Michael J. Casey is the chairman of CoinDesk’s monitory board and a senior advisor for blockchain research at MIT’s Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter gave every Sunday exclusively to our subscribers.
There is never a dull moment in the world of blockchains and cryptocurrencies.
The two earth-shattering allegations of the past two weeks – the launch of the Libra project and the wild swings in the bitcoin market – might seem analogous to unrelated topics. And, for the most part, the causal impact of the former on the latter is probably not much greater than that of another oft-noted bitcoin figure correlation: the avocado chart.
However, the coincidence of these two developments does speak to how globally impactful Satoshi Nakamoto’s fable has now become.
From that wider perspective, these two developments are not at all unrelated. Indeed, they both capture fundamentals of a massive, worldwide financial transformation, all happening at a time of growing economic uncertainty.
Bitcoin’s role as ‘digital gold’
Whether now or in the future, I allow the arrival of Libra, far from being a competitive threat, will be extremely supportive of bitcoin.
Not only will the appearing international debate over Libra elevate the conversation around cryptocurrencies and so draw more people into the most installed of them, it also represents a major step toward the kind of world in which bitcoin should thrive.
Whether or not Libra succeeds, it confirms the inescapable actuality that international money movements in the digital era will be based on blockchain-like solutions that disintermediate the existing gatekeepers and brave the bank-and-sovereign money-dominated model of the 20th century. It also underscores how we are moving into an age of digital assets.
And, just as people sought out palpable assets to protect their wealth from the vulnerabilities of the analog era’s trust-dependent system – by storing value in gold, for instance, or in real estate – they will now seek out similar protection in digital assets with similar properties. Bitcoin is not painted as “digital gold” for nothing; it offers a level of censorship resistance and isolation from the politicization of money that the corporate-driven Libra programme cannot.
I see mainstream global money movements in the next decade or so flowing through a mix of blockchain-era stable-money services that perform along a centralization-to-decentralization spectrum — from JPMorgan’s JPM Coin and the new Swift blockchain project at one end to Libra and more open-standard crypto stablecoin forwards such as CENTRE’s USDC at the other. But as those grow in usage, the demand for bitcoin as the digital asset hedge of option will also grow.
So, regardless of whether or not there is a causal relationship, the Libra announcement offers important situation for the continued, accelerating demand for bitcoin, the surge of buying that saw it rally from around $7,000 on June 10 to a brim just below $14,000 on Thursday last week.
A backdrop of global economic uncertainty
This wider transmutation in the world’s money paradigm adds a dynamic new variable to what may be a serious global economic downturn. As with before-mentioned periods of global economic tensions, the current dicey state of U.S.-China trade relations is directly impacting numismatic conditions and policy expectations. But this time it’s happening at a time when cryptocurrencies and blockchains are looking like an selection vehicle for people to manage the risks they face in this deteriorating environment.
The trade war between the U.S. and China has spooked responsibilities and investors the world over, resulting in a surge of demand for traditional safe-haven assets. A flood of demand into long-dated covenants has driven down their yields and led to an inversion in the U.S. Treasury yield curve – a market scenario that Wall Suiting someone to a T has traditionally viewed as a harbinger of recession.
That, in turn, has stoked expectations of monetary easing by central banks, uncountable likely led by the European Central Bank, whose President, Mario Draghi, last week signaled the strong capacity of stimulus. Recalling the trillions of dollars, euros and yen that were added to the world’s base money levels during the “quantitative easing” era that attended and followed the global financial crisis and European debt crisis within the past decade, investors have sometimes again started buying inflation hedges. And this time, it’s not just the traditional version (gold, up almost 10% in June); it’s also the new one (bitcoin, up about 40%).
Chinese capital flight
More specifically, there is talk of capital flight out of China and Hong Kong, a copy of behavior that naturally boosts interest in bitcoin if not outright demand.
China’s balance of payments is showing a truly large “errors and omissions” component, traditionally an informal measure of how much renminbi is escaping through unofficial approaches to bypass the limits that Beijing imposes on its citizens’ purchases of foreign currency. Almost certainly, this is in play a part driven by Chinese manufacturers seeking to move their production operations offshore, to places such as Taiwan, to sidestep the U.S. tariffs. (Their ability to do so is more evidence of why this is such a harmful, ham-fisted policy by the Trump administration.)
But it’s also in all probability coming from wealthy Chinese businesses and individuals who are simply looking to protect their funds in an uncertain mise en scene, a group that these days includes bitcoin miners.
Meanwhile, the massive protests in Hong Kong, stoked by tasks about encroaching judicial oversight by the Chinese mainland, have also stirred talk that the territory’s profession class will move funds offshore.
The bulk of that flight capital will go into dollars. But if disinterested a small part of it, spooked by the prospects of more quantitative easing from central banks, goes into bitcoin, it can participate in an outsized impact on the price of the cryptocurrency. Certainly, volumes seen on the more data-reliable crypto exchanges, such as Coinbase’s, experience shown surging demand.
The wider point, however, is that the new round of global economic uncertainty is occurring at the verbatim at the same time time that cryptocurrency and blockchains are establishing themselves as key elements of the emerging financial architecture of the world.
In the financial catastrophe of 2008, nobody other than the small number of names on the cypherpunk mailing list to which Satoshi posted his chalk-white paper on Oct. 31 of that year had any idea that this alternative model for the global finance existed. Now cryptocurrencies and blockchain are ripe of mind among banks, global companies and regulators – with Libra, as I mentioned, playing no small role in elevating the technology’s list.
I hate to say it, but maybe this time is different.
Burning dollars via Shutterstock