The Good News... (Part 3 Move to Digital Money)
To do List (The good news is that there is time to action these items now)
Shift to the new Financial System: The old financial system of fiat money in paper and coins was already deeply stressed by a record debt burden across most major economies. Government balance sheets are stretched thin by COVID stimulus too. It’s hard to imagine more bailouts. Government stimulus under the old system wasn’t working anyway because it always involved giving the money to the banks which usually failed to pass it onto the people who really needed the money. The Helicopter Money approach advocated by the Fed and other central banks meant money landed only on the highly manicured lawns of the biggest mansions, bypassing most people. The old approach made asset prices rise without protecting the interests of the poorer members of society.
As Buckminster Fuller said, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” In 2017, I wrote about the transition from an old form of money and accounting to an entirely new one (From Tally Sticks to Blockchain: The Redenomination of Your Entire Life). We moved from tally sticks to paper money (relying on Luca Pacioli’s double-entry accounting system from 1494) accounting around 1834 and have never looked back….until now. Now we are shifting from the old system of money and accounting to a new one again. Paper money is giving way to digital money. Double-entry accounting is giving way to blockchain and “triple entry accounting”.
It is interesting that Coinbase has continued to operate in Russia on the grounds that they are a lifeline to regular Russians who are now locked out of the banking system. The regulators may come after them later. But, it is more likely that we will find that the war will split into “clean” and “dirty” versions. Clean crypto will have government-compliant KYC/AML and no anonymity. “Dirty” crypto will have neither and will find itself continuously at war with governments that are adopting ever harsher measures to shut it down.
If Russia’s government had had blockchain, Putin and his Silovaki, Securocrat and Oligarch mates would not have been able to siphon off some $20b a year from the Public Treasury. The US Government would also find itself subjected to brutal transparency that would bring pork-barrel politics to an end and which the citizens of America might welcome. One reason governments don’t like blockchain is that it will usher in radical transparency. Maybe both nations would benefit from this shift? Yes.
Most nations need to find a way to get cash to those who are adversely affected or displaced by the economy (inflation/war/the combination). There is nothing faster than an airdrop of money into a mobile device these days. The technology is in place. MIT and JP Morgan have a Digital Dollar ready and the private sector have tens of thousands of coins ready to go and waiting. Policymakers had been fighting the new system of money (digital) and of accounting (blockchain), although slowly the idea of sovereign digital money has been gaining support from governments. Perhaps that’s just driven by the fear that China now has a sovereign digital currency and others want to catch up. Whatever the driver, events in Russia and Ukraine tell us we need to shift to blockchain-based digital money. Similarly, the world needs to shift to data that is controlled by the owner rather than by external parties so that refugees, for example, can have their medical records with them even if they’ve lost their home or their country.
That’s how this will happen. The new Digital Dollar will suddenly appear in the middle of the night on your smartphone. That’s how it happened in China.
There are distinct dangers here. I will be the first to argue against a Chinese-style Social Credit System. We need to be careful that we don’t replace financial engineering with social engineering. But, that fight about constitutional and human rights in the digital space can and must be addressed based on practical implementation. No doubt Putin (and Xi) wants a digital money system precisely because it eliminates the ability to move and act without observation. Huge personal protections need to be put in place if it is to be adopted in the West. Clearly, the US is about to move in this direction. The FBI has just announced a Crypto Enforcement arm - the Virtual Asset Exploitation Unit (led by Eun Young Choi) - and the White House is on the brink of announcing an Executive Order on the regulatory strategy for Crypto. Izabella Kaminska’s piece on Putin’s CBDC strategy is essential reading. She writes, “Putin isn’t mad, but focused on strategically cutting himself off from the global economy for a different purpose. He wants an excuse to onboard the entire nation onto a digital currency platform that’s 100% controlled by the state so as to better control the domestic economy which is facing unparalleled pressure.”
“In the last few years, we can observe two very important technologies emerging in Russia:
Every single shop till in Russia is now connected in real-time to the tax system. It is illegal for a shop to sell goods or services via a till which is not connected. Every receipt that you get has a cryptographic code evidencing that the transaction has been recorded for tax purposes in the central system. The man who delivered this project for the Federal Tax Service is now the deputy prime minister of Russia, Mikhail Mishustin.
In the years since 2014, Russia has built its own internal clearing system called “Mir”. This has enabled Russian banks and commercial infrastructure to operate independently of the visa, MasterCard and SWIFT as an internal matter.
“A software reset based around a new digital currency requires mass adoption and acceptance – and a population that is ready to accept a much higher level of centralized control. This is the dictator’s dream – controlling the people via their wallets, absolutely and totally. As we have been saying ourselves: “banks not tanks””.
The world needs to create a digital money system that brings the ease of use and the radical transparency needed to prevent government authorities from doing things in the dark but that also protects the human freedoms of the individual. The good news is that there is still time. The good news is that currency is the one the world will want to use. If the new currency is Bitcoin, with all its anonymity and non-KYC/AML compliance, then a new war has been declared. Bitcoiners say they will win and the Justice Department can’t catch them. Others say the US is about to become the biggest sovereign owner of Bitcoins in the world - through confiscation. Note that the Justice Department just made the largest crypto confiscation in its history by lifting $3.6b in crypto in the Bitfinex case.
The good news is that all this means even the government will want a way to convert their crypto into sovereign money or something they can actually use. A digital sovereign dollar will make that faster and easier and give the world a way to transact even if chaos is breaking loose. That’s why Coinbase started to distinguish between dodgy customers and innocent victims of war. Dirty versus clean. The distinction will only become sharper over time. That means more digital money is on the way. Investors just need to figure out which ones will be the winners here. For those focused on the social contract, we’ll need a Digital Bill of Rights too.
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