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CWC Newsletter #11 (January 22, 2020)

By Taylor Ryker, Analyst

What is the future of the US dollar? And how will cryptocurrencies and blockchain technologies impact the US dollar standard?

This blog post provides initial information and context of a potential showdown later in 2020 and beyond. A huge showdown that will test the legitimacy and longevity of certain cryptocurrencies, such as bitcoin. Central banks, powerful national governments, and traditional financial systems are all incentivized to mute immutable, decentralized blockchains because it inevitably erodes their control over populations and markets. Already some governments around the world have banned the circulation of bitcoin and other cryptocurrencies in their jurisdiction.

The rise of cryptocurrencies can be traced to the WWII era where the need for secure data transmissions were of utmost importance between victory and defeat. Prof. Brunton Finn of New York University details the history of digital cash and cryptocurrencies in his latest book, Digital Cash (2019). Data security was and still is a vital component that informed past and present research and development of cryptocurrencies.

This past week the World Economic Forum Annual Meeting in Davos brought top leaders, businesspeople, academics, and activists to discuss many issues, with one in particular, the future of cryptocurrencies and blockchain technologies. With the growing interest by central banks to issue their own digital currency, Davos participants debated the merits of data security and private money.

However, the Davos event saw the championing of data security while shunning the possibility of a private money outside the purviews of government surveillance. This would make sense due to the fact that private money would challenge the supremacy of government-backed currencies, such as US dollars, pounds, and yuan. The threat of digital cryptocurrencies usurping the dominance of government-backed currencies has accelerated the development, deployment, and adoption of central bank digital currencies (CBDC).

At Davos, the ex-United States Commodity Futures Trading Commission (CFTC) chairman J. Christopher Giancarlo declared that the adoption of a US dollar-backed CBDC is critical. Giancarlo announced his Digital Dollar initiative that would help "develop a framework for potential, practical steps that can be taken to establish a dollar CBDC." This response to a digital US dollar comes at a moment when the Chinese Communist Party and Chinese internet giants have already deployed or are deploying in the near future their own cryptocurrencies and digital currency.

The People's Bank of China and Chinese internet giants, such as Alibaba and Tencent, are currently ahead of the US in digitizing their currency to allow for a more frictionless economy with government surveillance. The People's Bank of China hopes to launch their digital yuan this year. Chinese internet giants are creating blockchain smart contract platforms to allow for the commercialization of "blockchain as a service."

The challenge to the US dollar standard may come from cryptocurrencies or digital currency from non-US countries who stand to benefit from the US dollar losing its world supremacy status. The Wall Street Journal reported how the global trade system runs on the US dollar and its implications on other economies around the world. In addition, the current strength of the US dollar is also adding to the trade imbalances making imports and exports bend to US monetary policies. Many countries stand to profit if there is a new world order where the US dollar and its economy do not dictate global monetary policies.

So what will happen to cryptocurrencies in the face of mounting interest in CBDCs around the world? Time will tell, but I want to leave you with something I read by Ben Hunt. In "Too Clever By Half," Hunt recounts that in the wild, the coyote is one of the most cunning animals that can outsmart humans. However, like with any new innovation or invention, the larger, meta-force always comes to kill the coyote.

Hunt believes that "the inevitable result of financial innovation gone awry, which it ALWAYS does, is that it ALWAYS ends up empowering the State. And not just empowering the State, but empowering the State in a specific way, where it becomes harder and harder to be a non-domesticated, clever coyote, even as the non-clever, criminal raccoons flourish. That's not an accident. The State doesn't really care about the raccoons, precisely because they're NOT clever. The State cares very much about co-opting an Idea That Changes Things, whether it changes things in a modest way or massively. It cares very much about coyote population control....Coyotes can change the world. Coyotes Will change the world. But not if they misplay the meta-game. Not if they hang out with raccoons. Not if they fetishize ANY financial instrument as an intrinsic aspect of a commitment to liberty and justice for all. Because it's not."

I would interpret Hunt's analogy to state that he probably envisions a future society where bitcoin and other novel crypto innovations in the financial industries become a menacing threat to society (read: coyotes) and their response is a global bitcoin ban. Best to find those cryptocurrencies that are working with the regulators, authorities, and central banks; or in other words, a domesticated, human-loving coyote.

Disclaimer: KJ Kingsley is not a financial advisor and holds the digital tokens or cryptocurrencies represented in the content above. This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this post constitutes a solicitation, recommendation, endorsement, or offer by myself to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of any of the author’s employers.

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