By: Dan Waldner
This submission was written in response to an article published by QBR on August 18, 2020, by Editor, Claire Murphy.
In response to Ms. Murphy’s eloquent conjecture at the threat of China’s virtual Yuan, let me quote Mark Twain: “The reports of my death are greatly exaggerated.” Global economic and financial systems are wildly complex, mixed with roughly equal parts governmental oversight, geopolitical perspectives, and historic entanglements. This currency suffers from many of the same problems as Bitcoin, which was heralded similarly as a game changer only to essentially fizzle as an economic experiment to the outer fringes of the financial system. While any digital currency would narrowly address specific problems - like portability, tracking, transparency, and ease of use - it completely disregards some of the other issues.
Before I start down the exposition, I do need to draw a very clear distinction here: this digital currency proposed by China is not a cryptocurrency. The three hallmarks of any cryptocurrency are that it be trustless, immutable, and decentralized. While China’s proposal generally ensures the first two, it heavily controls the currency in a centralized way. The government has the ability to track every transaction with the system and likely has direct control over the blockchain processors, wallet ID issuance, and any number of other safeguards on the system. Close, but definitely no cigar.
That’s a nice segue into my first premise: the American government has historically been a reliable custodian of worldwide monetary policy. American policy generally is at the forefront of economic regulation, with anti-money laundering (AML) efforts generally being led out of the Office for Foreign Asset Control (OFAC). American positions on economic sanctions are abided by most countries in the financial system. Most of the money in the financial markets flow through American banks, with American greenbacks, for American companies in American exchanges. 88% of Foreign Exchange transactions in the world involve U.S. Dollars; the Euro is a distant second at just 32%. And while Chinese GDP is approaching the United States, GDP per capita still favours the US by over six times. Just as in times of Roman Imperialism, the currency of the pre-eminent power in the world carries with it the power and backing of said country. Until this power is truly challenged, this will still be a driving force behind the ubiquitous use of the U.S. Dollar in the financial system.
Second, geopolitical perspectives are important. American policy around financial markets has been one, generally, of capitalism and independent control - with the aforementioned policies around monetary supply, AML, and regulatory restrictions acting as guard rails to the financial highway. Their roles, merely, to keep the cars flowing and shiny side up. China’s penchant for overreach and control is well-documented over the last half-century. Entrusting the Chinese government to become the custodians of the currency of record across the globe puts extraordinary power in the hands of an often-unreliable world power on the ascendancy. The Venezuelan example mentioned in Ms. Murphy’s article is just one example, but similar embargoes with Iran and North Korea were shared by most countries around the world and relatively uncontroversial. Consider though, a converse situation, where China wishes to enforce a unilateral sanction of their own. What about Hong Kong protestors to Chinese overreach, members of the Falun Gong, Free Tibet, or the persecuted Uyghur? Giving the Chinese government control over an international digital currency gives them the power to enforce their own rules over every transaction is a financial analog to their existing restrictions around free speech. Even with the chaos that President Trump has brought to the American political landscape, few would see it as enough of a precipitating factor to jump to a Chinese-led currency in any appreciable way.
Third, history is important. While we’re all witnessing an inflection point in business today, watching companies like Airbnb, Uber, Venmo, Slack, and a litany of others changing the way we interact and transact, changing the way we all do business across the ocean of engagements is a truly massive undertaking - and they all require a defining “killer reason” to switch. As a case in point, Uber let us get out of taxis without fumbling for change. Venmo let us quickly pay our friends for beers. Physical currency is absolutely dead in many of our lives currently (at time of writing, I haven’t touched a paper bill in a transaction in at least six months). The way we currently operate - our history - needs to be fundamentally flawed in order to make us need to change our approach. Speaking on behalf of people like me: I don’t feel our current payment approach is radically behind the times. In fact, if anything, I feel it’s pretty awesome compared to what it was only ten years ago.
Finally, perhaps the most compelling point is that any cohesive currency that does not have appropriate controls on it for preventing blocked countries, entities, or people from transacting on it will not be allowed into the current financial system. If there is even a hint that this digital currency will allow North Korea, terrorist organizations, organized crime, conflict factions, or any number of scammers and fraudsters - the fruit will wither on the vine and die before it ever sees the light of day. We saw the same thing play out with Facebook’s Libra currency very recently, another proposed digital currency with the same intrinsic flaws.
So, China’s digital currency faces a paradoxical position which precludes it from replacing the U.S. Dollar: either it controls the currency, which the world will not trust it to do, or it will allow it to be uncontrollable, which the world will not accept.
Until that very difficult problem is alleviated through a global shift in financial monetary policy - which will happen someday - I am confident Secretary Paulson is correct in his interpretation that this is not an imminent threat.
Dan Waldner is the Principal Strategist of Financial Services for Traction on Demand, and has spent much of his 27 year career at the intersection of Technology and Financial Services. Prior to joining Traction, he was Director of Customer Data for Scotiabank's Global Banking & Markets division, which included Capital Markets and Global Corporate & Investment Banking.