BACK STORY with DANA LEWIS

THE MONETARY REVOLUTION /Digital Currency

December 11, 2020 Dana Lewis Season 2 Episode 26
BACK STORY with DANA LEWIS
THE MONETARY REVOLUTION /Digital Currency
Chapters
1:26
Anatoly Crachilov and Michael Hall
20:07
Max Kearnfelt
BACK STORY with DANA LEWIS
THE MONETARY REVOLUTION /Digital Currency
Dec 11, 2020 Season 2 Episode 26
Dana Lewis

On this Back Story, Host and creator, Dana Lewis talks digital money. 

In Covid19 paperless purchases are accelerated the digital revolution.  China has launched a digital currency saying it will become an alternative to the U.S. dollar. 

Crypto Currencies like BitCoin are soaring in value. 

Dana talks to a leading digital coin trading Nickel Digital Asset Management , Europes leading digital asset management company, partners Anatoly Crachilov, and Michael Hall.

And, Max Kearnfelt,  is an analyst with Merics in Berlin Germany. (Mercator Institute for China Studies.   

 

 

Show Notes Transcript Chapter Markers

On this Back Story, Host and creator, Dana Lewis talks digital money. 

In Covid19 paperless purchases are accelerated the digital revolution.  China has launched a digital currency saying it will become an alternative to the U.S. dollar. 

Crypto Currencies like BitCoin are soaring in value. 

Dana talks to a leading digital coin trading Nickel Digital Asset Management , Europes leading digital asset management company, partners Anatoly Crachilov, and Michael Hall.

And, Max Kearnfelt,  is an analyst with Merics in Berlin Germany. (Mercator Institute for China Studies.   

 

 

Speaker 1:

China's central bank on the brink of launching a digital currency. How will this revolutionize the monetary landscape in China and abroad Bitcoin crossing at the $14,000 Cocteau currency surpassing 15,000 for the first time ever. Now it looks like we may hit the 17,000 Mark Bitcoin's price has been on a wild ride.

Speaker 2:

Hi everyone. And welcome to another edition of backstory. I'm Dana Lewis in this edition, a digital revolution driven in part by COVID-19 , but there are many other factors digital because it's not a coin or a bill that you carry in your wallet or your purse, but an electronic holding, maybe on your phone or your computer, you already may use payment applications for some of your shopping and bill pay . But at lightning speed governments are adopting electronic currencies. They can track and control and off the government grid. Cryptocurrencies like Bitcoin are soaring in value on this backstory. Can you trust it? Will you use it? I have no doubt. And we talked to digital currency experts about the future and the China analyst, because China is rolling out digital currency. As we speak in wild , they say it's to get away from the U S dollar. It's probably more about tracking every aspect of how its citizens behave in the new digital marketplace of the world. All right . In London now nickel digital asset management , uh, builds itself as Europe's leading digital asset management company. And I'm joined by Anatoly [inaudible] and Michael Hall. I guys , good morning. How are you? Good, good to be here . Bloomberg recently wrote we're living through a monetary revolution. So multifaceted that few people comprehend the full extent that the technical technological transformation of the internet is driving the revolution. The pandemic of 2020 has accelerated it. What do they mean, Michael? Do you want to take a shot at it?

Speaker 3:

Well, I think we're seeing a new form of money. If you look at the evolution of money, we started off bartering, sheep and cows. We moved to coins and or seashells maybe before that coin, some , we used to move to paper, money, and paper money was tied to gold. And then it was that link was cut. And when paper, money departed from the gold standard, it became fit money that central banks could conjure up with , uh , you know, turning the printing process a bit faster, or now they just put more zeros in a digital bank account. And as a reaction to that, we've seen digital currency starts off with the com with limited supply. So that I think what's really, what's really interesting. COVID has kind of forced people away from physical cash into using contactless cash. And the next evolution of that is using a blockchain based cash

Speaker 4:

And told you , why is it , uh , completely taken off Bitcoin, you know, has risen. I don't know what it is today. You can give me the price today, but I mean, it's, it's essentially gone up like 139% year to date.

Speaker 5:

That's correct. Yes. It's uh , 18, 18,000 plus essentially I would say 2020, the year of COVID to the grid , the entire kind of important evolution in digital currencies specifically, there was a sequence of events , uh , COVID triggers, mass unemployment, mass unemployment triggers a response by central bank, which can be summarized by flood market with money. And that's exactly what central bank did .

Speaker 4:

Everybody's printing money, every nation that's trying to get itself out of it . The financial disaster they're in are , are printing money, correct?

Speaker 5:

You have roughly $11 trillion printed over the last 10 months by a major economists around the world. And certainly if you look at that at the very least, you, by the way, you appreciate why central banks do that. But as holder of capital, you have to preserve this capital, right? And your concern is how to avoid inflation, which started to loom at some stage and currency debasement, which inevitably will hit. And we all know that every single FIAR project in the world being a kind of paper money, right, ultimately ends at zero. So kind of intrinsic value is zero. This paper and given the central bank so easily can inflate this people, investors are looking for hard assets and your classical heart assets would be real estate gold, will these kind of overcrowded traits . And then suddenly you come with Bitcoin as a new form of hard asset . And specifically within BTC, you have a scarcity element similar to gold. There is a certain number of coins ever to be printed. And the schedule, the issue and schedule is very precise. I can tell you exactly how many say Bitcoin's going to be there in the system in say March , uh , 2042 . Can you tell me how many us dollars would have been circulated? Of course not because there is no,

Speaker 4:

Probably probably a lot more than there are now because they're just going to keep printing them.

Speaker 5:

So you can say directionality is clear. They're going to be more dollars around with BTC . You have this scarcity element and that would drive the price up. And essentially we've seen this unfolding demand, which to some extent was triggered by forward-looking investors, such as Paul Tudor Jones letter , uh, bill Miller and all of them. They look for a new to protect capital. Bitcoin became one of the doors,

Speaker 4:

Michael, the , uh , if I can get Michael to jump in here. So, you know, Nouriel, Roubini, Roubini , uh, the New York university economist wrote in , um, 2018. He told CNBC it's the biggest bubble in human history talking about Bitcoin. Uh, and that the price would crush to zero. Then eight months later in congressional testimony, he said, Bitcoin's the mother of all scams. It's a quote shitcoin unquote , uh, and then fast forward to 2020. And now he has changed his story. Uh, and he's talking about while , you know, it's, it's not going to be easily DC-based , uh, and that there there's value there. So I would say that's a pretty big step back, but, but just not Roubini , but mainstream finance, mainstream banks, that would kind of turn their nose up a digital currency. Now, I guess just mainly because of demand also their customers want to want to invest in it.

Speaker 3:

Yes. I mean, banks are customer led and they follow the money. And if people want to invest in a product, they will meet that demand.

Speaker 4:

And is that product now more credible than it was even a year ago? And why do you think? So?

Speaker 3:

I think it's attracting more institutional interest of the names. People mentioned. They were the original, you know, the , the, the leaders , uh, the Pathfinders in the hedge fund industry. And they started hedge funds. People like Paul Tudor Jones and Stanley Druckenmiller when hedge funds weren't institutional businesses and a pension fund would never, they was pension funds were still in stocks and bonds fast forward, 30 years, pension funds and insurance companies invest in hedge funds that, which they didn't do 30 years ago. So these people are innovative . These people are leaders, they're innovators, and they are investing in Bitcoin now. And in 30 years time, maybe sooner pension funds and insurance companies will be investing in Bitcoin as well.

Speaker 4:

Electronic payment platforms, I'm stunned. I mean, you guys know these numbers quite well, but , uh , you know, $40 trillion in transactions through Ali pay and we chat pay, we're talking about China now , uh, which is leading in terms of the development of digital currency so far. Um, so the , the amount of transactions are huge. Do you see a difference between the boom in Bitcoin and , and digital currency and these currencies now that governments are talking about bringing in and they've done so on an experimental basis in China?

Speaker 5:

Yep . Well , uh , you're absolutely right. There is the whole evolution of central bank digital currency. So-called , uh , to some extent it was triggered by a 2020 . And if you look in the us , the whole model of , uh , distributing certain , uh, financial aid to ultimate population, right, goes through commercial banks. And it's not necessarily the most efficient way because in the U S only 29% of these financial aid ended up in consumption and other four to five and the top in saving and in our 40 to five and up in repaying, various form of debt , like credit card debts, and so on. So from the point of view of stimulating the economy, it wasn't really that efficient only 29% when consumption now in China or to the, to the, to in contrast , there has been an experiment which was run earlier this year. And the idea was a certain number of people were given , uh , what's called airdrop. When you got certain amount of cash, say a thousand dollars on your equivalent of $30, each person, whatever is the amount, the idea was kind of, you can spend this , uh, amount of free cash given by the government in the next three months on a certain type of goods. Can you fraud in stock exchange? Nope . There is no purpose of that. Can you save them? Nope , because you're going to expand them three months and essentially they forced population to stimulate certain areas of the economy. And that may be this precision, which kind of classical monitoring system, ALEKS and central bank digital currencies can provide Michael .

Speaker 3:

So I think central bank currencies are very interesting, but they suffer from like three basic flaws . One is that , um , they don't stop the central banks printing, printing money in the same way. They print physical money. They can print digital money as well. They can just multiply the bits on the computer drive and they print more, more money. Secondly, they can, these currencies enable the central banks to do things they weren't able to do with paper money. One of these is negative interest rates. So are you seeing that , you know , interest rates on bonds have gone negative, but it's very difficult to have negative interest rates. Because if your bank's going to charge you a negative interest rate, you take all your money out and you just put that money underneath the , uh , underneath your mattress. And it keeps the same value. So that , that's how you get around that issue. Um, with , uh, the third floor is, is a privacy. Now I'm not saying that everyone should be trading like privacy coins like Monero, but I think people expect that they have a level of privacy from the government, and it's not big brother where the government has a television and your TV camera in your living room. And they're not looking over your shoulder when you're using a bank account, you may not be doing illegal things, such , just buying drugs, but you might be buying a birthday present for your girlfriend was a question, Michael. Yeah, exactly. So, so you might be buying a processor , a birthday present for your girlfriend. You might, might not want her to know how much you've spent on it and what , and where it was purchased. So people expect a level of privacy with their money and cash gives them that privacy. And the question is what should digital cash gives them that? And that we have to strike a balance between having people being able to money on the drugs, which we would not want to have happen, but we also expect to not personalize a certain amount of money we can use to spend without the influence and knowledge.

Speaker 4:

It's an interesting range of balance that you talk about, right? Because China, they are absolutely tracking every single purchase and they know exactly what everybody's doing. And it's the ultimate big brother through the use of, of their new digital currency. And then, like for instance, the Soufan center came out today and they said, cryptocurrencies are potentially a cover for a lot of elicit businesses. It's not the first time we've heard that. Right. But they talked about Hamas Qaeda , the Islamic state , uh, the, the, the , uh, U S intelligence agencies are trying to track digital currencies and Bitcoin and different coins that have been used by illicit organizations . So what's the middle ground here as this matures and develops and more mainstream investors are involved in it. What's the balance between, you know, kind of big brother and the bandit down the road that uses cryptocurrency to , to do , uh, to do bad things.

Speaker 3:

Okay. So , so we hit those arguments a lot and the more money has been laundered and used to finance terrorist activities using us dollar bills, but no one is proposing banning the U S dollar bill .

Speaker 4:

No, but they are proposing tracking the accounts and tracking the transfers, right . Not proposing, but they do do it.

Speaker 3:

Okay. They should get rid of the a hundred dollar bill. The Germany should get rid of the European union should get rid of the 500 Euro bill. I mean, if that's, if you want to launder money, that's, that's the place to go, right ? Your $500 . And then the Swiss have a 1000 Frank bill. I mean, those are the ultimate money laundering tools, Bitcoin isn't, by the way, anyone who tries to launder money using Bitcoin isn't for surprise, because every transaction is publicly recorded and accessible to anyone. Who's got an internet connection. If you have a browser window connect to the internet, you can put in a blockchain address and you can see every single transaction that's gone through that address. Now there have, there have been some digital currencies , uh, designed for privacy, which we don't treat him . And the only real use case for those is that. So that's why we don't trade them. But it's a matter for the regulators. It's a matter for the central government to figure that out. The beauty is that if the government acts with two heavier hand, there are tools that exist for people to circumvent them. And just as the people in China who wants to use the internet, they can use the VPN. And so rather than have to read the Google search results filtered by the Chinese communist party, they can use the VPN and find out what Google really thinks .

Speaker 4:

And I totally would you just look, as we wrap this up, guys, would you just look down the road , uh, and tell me, where do you see this going now? Because now you have governments that are getting into digital currency. You have investment companies that, and , and very reputable ones that before didn't want anything to do with digital currency. Now they're slowly opening the door because their clients want it. Where are we? Two and three and five years.

Speaker 5:

Yep . We're being asked. Uh , one of the questions is whether the central bank digital currencies can distort to some extent or compete with , uh , Bitcoin as the pure cryptocurrency. And in my view, they cannot because Bitcoin is an asset with no monetary discretion, right? Nobody can influence the patient schedule while central bank currencies are there for completely different reasons. One of them is increased transparency of all the transactions, essentially you, as we discussed, eliminate any remaining privacy, but that allows States to create this kind of extract, valuable behavioral information about every single client, a customer, and ultimately allows a 4g to better manage the economy. Because what they're gaining is the real time spending updates for the whole economy and becomes what they're getting this kind of on demand, monetary policy, which they in a very precise manner now manage the economy by injecting money in various sectors. So for that purpose, it's completely different , uh , uh, use cases, right? From big investment point of view, digital central bank, digital currency are not attractive. You cannot really preserve your wealth.

Speaker 4:

Why , why do it then, like , why are there calls? I mean, I know like the, the former national security advisor of Britain has just come out and said that Britain should have its own digital currency soon. So

Speaker 5:

From the government perspective, as I just mentioned, that's a beautiful instrument to control micromanage the economy, right? So you have these very , uh, finely tuned spending, which you cannot observe on the individual level. You can transfer to individuals rather than you give money to commercial banks and the commercial banks push them into economy. And as we discussed in a not very efficient manner. So from the state point of view, having digital currents makes total sense. Now from investor investors , point of view, investing in digital currency makes no sense if you need store of value, you have to revert to an independent currency, which is one of them would be Bitcoin. And from here,

Speaker 4:

Just because it's more navigate, not navigable, because there are limited assets like in Bitcoin.

Speaker 5:

Exactly. As you know, there are 21 points ever to be issued of which 88% has already been issued. The balance of 12% will be issued over the next 120 years in a super predictable manner. So that's why you want to get exposure to that hard asset. What are we going to be for years, five years from now? I believe it will become part of institutional allocations as we have today, fixed income equities.

Speaker 4:

So we'll be allocation, good digital assets. It will not, it will be kind of two percentage points. One, two [inaudible] fetal 5%, but there is a significant, important role. It's a diversifier of the portfolios and it creates efficiency on the institutional portfolio level improves your returns. We filed really boosting your risk , Michael, last word to you.

Speaker 3:

So one of the issues that the central banks had when they printed money is they gave it to all the banks and the banks went out and bought stocks and they Geoff basis a billionaire or sorry, made him more of a billionaire even richer. And it just increased wealth inequality. One of the benefits of central bank digital currencies is they , as Anatolia says, they can be very precise and targeting who gets the money and what the money gets spent on. And that's a much more efficient way of doing quantitative easing. They're just giving it to bank . So they have bigger balance sheets and the stock market goes up. So this is digital currencies, central bank, digital currencies enable them to actually give money, spend money where they want it and do that money printing in the, in the right way.

Speaker 4:

You mean like for instance, like right now in this crisis where they're saying to people that, you know, people who are not being employed or unemployed, or, or who need , uh , some support during the COVID 19 , they would be able to actually send a directly to a family or a person, and then they would allocate it only for food rent, something like that.

Speaker 3:

Exactly. A lot of those , uh, furlough checks that went out, went directly into people's bank accounts and that stimulated the real economy. It didn't make the stock market go higher in , in the first case, but it did stimulate the real economy.

Speaker 4:

All right , guys, from nickel digital asset management, thank you so much. And the Tony Graciela and Michael Hall,

Speaker 3:

Thank you, Dana. A real pleasure thing this morning,

Speaker 4:

Joining us now from Berlin. Germany is max Karen Feld, who is an analyst with Merix in Berlin and Merrick's is the marketure Institute for Chinese study. And they , uh, they analyzed sort of anything out of China and all things. And max , uh , has written a brilliant article in , uh , or co-authored a brilliant article in the diplomat , uh , on China and its digital currency. Hi max. Hi. So give us a background a little bit here. Some 5,000 people in Shenzen saw their phones light up in October, and they got a read on envelope digitally, which gave him about $30.

Speaker 6:

That's right. So the Chinese government is launching a new digital currency, which is called digital currency, economic, electronic payments, which is perhaps not the most exciting name. So the idea is to use something, something similar to Bitcoin to create a virtual currency so that the, the paper renminbi, it has a digital , um , correspondence or a digital version of itself. And they've been testing this project in several different cities like [inaudible] , and it started with this lottery where they're just giving money away, but some , uh, some government employees in some cities have also received the , uh , part of their paycheck in this, in this new currency.

Speaker 4:

So it's really look , this is a very interesting shift for a lot of different reasons, right? And I want to , you know, take you through some of that, but , um, the people's bank of China said that this will make the, the RMB more popular around the globe. Are they trying to replace the U S dollar and trying to disengage from using the U S dollar as safe Haven and push their own currency? Op ?

Speaker 6:

Um, yes and no. Uh, this has been going on for a long time, and there's nothing new for th for Chinese officials to say that , uh, they want to replace the dollar or that they need to reduce the reliance on the dollar. So this is just the latest step in a , in a long process or where this has been talked about. But I mean, if you look at the actual results instead, it's pretty clear that the [inaudible] has not been growing in popularity around the globe, particularly much the last say 10 years. Um, it's, it's stable around two to 2.5% of , uh , Swift messages go are cleared in renminbi. Um, the reason for this is largely that China prefers it that way. Um, a great amount of , uh , renminbi usage would probably lead to appreciation of their currency. So

Speaker 4:

Just to talk about it for a second though, why does Russian president Vladimir Putin, why do other countries, including China keep talking about not being reliant on the U S dollar because that promotes sort of American economic domination, is that what they're trying to get away from?

Speaker 6:

I think there's two parts to this. First of all, it's, it's a practical issue in the sense that the us has sanctioned countries in the past , uh , um , yeah, like around they, they can , uh, even though Swift is a Belgium company that can put a lot of pressure on Swift and banks to not do business with Chinese party parties, if they wanted to. And in the case of Iran, this, this led to them having to greatly devalue their currency to, to protect their economy, which was under enormous pressure. Um, then there is of course, a , a question of a narrative as well. These, these , uh , countries , uh, Russia and China don't want to see themselves as a part of the American system, they want to be respected equally. And of course, part of that means that anytime you have an opportunity to talk about being independent, to being strong individually, you have to take that opportunity.

Speaker 4:

All right . So, so w when I took a look at some of the statistics, I mean, they jaw dropping in terms of the Chinese market on digital payment systems, like 80% of China is 900 million mobile internet users use their mobile phones for transactions, Chinese shoppers and merchants represent almost half the world's digital wallet users and Alibaba, and Tencent control, 95% of the market and cleared 50 trillion with a T in transactions in 2019. It is huge, the use of digital currency.

Speaker 6:

Absolutely. Um, I think it's a little bit analogist to the way airports and subways were set up in China in the sense that if you look at a air , if you look at the infrastructure in the West, this is rather old and oftentimes built very long ago. Well , if everything in China is sort of new and fresh, and if I wanted to launch a payment system today, I wouldn't be using these old things that we use that we use in the West, but in China to have , um , they have , um , it's an emerging market. So they set up a new, fresh things. Um , this digitalization has been , um, the way it's been rolled out into the Chinese market has been very successful. I mean, everyone almost will use a, some form of online payment system, even farmers and , and surprise in the most surprising places. So you can go to the countryside in China and see people use these kinds of technologies to make payments.

Speaker 4:

All right . So I've led you through this, and I've, we've kind of painted a picture that, you know, China innocently just wants to roll out a digital currency for efficiency , uh, to make them less reliant on the dollar. And probably at the end of, at the end of what we've talked about so far is , is where you take a turn in your article and the diplomat is that really, it's not about that. It's probably more about surveillance and control, is that right?

Speaker 6:

Well, to some extent, yes. Uh, the fact that it , so most of the digital payment systems in China retinol are run by companies, Alibaba and Tencent. Now, if the central bank launches its own digital payment system, then that gives them control over the amount, the, the , uh, the monetary base to a large extent. And they already have, they can issue as much currency or as little currency as they want. They will have complete visibility of overall transactions that are made through their network. And they also have great ability to make users use their own preferred payment system. So it will undoubtedly result in a situation where, where the central bank has much more oversight of what's going on in the economy and can control things more in various ways .

Speaker 4:

This is the ultimate big brother tool,

Speaker 6:

What could be. But I think that something like this has multiple uses , obviously. So on the one hand, you can use this for things like this, but , but I think there are also a quality of life things here , uh , for the central bank sake, you can have greater control of inflation. Uh , oversight can be very good at , uh, at catching illicit transactions, transactions, and all sorts of things. So even though there is a control element, I don't want to be saying that that's the only use or the test , the main purpose of, I think that the policy makers in China are, are generally speaking, thinking rather broadly. And they are , uh, there are multiple goals with most of the policies they launch .

Speaker 4:

You've obviously become a bit of a digital currency expert in, right in writing this piece and watching it. I mean, I guess because if you take a look at what's happening in digital currencies around the world, I mean, Bitcoin is punching through, you know, record levels. Um, uh , as many other digital currencies are cryptocurrencies are, but the whole design of those were to have anonymity , um , through blockchain technology. So do we need to separate the two, you know , topics when we're talking about China's digital currency and other governments, which are talking about moving towards digital currency in the original kind of cryptocurrency model, which was, you know, you could move money between people , um , and you could do it w with, with, you know, virtually anonymously.

Speaker 6:

Yes. I think you need to do need to separate these two, because the technology that you use for , um, for Bitcoin is the blockchain, right? Where you are having something unchangeable as the main strength of the currency is that you have this , uh, you have this ledger that cannot be altered, or at least not easily altered . There are some blockchain experts who do say that it could potentially be hacked. Not that I know very much about that, but I think someone, someone said once that the distinction between , um , uh, an authoritarian regime will tend to gravitate towards AI solutions and a more democratic regime will tend to gravitate towards the blockchain solution. So this blockchain was , cannot be altered by the government as much. Uh, there will be a constancy of , of , um, of units, or maybe there is some sort of algorithm that produces units at some set pace. Whilst in this case, the central bank can of course issue as much currency as they want. Um, and I don't think it's very surprising that a central bank do they have control over instead of a currency that unalterable program Backstory on the digital revolution.

Speaker 2:

It was supposed to take about 10 years, but it's been compressed and supercharged in the last year, mostly because of the pandemic. And it will change the way we do business, the way our governments operate remarkable. And it's happening now. I'm Dana Lewis. Thanks for listening. Please subscribe the backstory and I'll talk to you again soon.

Speaker 7:

[inaudible] .

Anatoly Crachilov and Michael Hall
Max Kearnfelt