A Cautionary Crypto Tale From China

Andy Snyder|May 4, 2020

Get ready to hear a lot more about digital currencies.

This is a story that ties together all sides of our Triad. Anytime money is involved, Liberty is at stake. The notion is doubly true when this new form of currency gives governments even more control of their people.

Connections are in play too. Currency is how deals get done. It’s what brings two parties together. It forms the backbone of a healthy economy.

Mess with it… and we threaten to mess up a whole lot more.

But we’d say it’s Know-How that’s most important to this tale. Most folks have no idea what’s happening or what it all means.

Our job is to change that.

This is a big story.

Electrocash

You likely missed the news – because it’s hardly been reported – but China is set to test a digital form of its yuan this week. It will affect 38 million people in four major cities.

Government employees and other public servants will receive their next paycheck through the new system.

Dubbed the e-RMB, this new digital currency scheme is much different from the electronic banking system we’re used to. Without getting too deep, the key difference is how transactions are settled. In the case of China’s digital money, it’s never settled in dollars and remains outside the global banking standard.

That’s the key for Beijing.

As you can imagine, it’s getting tired of sanctions from the West. And it’s getting tired of converting its surplus export yuan into dollars and feeding America’s “just borrow more” economy.

With the e-RMB, it aims to rewrite the rules of global finance.

In the eyes of the Chinese, it has its merits.

“A sovereign digital currency provides a functional alternative to the dollar settlement system and blunts the impact of any sanctions or threats of exclusion both at a country and company level,” said an opinion piece published by China Daily.

“It may also facilitate integration into globally traded currency markets with a reduced risk of politically inspired disruption. The stability of the Chinese yuan during the COVID-19 crisis has enhanced its appeal to many investors. These two settlement systems – U.S. dollar and China sovereign digital – may operate side by side or if need be, on a mutually exclusive basis.”

And, yes, it pains us to recite anything printed by the propaganda mouthpiece China Daily. But it’s important to know all sides of this story.

No Crisis Goes to Waste

China has grown tired of a global monetary system that relies on the greenback. And you can bet it’s going to use America’s latest crisis as fuel to propel its agenda.

It’s got plenty of evidence.

As of last Wednesday, the Federal Reserve’s balance sheet has exploded to a whopping $6.7 trillion. It’s now the equivalent of more than 30% of the U.S. economy.

That’s $6.7 trillion worth of new money. And with every dollar we print, China’s trillion-dollar stockpile of American debt is worth that much less.

Clearly, it has plenty of reasons it must win the race toward a digital currency.

Washington is currently losing the race… but it’s thinking about tightening its laces and making a sprint.

During the hoopla and debate over the (first) coronavirus stimulus deal, Nancy Pelosi allowed her teammates to concoct language that would have America on her way to creating her own government-run digital currency.

The wording that would force the Federal Reserve to open digital dollar wallets for all its customers never made it into the final bill – thank goodness – but clearly the desire is there.

In this case, Washington wants to use the digital dollars and their corresponding digital wallets as a way to quickly stimulate (or, of course, “destimulate”) the economy. With the push of a button, Pelosi could put $1,200 straight into a voter’s wallet… without any of the messy settlement issues we just saw with the first round of stimulus checks.

Everybody would have a government-run FedAccount (a real term)… just like we all have Social Security numbers.

Mark our words, when the government starts to pay all Americans just for being Americans – the idea of a “universal basic income” – this is the system it will be based on.

When it happens… it will be a devastating blow for economic freedom. After all, it’s tough to bury a digital wallet under the old oak tree in the backyard.

That scares us.

But it does make us want to buy a bunch of bitcoin.

We’ve traditionally steered away from the highly speculative asset (still a term we use loosely with cryptocurrencies), but it’s looking more attractive by the day.

The money wonks have done some crazy things over the last two months… and this mess is far from over.

Keep an eye on what’s happening in China. It’s a (worrisome) glimpse into the future.

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