality check on modern monetary theory, which many see as a way to devalue the dollar and see inflation rise sharply. With this as a backdrop, let’s look at different measures of private and public debt relative to GDP: total household debt, total corporate debt, total federal debt, and total federal debt held by foreign investors. Coin World – Washington’s Choice on the Digital Dollar

Washington's Choice on the Digital Dollar
Washington's Choice on the Digital Dollar
Washington's Choice on the Digital Dollar
Washington's Choice on the Digital Dollar

All four of these spike sharply in early 2020. This is partly because the denominator of GDP shrinks as the embargo limits U.S. economic activity, and partly because looser credit conditions allow companies, households, and the government to borrow more money. It is also worth noting that household debt, corporate debt and debt held by foreign investors subsequently corrected in late 2020, while total federal debt remained largely stable. One interpretation is that the U.S. government prevented the economy from collapsing through stimulus checks, sector bailouts, employee retention loans, rent relief, and other measures. In doing so, it shifted private debt onto the public books. The second interpretation is that reducing the debt holdings of foreign investors opens an easier path to monetization. If the government is less dependent on foreign capital, there is less concern about a sharp drop in the dollar exchange rate, since most creditors are dollar-based. A third interpretation is that the federal debt of 130% of GDP is well above the 80% threshold recommended by the IMF. If that number were lower, it would be easier for the U.S. to grow its way out of this problem. But at such levels, we may never get out of the woods. That’s bad news for the economy; but good news for Bitcoin.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/washingtons-choice-on-the-digital-dollar/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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