By Eric Peters, CIO of One River Asset Management
“When you and I grew up, half the world was covered in communism,” said the CIO. “Global markets and international business provided the keys to liberate the human potential stifled by that system,” he continued. “When we started in the business, there weren’t vast pools of human capital moving piles of paper. But those days are done.”
Too much of society has become financialized, optimized. Such a structure leads to corrupt incumbents, fragility, instability. “Markets and economics are no longer the answer to the world’s problems. And that’s not to say communism is the solution. It’s not. But it appears clear we’re entering the type of decade you see a couple times a century where politics dominate.”
“Virtual currency-related business activities are illegal financial activities,” declared the People’s Bank of China, increasingly desperate to ensure the successful rollout of their centralized digital yuan.
PBOC SAYS ALL CRYPTO-RELATED TRANSACTIONS ARE ILLEGAL— zerohedge (@zerohedge) September 24, 2021
So the digital yuan is a complete disaster eh?
“The government will resolutely clamp down on virtual currency speculation, related financial activities and misbehavior in order to safeguard people’s properties and maintain economic, financial and social order.”
Beijing stopped short of outlawing the ownership of such digital assets. They prefer centrally controlled coercion, slow suffocation. One risk to outlawing the ownership of virtual currencies is that citizens who forfeit them are forever resentful. And states that turn their citizens into criminals at scale do so at great peril. Soviet communists turned such transformation into an art form.
These are the stakes at play. China’s central bank digital yuan will provide Beijing with unparalleled transactional insight and financial control. It further intends to export this system as an alternative to the US dollar, directing business in China through its new international payments system.
But the free market has already created parallel systems that lay outside of Beijing’s dominion. Bitcoin is one. Ethereum another. So are stablecoin. Such systems are built to meet market demand for digital versions of an existing fiat currency, such as the US dollar. More than 98% of the $128bln of global stablecoin is linked to the US dollar. Even more impressive, the annual transaction turnover of US dollar stablecoin is over $100trln. It is an astonishing success of blockchain technology applied by the private sector at scale. There is no such demand for the digital yuan – the largest private CNY stablecoin is less than $5mm (see ""I'm Not At All Excited": China's Digital Yuan Is Turning Into A Giant Flop")
China and the US are, thus, confronting very different positions. China success in the digital currency arena hinges on control – the digital yuan will be used by decree. US success depends on regulators integrating US dollar stablecoin into the mainstream. They will.
And when they do, these technologies will come under conventional oversight, unlocking exponential growth. Benefits will accrue to the nation with the currency that the market selects. That remains, unambiguously, the US.