A Digital Dollar is Soft Power
Bucks on the ground are boots on the ground.
Dateline: Woking, 4th May 2023.
I read with interest that Venezuela’s national cryptocurrency, the Petro (PTR), ceased operations earlier this year. It was introduced with the goal of helping the country evade United States sanctions but failed to gain traction. The story caught my eye because Venezuela used to come up in talks about cryptocurrency all the time, with an underlying assumption that Venezuelans would prefer Bitcoin over their own hyperinflated currency or would adopt President Maduro’s Petro, created in 2017 and (supposedly) backed by Venezuela’s vast oil reserves. A fascinating cryptocurrency case study of a country trying to sidestep the mighty Dollar.
What the Zelle?
The Petro didn’t get off to a good start and began trading for half its official value on the streets of Caracas. Meanwhile, as anyone could see, on those streets the restaurants, shops, supermarkets and even the street vendors not only accepted but preferred dollars in cash or by bank transfer. I wrote about this at the time when I was surprised to discover that shoppers could pay by Zelle in supermarkets in Venezuela but not in America! In fact Ecoanalítica, a macroeconomic analysis company that tracked 15,000 transactions in 10 different Venezuelan cities at the time, discovered that more than half were conducted in dollars and around one in eight were processed through Zelle. The sentiment on the streets in Venezuela and elsewhere seems unambiguous: people want dollars. Period.
I remember seeing in several places that bitcoin "number go up" on the back of the appointment of Javier Milei, a pro-bitcoin candidate, as the President of Argentina. He is not only in favour of Bitcoin, he is also in favour of allowing the poor to sell their organs, asking his dead dog for advice via a medium and the dollarisation of the economy. At the World Economic Forum in Davos this year, he also said he intended to dollarise Argentina's economy and shut the central bank (but the conditions were not yet right for doing so).
This is of course made me wonder why bitcoin went up when his plan is not to use the cryptocurrency but, of course, greenbacks. There are a lot of them in Argentina, by the way. The Bank of Argentina may be short of dollars, but Argentinians are not. Individuals and businesses hold vast amounts of dollars overseas (or under their floorboards). As of the end of 2022, Argentines held over $246 billion in foreign bank accounts, safe deposit boxes, and mostly undeclared cash, according to country's National Institute of Statistics and Census.
(That figure is more than half Argentina’s GDP!)
Last year I saw a social media post from someone who had sent money to a friend in Argentina using a stablecoin, USDT (Tether). It was the recipient's preferred method of payment. The poster pointed out that the recipient had access to bitcoin, but did not want it. What this confirmed to me was that in many places, people want cryptocurrency only as a second-best way of getting fiat currency. They don’t want dogecoin, they want dollar dollar bills. So why not give it to them in digital form?
Dollars FTW
While the British Labour opposition is committed to fight the coming General Election on the basis that they "recognise the growing case for a state-backed digital pound to protect the integrity and sovereignty of the Bank of England, and the U.K.’s financial and monetary system", American politicians seem very negative about digital fiat. Indeed, Mr. Trump said plainly that he will "never allow the creation of a central bank digital currency”.
with kind permission of Helen Holmes (CC-BY-ND 4.0)
It is not clear to me why because, as is obvious to economists as well as to an itinerant technologist, given the international role of the dollar, a widely accessible American CBDC would enhance the appeal of the dollar. It could be held by foreigners who want a means of holding dollars without the challenges of holding banknotes (such as potential loss or damage), or the risks of Eurodollar deposits, including possible political interference and a lack of deposit insurance or emergency lending facilities for issuing banks.
Frankly, a digital dollar could be a big win for Uncle Sam. Take a look at the scale. Global trade in 2022 totalled $32 trillion, and the dollar is one side of almost three-quarters of those transactions, a percentage that has remained steady for a generation. Also in 2022, the US capital markets turned over the same amount (i.e., $32 trillion) per month. Also at the end of 2022 the Bank for International Settlements (BIS) reported that the turnover of foreign exchange derivatives amounted to $7 trillion per day with the dollar on one side of almost nine in ten of those trades. Last year, according to Credit Agricole, the dollar’s share of SWIFT payments was at its highest level in a decade (and while usage of Sterling held up, the Euro’s share collapsed).
That’s why, in my opinion, the delivery of a US Central Bank Digital Currency (CBDC) should be a priority. Yes, it might make the US domestic economy more efficient but it’s really much more about maintaining the dollar’s dominant position in the global financial system. It’s important, much more important than it seems at first in a country full of Zelle and Venmo and Cash and Paypal users.
Andrew Peel, Executive Director and Head of Digital Asset Markets at Morgan Stanley Investment Management has just published a note on “Digital (De)Dollarisation” in which he predicts that that dollar-backed stablecoins are set to have "a profound impact on the financial landscape“. Rather than challenge the dollar’s dominance, as he says, their continued evolution and growing acceptance means they have the potential to in fact reinforce the dollar as the dominant global currency. Even in China, which has been trying to expand the use of the Yuan to diversify away from the mighty dollar, businesses are holding back from converting their foreign-exchange earnings into the domestic currency. Recent data from the People's Bank of China shows that foreign-exchange deposits rose from $779 billion last September to $833 billion this March.
(It goes without saying that distribution mechanism is critical. If digital dollars were only available through US banks and subject to US banking system access policies, the appeal would necessarily be limited. On the other had, a well-designed and widely-available digital dollar would be a preferred transaction medium and perhaps even a store of value for billions of people around the world.
I wrote a book about this, The Currency Cold War, back in 2020 and I’m not embarrassed to repeat a key message from that book: digital currency is a kind of space race, and America should be going all out to win it! A well-designed Binary Buck would be worth as much to America in the form of soft power as an aircraft carrier is in terms of hard power. In fact, as Deutsche Bank Research wrote last year, a CBDC might be the “ultimate soft power”.
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