by Chris Faure for the Saker Blog
Reserve currency, backing of a currency and value of the financial systems that distribute a currency.
Its going to take years for the US dollar as reserve currency to fully reduce in importance and of course, the US should continue to use their currency as their own even when it changes into a normal currency. Yet there are financial technologies (FinTech) which may accelerate this process via leapfrogging and I would argue that from a Chinese perspective this is happening. (Leapfrogging is easiest understood by looking at an older example: slower developing countries without a well developed terrestrial telephone system, where these countries leapfrogged the building of a terrestrial system, and directly went to cellular telephone technological networks without loss of function.)
Let’s first take a look at some general concepts:
The fact of ownership of financial systems is very powerful. There is value in the currency that the financial system produces, and there is value in the system itself.
The value proposition is similar but differently done in cryptocurrencies and in digital currencies. The backing frequently lies in the system itself, and not as many think, in a hard asset such as gold. This is a large step to take in thinking for most people, as the idea generally still is that money has to be something that is tangible and real – like gold (or cowrie shells). But it is not such a big step to take if one considers that the act of money creation, production and distribution of currency itself is modernizing and is developing on the same trajectory that the rest of our technological and currently digital society is developing in.
As an example, compare the development of current money distribution systems and the new Financial Technologies (FinTech) with fully automated manufacturing plants for example, where the product coming off the production line is as a result of the technological system. Money is the same, it has to be manufactured, distributed or created or somehow brought into being and these systems are now modernizing, just the same as modern fully automated manufacturing.
https://www.youtube.com/watch?v=CwL_C5FXkN4
The current financial systems belong to the west and banking systems technology is expensive, old, legacy, decrepit and not friendly to the ordinary person, not to mention very hard to maintain. Even the ubiquitous credit cards are now old technology and fast becoming deprecated technology and being replaced by wallets on cell phones that work like supermarket scanners.
It is often speculated that China will back their digital Yuan with gold. This is not an accurate speculation. The backing is the same as with other digital and cryptocurrencies, i.e., the work that the system provides to create the financial transactions in the financial ledger confirms that the transaction is secure and someone actually owns digital currency, they can pay for goods or sell goods and they can do it much easier and incredibly cheaper via a scan of a cell phone or other digital device.
The difference between China’s digital Yuan and common crytocurrencies is the ownership of the system. In modern independent cryptocurrencies the system (the technology) is owned by those that use the cryptocurrency – it is open source. Obviously for the digital Yuan ownership of the system lies with the Chinese State. The digital Yuan though retains the strength of other cryptocurrencies. It is secure transactions, tamper proof, immediate, inexpensive, easily distributed, can cross borders and all this by virtue of being a distributed blockchain system. The easiest to explain a blockchain is that it is self-policing because of technology of consensus algorithms that verify the efficacy of financial transactions. Blockchain very simply stated is blocks of financial transactions that are algorithmically created, are by definition encrypted, and chained together in such a way that nobody can meddle with any one of them.
To recap:
– The digital Yuan is not a cryptocurrency. It is a state issued digital electronic currency that happens to run on a blockchain (the FinTech).
– As the Chinese digital yuan is not and will not be backed by gold at least in our term (it is backed by the strength of the yuan as well as its system), we may well ask what the objective is of this currency.
Is it just a cute technological way of using money?
I would argue absolutely not.
Internationalization of the Yuan
Few realize the extent of the internationalization of the Yuan. As example, 20% of French trade with China is currently settled in Yuan and this is 55% of payments made between both countries. The Macron government is encouraging banks and companies to increase Yuan uptake.
I would argue that the digital yuan is a part of the 5th plank of the Belt and Road process of facilitating cross border investments and supply chain cooperation (perhaps not openly stated). If one takes into consideration that belt and road is operating now in infrastructure development and investments in nearly 70 countries and international organizations – this is not such a difficult leap to make.
So how can that bold statement be supported? It may be hard for people in countries with old financial systems (the US would be one), to even imagine the new FinTech operating in many other countries. Where I live, I can go to the local corner store, and literally send cash money to someone on the other side of the country, and they will have it immediately. I don’t have to go to a bank, do a bank transfer, send a check, or interact with a bank or a type of Paypal at all. This is a service that the corner store offers at a very reasonable cost. I can also do this directly from my cell phone. We know that in China there is little use for hard currency, and most transactions take place on internal Chinese financial networks and cell phones for the average person, but business finance still flows through banks.
So, let’s start supporting that bold statement
- The Chinese authorities added Crypto (cryptographic as well as cryptocurrency) to the School Curriculum – quite literally ‘educating the future’ in new FinTech.
https://cointelegraph.com/news/chinese-communist-party-adds-crypto-to-curriculum
- In reality the distribution of the new Chinese Digital Yuan is proceeding apace. In size, the following is not a massive deal, but in construction of the agreement, this is probably the number one of the new Chinese Digital Yuan Deals and is pure modern FinTech.
“China Baowu Group, the world’s largest iron and steel complex, completed a yuan-denominated, blockchain-technology-based transaction of more than 100 million yuan ($14 million) with Rio Tinto …, a move signaling the rising influence of Chinese currency in pricing major commodities.
Standard Chartered issued a blockchain-technology-powered letter of credit for the Baowu-Rio Tinto deal, which the bank said was the world’s first such certificate pegged with offshore yuan.
The use of blockchain technology – a digital public ledger of transactions that has seen increased usage in the global commodity trade – helped facilitate the trade and reduced costs for all parties involved in the transaction …”.
https://www.globaltimes.cn/content/1188131.shtml
So, what can we learn from this transaction?
This is not only a further distribution of the Yuan, but is a further distribution of the digital Yuan. While we do not know how this deal is constructed in detail, the use of the words blockchain-technology-powered letter of credit says it all. It looks like this deal will run completely on a blockchain, in the form commonly known as a smart contract, where each step of the deal and its payment schedule in digital currency are transactions on a blockhain. (Now try and skim off that transaction where the rules are hardcoded at the outset with technical principles of consensus pre-programmed in the smart contract and agreements signed directly on contract existent on the blockchain– those that know project management, will know the value of a self-documenting project).
- the “Moodies”
In addition China has become the ranker of record for private cryptocurrency projects.
The health of financial systems or countries are ranked by three major ranking agencies. These are S&P Global Ratings (S&P), Moody’s, and Fitch Group. S&P and Moody’s are based in the US, while Fitch is dual-headquartered in New York City and London, and is controlled by Hearst. These organizations hold the collective global market share of who can be considered good, and who can be considered bad in the global financial system. Not too healthy in my opinion as this is a disproportionate western control over the financial well-being of other countries.
So, as the proverbial quote from Buckminster Fuller states: “You never change things by fighting against the existing reality. To change something, build a new model that makes the old model obsolete.”
The old banking and financial systems are indicative of the existing reality and are old, decrepit, ancient technology, needs a bunch of maintenance, and the worst is that they are of course owned by those that use them as weapons against others.
China is doing no less than building a new model in FinTech that will make the old model obsolete and in this way they are simply leapfrogging the current financial systems distributing the dollar with fast, lean and modern systems supporting the Financial Silk Road. They have made their own ranking system in new FinTech, i.e., cryptocurrencies. The June rankings are as follows:
Quite rightly the Asiatimes is asking .. Who is actually decoupling from Whom? And I can add, and using modern FinTech to do so with solutions appropriate contextually to our modern world.
https://asiatimes.com/2020/05/whos-decoupling-from-whom/
My own expectation is that the notable private cryptocurrency systems (those that actually make it to the Chinese ranking system) will eventually be able to exchange smoothly and seamlessly with the Chinese Digital Yuan.
A quick look for the same trajectory, leapfrogging legacy systems, outside of FinTech
We see this creation of seamless new systems outside of hard FinTech as well. Here are three examples. The current hegemon in its common ‘break it’ style, made errors as it thinks if it breaks something, people will come back begging, to make a new plan. This is not happening any longer, and the world simply decouples and creates new systems, as we see from three seminal events and the hegemon further losing its power base.
– The US attacked the WTO on the basis of refusing to allow it to vote for and institute staff for the appeals body for trade disputes. Usually this would have taken many meetings to solve. This time, what happened is that China has joined 18 other members including the European Union, Canada, Australia, Singapore and Hong Kong in launching a temporary system for trade disputes at the World Trade Organization, with the agency’s appeal body having ceased to function in December after the United States blocked appointments of new judges to the top trade court.
The needed functionality is now still there, the US having excluded itself (actually shot itself in the foot), while the rest of the world moved forward saying we need this body, and we will have this body, with or without hegemon. The Multi-Party Interim Appeal Arbitration Arrangement (MPIA) was developed in just over three months, after the members announced at the World Economic Forum in January that they would seek to form a new body to work around the demise of the regular WTO panel.
From a combined statement by the European Union: The new system is designed to preserve the principle enshrined in international trade law that governments have the right to appeal in any dispute.
– Most readers of this blog will know how the US is trying to carve out for itself some way back to the JPCOA, the Iran agreement, after simply breaking this agreement. It is proving to be not so easy to walk this one back and so far, they have lost their power base. Do-overs are not so easy in terms of diplomacy, after one has squandered the world’s goodwill and Iran is receiving widespread help to overcome the results of any further sanctions.
https://responsiblestatecraft.org/2020/05/01/in-tortured-logic-trump-do-over-iran-nuclear-deal/
It is no wonder then that the EU policy chief made this statement: US century ceding to Asian one, says EU foreign policy chief. https://tass.com/world/1160031
– The third event is the US stunt at the recent Vienna arms control talks. The US stealthily placed Chinese flags, took photos and posted media – then accused China of being a no-show, knowing full well that China declined to attend these talks and refuses to be roped into an agreement that is not in the least appropriate for it. Clear petulance is the hegemon’s only response to a visible decoupling of the world with the US and western cronies. They have nothing more left than petulance and literal pictures of false flagging to offer.
So, it is clear that both inside and outside of hard FinTech which this writing is about, the trajectory of recreating systems and simply leaving the US out, is alive and well.
A small note on Iran and Venezuela as part of the empire resistance countries. Iran is mining cryptocurrency and Venezuela floated theirs, namely the Petro. Unfortunately (and this is not the focus of this writing), they did not do that cleverly but the newest news is that the Venezuelan government is now beginning to trade in cryptocurrencies, and for example, accepting current private chain cryptos for payment for passports. Bear in mind I said that some private chain cryptos will eventually be exchanged with the digital Yuan, so, very soon now, if a government takes payment in a crypto, they will have digital Yuan if they decide to exchange – and they do not need anyone’s permission (Like a Central Bank).
What is the Chinese View
With ‘the moodies’ rating system, cryptography education in China, a clear project based on the digital yuan and blockchain technology and more to follow, it becomes clear that the Yuan and the digital Yuan is being moved into the global financial sphere, de facto without years of negotiation and agreements and trade type negotiations. My expectation then is that certain cryptography and cryptocurrencies will eventually be seamlessly exchanged on China’s blockchain(s) – and you will have a digital yuan wallet on your phone, or on your computer or even a credit card supporting and in this way, you and I could be right on the Belt and Road. In other words, if I want to use a cryptocurrency to pay for something, and I have digital Yuan or another crypto, I can simply, within my electronic wallet exchange for the right currency that I need. This is how China is distributing their Digital Yuan de facto.
What is the Russian view
Russia is still a little behind this revolution in FinTech. but with one fell swoop they can get rid of their central bank if they so choose. The Russian Central bank is following Western ways on the renewal of currency through their central bank. https://cointelegraph.com/news/russias-central-bank-seeks-to-ban-crypto-issuance-and-circulation.
Yet, the decoupling continues. It is interesting to wait to see if the 5 UN security council countries will in fact gather for the summit that Mr. Putin invited them to. My expectation is that if they don’t, Putin will run out of patience and choose others, perhaps the G20 or something new. The decoupling will continue.
We now have clear precedence set on the decoupling part of FinTech and other organizations. It is no longer a big deal to decouple from empire.
What is the Western view?
Forbes stated recently that the launch of the Digital Yuan could create serious problems for the U.S. banking system—potentially forcing the U.S. to digitalize the dollar to compete. The Federal Reserve has warned that central bank digital currencies might one day replace commercial banks, creating “a deposit monopolist” and playing “havoc” with the banking system. (This seemed to me somewhat like gobbeldy-gook and is meaningless – yet, they know something is happening.)
The West is 20 years behind this technology, because China decided to leapfrog and not follow the accepted development trajectory and as such has reconfigured the potentials for the entire planet.
It is high time and in the words of Michael Hudson: “So the United States, through the World Bank, has become I think the most dangerous, right-wing, evil organization in modern history — more evil than the IMF. That’s why it’s almost always been run by a Secretary of Defense. It has always been explicitly military. It’s the hard fist of American imperialism.”
The world is leapfrogging, and elegantly zig-zagging around current imperial financial systems, for a true birth of a new post capitalist post industrial order, without going to war for it.
A state backed digital currency is better and fairer than a privately generated one and I’d much prefer to have digital yuan than bitcon. Remember that those who created bitcon et al sell these tokens for things of value and usually have millions of the things. They get to be billionaires for free and everybody else has to work to get the tokens. At least a state backed one would spend it back into the economy for public goods and services.
Given China’s Social Credit System digital currency is logically and simply the next step in controlling life and people. What this spells for humanity is frightening stuff.
This sounds more and more like the fulfillment of Biblical Prophecy, the Beast System and with it the tattooing or implanting of your digital wallet into either your right hand or forehead.
God wants to solve mankind’s problems by way of heart change, but instead it will be legislated through political control of your life. No wonder such a system is forbidden by God to take part in. Anathema to the believer. One of the 2 unpardonable sins!!!!
Never forget the words of Dostoevsky about controlling ones ‘conscience with their bread.’
@Gerry 100% Truth ! The chain will do no good if applied that way. What many don’t understand the only realm where there must be a common system (or better is desirable under ideal conditions) is the inter-nations exchange of wealth via a trusted, fair, and fully transparent to anyone. What a nation is doing locally or in a region is something completely different.
As long a country operates from it’s own ressources it can develop it’s production to any desired level without even needing anything from outside ! They can use marbles if they like to store wealth or whatever it’s up the people there.
Like wise on the inter-nations level BUT there the whole must be abstracted more, because it serves as a universal and it obviously needs the approval of all involved, to be fair, trustworthy and transparent. Here techonology is in essence also totally secondary, the primary process is a political one ! Whether they then use blue marbles or block chain or any other shananigan depends on the catalog of requirements to be met.
The focus on technology is wrong, it’s last in the whole process !!
So what we see now is only positioning of basically two camps the uni-lateralists (Dollar) and the multi-polarists (the New, to be filled with something but not the real deal, again anything viable can do it).
If the whole world will go towards a rule based system as is promoted by Russia + China (the UN-Charta as has been envisionend as base) then in parellel with the general political configuration, the one of inter-nation wealth-exchange will be setup, one cannot do it the other way around or it fails before it starts, obviously.
Just don’t let them implant a chip with the number 666 in the back of you hands and/or your forehead.
Under the coming Anti-Christ regime, you will have to show this number before you can buy or sell. It won’t matter whether you are using digital or hard currency or whatever the financial technology to buy or sell.
So draw your conclusion as to how to survive without betraying your faith in Jesus Christ.
China’ Social Credit System does not apply to individuals bit to entities like corporations and medium to small businesses. It is literally a customer feedback system that helps peoplw become aware of shady practices.
If any western country had that very system it would be rightly called a progressive way of keeping business in line. But there is a propaganda war on so it gets labelled as the very opposite of what it is. I.e anti-people
It is also completely transparent, unlike the secret credit scores that are kept on us in the West that might prevent us getting loans or mortgages and we have no idea why.
Interesting. However, I would argue that there is a need for an international currency that is independent of any state backed currency.
In any ‘domestic’ economy, monetary policy is a key element of overall economic policy. Varying the money supply is necessary to smooth out the normal fluctuations of any economy. Monetary stability is not an issue, and indeed most central banks seem to target a 2% inflation rate, in order to allow price adjustments in an economy where some prices are sticky, such as labor. And often much higher rates of inflation can be necessary in order to facilitate economic transformations in times of economic shocks.
For international transactions, however, monetary stability is key. Indeed, one of the major problems with the $US, as an international currency, is that its exchange rate can swing quite wildly, in response to monetary policy made for domestic considerations. In this sense only a reference, such as gold, which is internationally recognized and whose quantity is impossible to manipulate, is really suitable as an international currency. The major problem with gold is that it is difficult to use. However, tying it to a digital currency resolves this problem.
Thus, I would argue, that while a digital yuan would be interesting for domestic use in China, for international transactions only digital gold would resolve the issues that are caused by the use of the $US.
Many thanks, Chris Faure, for this wonderfully clear report on the state of play of the current geo-political game of decoupling from the current financial system, through the process of creating an alternative to it.
I love your concept of “leap-frogging” – genius strategy and also very basic, being simply the standard way to find the correct point to intersect with any curve that one lags behind on.
This one conclusion of yours, arising from the evidence you presented, stopped my mind and blew away my heart’s despair:
For this alone, thank you.
~~
I also had not seen until now how the blockchain repositories can indeed become an alternative to the central banks. Simply by doing.
And the new money houses can choose to charge interest, of course, but they’ll have to do it from scratch, without the advantage of thousands of years of arbitrage and subterfuge. It won’t be so easy, I hope, to obscure within a blockhain record the obscene profit of compounded interest.
Indeed, a new era could be dawning – perhaps so, perhaps not – but if money and debt settlement want to become transparent, the fintech you describe provides the platform for this to happen. Or so I think – but I am no expert, and I welcome correction or collateral for this thought.
~~
Please keep writing these essays, Chris Faure – and many thanks to the Saker for bringing us this author.
Excellent summary. Thanks. Something the author referred to is worth expanding on: China owns 90% of the IP behind CBDC.
They’ve spent twenty years and hundreds of millions of dollars developing and testing it. Any central bank that wants CBDC must talk to China. Singapore’s central bank and Italy’s have already asked to do so.
Thank-you Godfree. From you I would consider this high praise. Good comment, and supports the idea that these days, in currency development, the ‘system’ is as valuable as the currency.
After reading Jimmy Moglia’s article I was a little down. This article however cheered me up greatly. The two things important to humans, one social and one commercial. I have a sneaky feeling that SE Asia and China is more attuned to their tight co-existence.
As someone being involved in blockchain technology and crypto currencies for the last decade, I have to say the author lacks some fundamental technical understanding in this area.
The ownership of the network has nothing to do with if the software is open source or closed source. A closed network can be open source as well as an open one. The difference is in who controls the network, which is determined by if the network is permissionless (consensus nodes can join and leave as they please, e.g. Bitcoin and Ethereum) or permissioned, where only specific nodes are allowed to form consensus on ledger transactions.
This is fundamental to understand, since a permissioned network (such as the one supporting the digital Yuan) will have the ability to reverse and censor transactions, while a permissionless network can’t (nodes are assumed to be independent).
Furthermore, the Chinese ranking table in the article has been laughing stock in the crypto community for quite some time, as it ranks some of least utlized and unstable networks at the top. One can only speculate to why, but a it’s known that a lot of these tokens are held by Chinese crypto currency speculators who have an interest in increasing their market value.
With this lack of understanding of fundamentals, the remaing part of the article (which is outside my area of expertise) unfortunately looses credbility.
Jonas, true. I did not want to belabor the technical points and wanted to write this in words that the ordinary person (with very little knowledge) can understand. So, that was deliberately done and is not a true reflection of a fundamental technical understanding. In fact, if I had to write this technically correctly, most folks would not get it. I mean, who really outside of the industry, understands permissioned and not permissioned networks and all the permutations or the word ‘immutable’ for example’. In fact, we can draw up a very big chart for all the permutations there. There was no need to explain the nuances of a consensus algorithm to a novice audience, while that is not the focus, or true pow and pos. And what would it have added?
Secondly, the focus of this writing is on what China is doing with the technology, and not on the technology (and I certainly will not enter the crypto wars here). A very light hand on the technicals, just enough for transferring certain conceps, was the biggest challenge in writing this piece. This was deliberately done, to make it understandable for the person with no specific technical dictionary, or knowledge.
Most major currencies across the world are already created digitally on bank computers, so there is nothing new about a digital yuan. For example, in the US just 2% of the money supply is printed on paper as bank notes, the other 98% is created by private banks ex nihilo as debt whenever they make a loan to the US government of $26 trillion, or to the corporate sector, or private citizens. The Chinese government owned central bank creates its domestic currency the yuan without incurring any debt to the private sector, so that in the words of Abraham Lincoln “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”
A secondary consideration is how much do the private banks across the world charge their customers for the use of their privatized national currencies. For example, credit card interest is on average 16% and god forbid that anyone should be late on paying back their debt, there is a late payment charge of $35 and the interest rate jumps to 24%.
Whenever anyone uses a credit card to make a purchase, the banks charge the vendor 3% of the purchase price. If a debit card is used the charge is 2%. Considering that most Americans use a credit or debit card every time they buy anything, this adds up to billions of dollars in easy bank profits, that it takes their computers milliseconds to effect.
When I withdraw money from my foreign bank account at an ATM in the US, I am not only charged the foreign exchange buy/sell spread, but also a transaction fee of $9.25 on a withdrawal of $340 in cash, which is the maximum I can withdraw on any given day.
Kapricorn4, you may be missing the biggest difference here, which is blockchain, the technology itself. This is different banking and currency methods.
What is a blockchain – explains the Byzantine General’s problem, explains in basic terms the issue of consensus in the new systems, and touches on the issue of trust. It is in finance the difference between horse and buggy and sending up a rocket.
Short and easy: https://www.youtube.com/watch?v=Y72Uq2C_lqs
I do not own a smart phone or even a cell phone and I have no intention of buying one. My income is transferred automatically into my bank account(s) and it just appears there as if by magic, that I check every month using my desktop Apple computer. Occasionally, someone has got hold of my debit card number, no doubt illegally, when I have made an on line purchase, but the bank reverses it, when I complain.
If blockchain provides greater computer security for financial transactions, all well and good, but it is the banks you have to convince to buy or lease it, not me.
It is high time and in the words of Michael Hudson: “So the United States, through the World Bank, has become I think the most dangerous, right-wing, evil organization in modern history — more evil than the IMF. That’s why it’s almost always been run by a Secretary of Defense. It has always been explicitly military. It’s the hard fist of American imperialism.”
According to the Economist, “[China is] the world’s largest official creditor, more than twice as big as the World Bank and IMF combined”.
An excellent article, the inevitable answer to the USD.
The blockchain I understand to a small degree,
The transaction model I understand better.
Is the currency expandable with new issues? What is not needed is an accumulating value currency, ideally china would issue new digital yuan to keep the transactional currency “stable” in terms of its own GDP. New script issues then could be used to ‘buy’ and rescind older scripts or add to them. However I am too ignorant to judge whether this is already built in, unnecessary or even possible.
Using the same model in Australia (once the quislings are removed), raising national capital would be an issue of more cryptocurrency. If this was then used productively to expand the economy, then the books balance. If it is used as US borrowings are presently in speculative markets, then we are in trouble, as we now are.
I can see this working but I am unsure how viable this is as an idea — any thoughts would be welcome, but the political element of the type of government in power is critical whether; which is the case with any political economy. However, a digital currency does allow a dimension of ‘commonwealth’ to be promoted instead of constant indebetedness that my country has succumbed.
I think I dwelt with the issues you raised in my comments in an article on the same subject – the digital Yuan – by Pepe Escobar.
I concentrated mainly on the impact of the digital Yuan and its use on trade, transactions and stores of value for investment like Bitcoin in the real world. I leave the technicalities to the experts.
The digital Yuan will shield the paper Yuan from fluctuations due top speculation, manipulators of the like of Soros etc.
It will bypass the US controlled international financial system based on the USD.
Finally, it will enable China and others to dump the USD for international trade and/or reserves.
And in dumping the USD,China can also dump the USA’s Fed.
The end result? The USA will need the digital Yuan to trade and buy its needs from the world (Chinese) market.
Digital Yuan can initially be backed by gold to instill confidence and ease acceptance.
Once confidence is built up, it can come off gold like the US dollar in 1972.
Then the digital Yuan will be backed up not only by the ‘ownership’ (and fiat) of the Chinese financial system but also by the goods and services of the Chinese economy.
This threesome – gold, ownership/fiat of China’s financial system/Central Bank and all the goods and services of China’s economy will make the digital Yuan a very valuable asset in itself.
The fact that it is blockchained will also protect its value (which will be decided by the market) far more than the US dollar which value is now subjected to depreciation by virtually unlimited quantitive easing.