The e-yuan? I laughed when I initially read that out loud to myself. It honestly sounds like a childlike grunt of disgust at being forced to eat vegetables. Strangely enough, China’s digitalization of its currency and expected universal rollout in 2021 is exactly that – a central government begrudgingly eating its vegetables by the mandate of its mother, the open market.
China’s move to a global cryptocurrency is particularly instructive both for cryptocurrency players and other governments. The most powerful regulatory tool that any government possesses is the ability to control currency – the medium of convenience through which all trade must pass if it is to remain economically viable. The ability to control and regulate currency gives government the ability to regulate transactions on a secondary level and who commits them on a tertiary level.
For a currency-based regulatory system to work, however, a government must monopolize the market of mediums. Most governments achieve this monopolization by way of practicality. Their currencies – paper and the electronic promise of paper – must be more convenient and accessible than any alternatives, and their currencies must carry a stable value.
Cryptocurrencies such as Bitcoin, Ether, Ripple, etc. undermine a traditional currency’s monopolization of practicality. They are convenient, fast, and accessible to anyone with access to electronics and the worldwide web. While they have not shown signs of replacing traditional currencies completely, cryptocurrencies threaten to rapidly supplant traditional currencies in electronic transactions, which now dominate the market of trade.
Bitcoin, Ether, and Ripple, however, did not pose the biggest threat to China’s currency. They are open-market cryptocurrencies that operate independently of institutional channels of marketing distribution. China’s hand got forced by Facebook.
Facebook will launch its own cryptocurrency in 2021: Libra. While open market cryptocurrencies do pose regulatory headaches, they lack the institutionalized connections to pose an immediate and serious threat to a traditional currency on a global scale. Facebook, however, is already global, and it arguably possesses the largest or the second largest institutional channel of marketing distribution in the world. In other words, it can rapidly popularize Libra in a way that quickly and completely supplants China’s yuan as the dominant currency.
China, like most governments, cannot afford to let that happen. While it could still regulate Libra, it would lose direct regulatory control over the dominant currency in its market. If it lost direct regulatory control, it would lose an outsized portion of its regulatory control over trade. In other words, Libra posed an existential threat to China’s current approach to economic and trade regulation.
China is reacting traditionally. It is attempting to create a dominant digital currency that smoothly interacts with traditional currency. If it can succeed, it might prevent Facebook’s Libra from displacing its dominance over its currency market as a matter of practicality.
Private cryptocurrency projects, however, have an uncanny ability for circumventing and frustrating traditional methods. There’s absolutely no guarantee that China’s gambit works. What then?
A couple of years ago from the audience at a Federalist Society event, I outlined how cryptocurrency regulation would look . There are three players with varying levels of knowledge in the cryptocurrency space: institutional investors, geeks, and average Joes. The institutional investors and geeks don’t need government regulation. They are savy enough to protect themselves in the chaotic and treacherous world of cryptocurrency. The average Joes, however, lack sufficient knowledge or motivation to acquire that knowledge.
My attitude is to let the market determine who survives. Governments, however, dare not share my cold-hearted attitude because it is politically untenable. Thus, regulation is inevitable. At the time, I proposed a regulation system with an open commodities market and an investing exception similar to the Regulation A offerings exception for securities, which allows private individuals to invest directly in companies prior to public offerings.
What I did not discuss at that event was what would happen when institutional investors and the geeks starting challenging the government’s control through technology. That conversation previously only popped up in dark corners of the internet that breed conspiracy theories and other ideas that defy conventional wisdom. We have reached that day though.
China will try to compete with Facebook and other cryptocurrencies directly. If it finds that it is losing, the noose will tighten, and it will ban other digital currencies. A tightening noose will spell the end of private institutional cryptocurrencies in China, but it will not spell the end of open market cryptocurrencies, which will operate as they always have – independent, anonymous, and convenient.
I look forward to seeing how this plays out and whether Western governments follow China’s lead.