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To investors,
I have been advocating for the United States to digitize/tokenize the dollar for almost a full year at this point. We are finally starting to see some movement on the issue from our elected officials or the Federal Reserve, but they are not doing nearly enough to address the dire situation they will find themselves in.
We saw a Democrat stimulus bill include reference to a digital dollar system being leveraged for delivering stimulus checks earlier this year. Ultimately this section of the bill was removed, but it was a positive development to at least see elected officials considering the possibility. As for the Federal Reserve, there was an IMF press conference this morning where Chairman Powell shared his thoughts on central bank digital currencies.
Powell’s general perspective appears to be the following:
Central bank digital currencies (CBDCs) provide some value
CBDCs will not be a replacement for physical cash, but rather a compliment
There are many challenges with implementing a CBDC, including cyber security, proof of no counterfeiting, potential monetary policy changes, etc.
The Fed has been working on a faster/cheaper payment system (FedNow), but that won’t be implemented and operational for a number of years.
The CBDC idea is merely an idea that is being explored right now and there won’t be any work done on it until the Fed fully understands the pros/cons.
To be fair to Chairman Powell, we don’t have too much information from him to go off of at the moment. With that said, it appears the Fed is intrigued by the idea of a central bank digital currencies but not taking it nearly as seriously as they should.
I laid out the condensed argument for the immediate US action the last time I discussed CBDCs on CNBC.
The argument has two key elements — accessibility and monetary policy competition. Let’s tackle accessibility first. We know that China has been working on a digital currency for a number of years now. They are actively piloting the technology within certain cities and geographic regions within their country. The early reports are suggesting that people are adopting the digital currency and more than willing to use it as a replacement for the legacy system.
This is important to keep an eye on because if China is able to digitize their currency before the United States, the renminbi will be more accessible to people around the world than the US dollar. Here is an example that I use to show this — imagine if you are in a country like Venezuela where the national currency has failed due to hyperinflation. You know you need to get out of Bolivars and you definitely desire to hold US dollars. The dollar is deemed “safe,” but the problem is that it is hard to acquire dollars.
The black market can be marked up hundreds of percent and is physically dangerous to interact with. Your bank and government have put significant capital controls in place, plus you have to worry about the bank confiscating your dollars if you leave them in your account. So you begin to look for alternative currencies to hold. Gold is an option but it is also hard to acquire and difficult to transport, especially if you need to leave quickly. So what are your options? You essentially are going to turn to the internet and ask yourself “what currency can I get my wealth into that only requires an internet connection?”
The answer today is Bitcoin. The problem with Bitcoin for short term holders is that it is highly volatile. There are not many people that like the idea of putting their life savings into something that could be up or down 20% in a matter of days. But if you’re optimizing for security, Bitcoin is a great option. That is until a nation state gets their currency fully digitized. So now you are in a situation where you can buy digital renminbi, but you can’t buy US dollars. Of course, the renminbi is going to be more attractive for short term use than the non-existent digital dollar.
This difference in accessibility may not sound like a big deal right now, but if China has a 2-3 year head start on the US, it is possible that the US dollar’s reserve status comes under immense pressure as renminbi gains adoption. This is the Chinese government’s dream scenario and the US is playing right into it.
But before we all start to believe that the world is ending and China will be the sole superpower, there is a big catch to this entire theory — the monetary policy competition. I personally believe that every fiat currency in the world will eventually be digitized or tokenized. There may be slight differences in the technology stack that each nation state uses, but each currency will end up being leveraged via digital wallets and have similar functionality.
When you get feature parity on the technology competition, the only thing left for nation states to compete on is the monetary policy. The issue with this for nation states is that they all operate fiat currencies. The central banks can only manipulate interest rates or expand/contract the money supply. They don’t have any other levers to pull, nor aspects to compete on. The differences between each nation state fiat currency is just too small to ultimately matter when facing Bitcoin.
People are going to be face a choice — every currency in the world, both CBDCs and non-government currencies, will be digitized. The average citizen will have access to anything they want. Rather than choosing between the lesser of two evils with fiat currencies, they will ultimately choose Bitcoin. The fiat currencies are unlimited in supply, controlled by human decision making, lack transparency, drastically increase government surveillance capabilities, and provide an incredible amount of cybersecurity risk.
Bitcoin is artificially capped in supply, boasts a programmatic monetary supply, has full transparency, decreases government surveillance capabilities, and is the most secure computing network in the world. The choice that will be made by the digitally native generation is so obvious. People are going to choose the digitally native currency, rather than the fiat currency that is merely lipstick on a pig.
You can see this difference playing out in various central banker comments around the world. They continue to say that the CBDCs will be compliments to physical cash, rather than replacements. The central banks are being forced into the innovator’s dilemma. They can’t replace the existing system, because that would require them to relinquishing their power and control. Instead, they will ride the legacy system for as long as possible, but ultimately it will fail and be replaced by the superior Bitcoin system.
This entire transition scares the hell out of me and everyone else I know. It is littered with unknown scenarios and will put governments around the world in difficult positions. Whether we like it or not though, every currency is going to be digitized and the monetary policy competition is going to be insane. This is not a question of if, but rather when.
My suggestion is to start reading up on this stuff. You need to be educated on what is starting to happen. It will likely be the largest shift to global macro markets over the coming decade. It will force central bankers to make wild changes to policy in an attempt to avoid falling behind. They will ultimately be unsuccessful, but they will definitely have an impact across your portfolio in the meantime.
My friend Raoul Pal had a great Twitter thread on these CBDCs over the weekend. I’ll be writing more about them in the coming weeks as well. We are living through extraordinary times. Your best defense is to educate yourself and remember that no one is going to look out for you like you look out for yourself.
Hope your week is off to a fast start. Talk tomorrow.
-Pomp
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THE RUNDOWN:
50,000 Shoppers Give China’s Digital Yuan Its Biggest Test Yet: Tens of thousands of Chinese this week spent digital yuan at Walmart, gas stations and convenience stores across the southern tech hub of Shenzhen. The experiment -- unprecedented in scope and size -- went off without a hitch, catapulting the world’s No. 2 economy to the forefront of a race to develop virtual money. The real-world test is thus far the largest in terms of users and money involved since the Chinese central bank kicked off testing of its digital cash in a handful of cities in April. Read more.
E-Krona or Bust, Says Sweden’s Chief Central Banker, Trying to Drag Swedish Govt Into Digital Age: Sweden’s top central banker Stefan Ingves has gone all-in on sovereign digital currency, and on Thursday the Riksbank governor called upon the Swedish Parliament to do the same. "There shall be digital state money as legal tender, an e-krona, issued by the Riksbank," Ingves wrote in a Thursday economic note that amounts to his strongest statement yet in favor of a Swedish central bank digital currency. Read more.
Digital Euro Within Decade ‘Very Likely,’ Says Finland’s Chief Central Banker: Bank of Finland Governor Olli Rehn told Reuters Friday he believes a digital euro is “very likely” to debut in Europe in the next 10 years. He was less certain on the European central bank digital currency’s eventual design, saying the European Central Bank “will first analyse and experiment.” Read more.
Bank of Spain to Weigh Digital Currency Design Proposals, ‘Implications’ Through 2021: Spain’s central bank is fast-tracking research on digital currency ‘s design and the economic implications of central bank digital currency introduction as per a four-year strategic plan released Friday. CBDC researchers will "consider different design proposals" and analyze digital currency's financial and systemic risks for Spain. Read more.
Senate to vote on $500 billion GOP coronavirus stimulus bill Wednesday: The Senate will vote on a $500 billion coronavirus stimulus bill on Wednesday, Senate Majority Leader Mitch McConnell said Saturday, as a larger bipartisan deal remains elusive despite continued talks between top Democrats and the Trump administration. McConnell blamed his opponents across the political aisle for the current stalemate, arguing that the Senate has enough time to pass the GOP stimulus package and confirm Supreme Court nominee Amy Coney Barret if “Democrats do not obstruct this legislation.” Read more.
LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE
Jeff Richards is a Managing Partner at GGV Capital. He has been at the firm since 2008 and previously spent 13 years as an entrepreneur and operating executive in the US and Asia. Jeff founded two technology startups, including R4 which was acquired by VeriSign.
In this conversation, Jeff and I discuss:
Jeff's investment strategy
Investments like Wish, Coinbase, Lambda School, and Slice
His biggest winners & losers
The advantages to being a public company
The resiliency in Silicon Valley
Various geographic investment markets around the world
I really enjoyed this conversation with Jeff. Hopefully you enjoy it too.
LISTEN TO THIS EPISODE OF THE POMP PODCAST HERE
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