The US has this really amazing strategic asset in the US dollar. If you look at borrowing and lending in the world, how trade is denominated, and the influence the US has with the dollar as a tool of national security since settlement happens in the US dollar — even two countries like Brazil and countries in West Africa, or even China and Russia — the bulk of trade between China and Russia used to be denominated in US dollars as of five years ago. That’s an amazing national security tool.
… Certainly not relying on the US dollar for settlements allows you to sidestep things like sanctions. If you look at how Russia and China have been denominating their trade relative to each other, they moved off the US dollar. Ultimately, they don’t want to hand the US this leverage.
The way China is executing on this I think is brilliant. They’re building a new, digital settlement layer, an electronic payment layer, and a central bank digital currency. This allows them to control their money supply digitally. They can turn the knob, have that capital flow to their commercial banks, those banks can lend to fintech, and the money enters circulating supply.
They’re going to extend that out to their belt and road initiative, which is trillions of dollars pouring into infrastructure for Africa, central Asia, the Middle East, and connecting into Europe. All those trade routes their investing in to have access to energy and goods and not be depending on the US and invest deeply into emerging markets — for them to have a settlement layer denominated in Yuan and not USD is pretty phenomenal.
The US is not being strategic about it. We wrote this paper — what should you do if you’re the US government given the strategy China is using. The conclusion we came to is that the US needs to take a three pronged strategy.
First, invest in their own digital currency layer… that’s a lot of work and will take several years. Because the Chinese government has been working on this for five years, that’s not likely to be competitive. You’re not going to beat the Chinese government to market on this… That’s not enough…
Prong two should be to support the crypto dollar ecosystem. One of the killer apps on crypto is the US dollar. There’s now about $25 billion worth of crypto dollars floating around in the crypto ecosystem. The majority of these are actually backed by real dollars sitting in banks somewhere. People are transacting on these crypto platforms because it’s a better experience…
Third is that the US government should much more actively be supporting the decentralized cryptocurrency ecosystem. If a central bank cryptocurrency and supporting crypto dollars is defense, going blow for blow with what the Chinese government is going to offer… But the question is how do you actually win? As you know from startup 101 theory, the way you win is not by trying to play the same game as your competitor. You try to switch the rules of the game. You try to offer the market something that structurally your competitor cannot offer.
… What should the US government do that structurally the Chinese government can’t do. In our opinion, a lot of the values of the cryptocurrency ecosystem — the kinds of things they’ve embraced, for example privacy — or bottom-up decentralized innovation, and allowing developers to have freedom of speech, freedom of expression, are things that are antithetical to the way the Chinese government operates today. They’re not going to be able to offer privacy, true freedom of speech to developers. So if we embrace the things the Chinese cannot structurally embrace, then we have a shot of outcompeting China and winning. In essence, that third prong of the strategy is offensive whereas the other two prongs are defensive strategies.
We laid this out in a paper and I learned through some friends it was actually circulated very broadly across senior circles in both the intelligence community and Treasury and regulatory bodies.
That was Avichal Garg on the Venture Stories podcast, the State and Future of Crypto in 2020. His proposal seems right on the money in my perspective. Garg’s general view, by the way, is that financial applications are the first product-market fit for crypto because the current system is so poor and runs a lot on paper that it overcomes its scalability issues.
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