The Truth About Cryptocurrencies
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Neil Koenig, Producer, Journalist and ideaXme board adviser interviews David Roche, Founder of Independent Strategy and Quantum Economics.
The Truth About Cryptocurrencies
The news today is full of stories of fortunes made or lost through investment in Bitcoin, Ethereum, and other cryptocurrencies. But what exactly are these new digital currencies? How did they come about, how do they work, and why are they so popular? In this interview, David Roche tells the story of the birth and development of this new kind of money, the impact it is already having on global economics and politics, and the reasons why central banks and governments are so worried by the rise of cryptocurrencies. David Roche is a global investment strategist based in Hong Kong. During a long career he has forecast some of the major turning points that have affected global markets, such as the demise of the Soviet Bloc and the subsequent fall of the Berlin Wall, and the financial crisis that swept Asia in the late 1990s.
David Roche grew up in County Kildare in Ireland. He holds an MA from Trinity College, Dublin and an MBA with the highest distinction from INSEAD. He is also a Chartered Financial Analyst and has a diploma in accounting and finance from the UK’s Association of Certified Accountants. In his youth he spent time in various countries, including a period in what was then known as the USSR. He says he fell into a career in investment strategy “by accident”. After a spell working for JP Morgan, he joined the multinational financial services enterprise Morgan Stanley, where he was Head of Research and Global Strategist. In 1994, after leaving Morgan Stanley, he founded Independent Strategy, an investment research firm which provides advice to institutional investors and governments. He often contributes to many top financial publications and is also a regular commentator on the BBC, Bloomberg TV and CNBC television networks. He is also the author of several books, including “New Monetarism”, “Sovereign DisCredit!” And “DemoCrisis”.
Neil Koenig: [00:00:00] Hello and welcome to another episode of ideaXme. Cryptocurrencies are much in the news but remain a mysterious subject for many people. So, what are they? How do they work and why should we care about them? To help answer these questions and more, I’m joined now by David Roach, founder of Independent Strategy and Quantum Economics. David, the phrase cryptocurrencies is quite familiar now. Well, what exactly are they and what is meant by the word crypto?
The Truth: What are Cryptocurrencies?
David Roche: [00:00:33] Ok, well, the crypto bit means they’re encrypted. Which means that they work through something like a blockchain technology, which I would explain. I’m not trying to kind of confuse people with more jargon. What they are a form of currency which fall outside the control of a central bank or a government. (Fiat money is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal tender). And they represent an alternative way of investing or using money to transact or measuring value. That’s the theory. So, they are meant to do everything that what is called a fiat currency, which is the traditional sort of currency you get from your corner bank. They’re meant to do everything it does, but without having government in the cockpit. That’s in a nutshell. Now, blockchain. Let me explain that for a minute. That is a succession of transactions. So, you sell me your cat. I buy some cat food and I take the cat to the vet, and then I sell the cat to another person. So, we have four transactions going on in that now. What a blockchain transaction is, it links one transaction to the other, transaction to the other transactions. So, think of your model train set. And these are linked using encryption. So, you have these four wagons and let’s say, a locomotive chugging along link. They can only be unlinked or changed or taken off the rails or put on another siding or another rails, if everybody in that chain agrees, that’s a blockchain transaction.
Blockchain Technology and Cryptocurrencies
Neil Koenig: [00:02:18] How do you access the blockchain? Is this publicly available?
David Roche: [00:02:22] Yeah, you can blockchain technology off the net. I mean, it’s not only used for cryptocurrencies, but also for everything. For example, it’s used in shipping goods around the world. It’s used in insurance policies. It’s starting to be used by banks to run their back offices and things like that. So, the blockchain technology is all about making sure that a succession of transactions is secure because they are encrypted and form a chain and they cannot be altered in any way. Therefore, their proof against fraudulent activity, provided the codes are properly linked and solved, they’re secure.
Neil Koenig: [00:03:03] So, could a kind of bystander access some of this material? I mean, could a member of the public say, I want to watch a blockchain transaction conducted by third parties? Could they just log in somehow?
David Roche: [00:03:19] No, no, no. Otherwise, we’re going to have a lot of people watching the transaction who will be wondering how to undo the transaction or steal this bit of that bit. So, no. But you can look on YouTube ad infinitum and see all sorts of ways and illustrations of how transactions work. But essentially, they are just a succession of transactions which are encoded, and which are linked to each other and are secure because they are linked to each other and approved by a chain of people involved in those transactions. And that chain cannot be broken, altered, or downloaded by anybody else unless the whole the whole chain of people involved agree to do so. And their security rests on that characteristic.
Neil Koenig: [00:04:07] Blockchain technology underpins crypto or digital currencies. The most famous example is Bitcoin, but there are lots of others aren’t there?
David Roche: [00:04:18] There are hundreds. There are different sorts of cryptocurrencies. There are ones which are linked to an underlying currency or asset value. They’re called stablecoins. And we can go on and on. But there’s no shortage of cryptocurrencies to invest in.
Neil Koenig: [00:04:39] Do you know anything about how they began?
David Roche: [00:04:42] Well, they began by a single person whom we still are not entirely sure of his identity. He created a blockchain for the first time. And then blockchain was used by Bitcoin to create a currency, which is limited in terms of its supply. There are only so many Bitcoins that can be so-called produced or mined as it is called, and then setting this up to work in a blockchain which a huge amount of people called miners, but they’re owners of computers who solve these the cryptography problem, or the characteristics of each transaction and get paid for doing so in Bitcoin. They get paid in Bitcoin. And the controversial side of Bitcoin is, of course, that it uses huge amounts of power, which is usually is made by fossil fuels to make the process work. In other words, the mining process that of setting up the blockchain and solving the various stages of cryptography in the blockchain, are extremely energy intensive and therefore much frowned upon and banned in China.
Neil Koenig: [00:06:12] Are all digital currencies affected by this energy problem?
David Roche: [00:06:19] Less so, when you when you go to currencies like Ethereum, which is the second biggest to Bitcoin, then they’re based upon a concept of shared value, which is complicated to explain, but it really means that the people who are involved in the chain are invested in the chain, and the way in which the security is provided in the chain is by their investment in the chain. So, that if they were to become in any way fraudulent, they would lose their own money. So, you have a system which is more based on trust than the pure cryptography, though it involves that too, but it uses a lot less energy.
Bitcoin and Ethereum
Neil Koenig: [00:07:08] Bitcoin and Ethereum and lots of these other digital currencies we’ve been talking about are products of the private sector, but now the public sector is starting to get involved, isn’t it?
David Roche: [00:07:22] In a big way for several reasons. One is because, of course, the public sector in particular central banks, but also governments, are mindful of our wellbeing and therefore they think that cryptocurrencies may make the whole financial system and economy unstable. The second factor is that, of course, cryptocurrency takes away from their power. If you’re not in charge of the national currency but there’s an international currency which replaces it, then you no longer have the tools of monetary policy. You no longer have the tools or control over your citizenship and what they do with their assets, that you did under the good old system of fiat currencies, where if you didn’t like, for instance, people taking money out of the country, you could simply put on exchange controls. You can’t do that with cryptocurrency. So, there are two factors. One is altruistic. They’re intensely worried about our well-being, and the other is that they’re intensely worried about themselves losing power.
Neil Koenig: [00:08:28] You mentioned this phrase Fiat currency, which one starts to read about these days because of its a way of describing the sort of traditional currency that we’re all used to. So, what’s the difference between a crypto or digital currency and a fiat currency?
David Roche: [00:08:46] Well, a cryptocurrency is created by supply and demand within the context of encrypted assets, which does not touch the sides of state institutions. It’s secure or insecure, based upon transactions between private individuals. Now that may include your best loved investor or your pension fund. I’m not saying that these are all teenagers wandering around the streets staring at their mobile screens or the. But what I am saying is that this is not a phenomenon in which the state is involved. If you come to a fiat currency, then it is entirely the state which is in the cockpit. Let me explain why it’s flying this plane. A central bank issues currency in one form or another. It can be a real currency that you could put in your pocket, or it can be simply a credit to a commercial bank. That commercial bank can lend that currency on. Let us assume for one single second, that the commercial bank wants to lend all the currency, that fiat currency that it got from the central bank. Then it would reserve a portion of that currency to safeguard against future losses. Let’s say kept five percent, then it would lend the other ninety five percent.
David Roche: [00:10:09] If the whole banking system worked by reserving five percent, keeping five percent but lending on everything else, then the original amount of money lent given by the central bank to the system would expand by 20 times. That’s how the arithmetic works, a fiat currency, and it is entirely within the banking system. And of course, you can obtain it in either real cash form or as a credit to your account by transacting with your banking system. But you can see that the chain of control runs from the government licensing the central bank, the central bank having a monopoly of printing money. That money is transferred to the banking system, and the banking system causes it to expand by lending called the fractional reserve system because it keeps a fraction of it in reserves and the rest it lends. And that is how your money is created. When you have a cryptocurrency, you don’t even touch the size of that. You have a cryptocurrency because you have transacted with the issuer of the cryptocurrency who the private sector, to give you a credit of so many Bitcoins or Ethereum or whatever. That’s the difference.
Neil Koenig: [00:11:25] Are any of these currencies today, either fiat currencies or cryptocurrencies backed by anything in the real world, any assets out there? I mean, I’m thinking back to the gold standard, which used the term, yes, in the 20th century.
David Roche: [00:11:43] The quick answer to that is no. What backs a fiat currency is the full faith and credibility of the government and the central bank, which basically means they promise to print more. They have an undertaking that they will preserve the value of the currency, but that really, history shows, is not always a consistent virtue. So, the answer is really no. If you go into the Bank of England with your pound note and ask for its equivalent in gold, you will be probably locked up, but you certainly won’t get your equivalent in gold. There was a time when you would. That was when currencies were issued against an asset. Now it is issued only against the faith of the government. So: What gives the credibility to a fiat currency? The answer is: What gives the credibility, is that you believe in it. It’s a circular argument. If you didn’t believe in it, then the currency would have no value. And if you go to Venezuela, you’ll find out what that means. So, that is how it works. And the argument for cryptocurrency is that, if you look at fiat currency, the credibility is based on a network that you accept from me, somebody else, except it from somebody else, and the whole system works because people believe in it. Once the cryptocurrency achieves a similar network, why will it not be similar credible? That is why I think that without being, you know, a rabid supporter of this or that or being highly invested myself in this stuff, which I’m not why I think the cryptocurrency can rival fiat currency because it can achieve the networking effect, which is now also the basis of fiat currency because fiat currency cannot be changed into any real asset.
Neil Koenig: [00:13:43] Ok. This is a good point at which we can just remind ourselves of what we use currencies either digital or fiat for.
David Roche: [00:13:54] There are three purposes to fiat currency or cryptocurrency. The first is to measure a value. You use your currency to measure the value of what you’re buying or investing in. The second is to transact. I give you the currency and you give me the cat. In the case that I’m buying your cat, God forbid. And the third is to invest. Let me let us say that I wish to invest money in something that will go up. I don’t want your cat. I want to own something which will help me to retire before I drop dead, which is becoming increasingly difficult if you rely on state pension funds. So, it’s a vehicle of investment. So, it does the three things measures values, it transacts, and it is an investment asset.
Neil Koenig: [00:14:47] Ok, so we’ve managed so far throughout history without digital currencies. Why would anybody want one now?
Fiat Currencies and the Lack of Trust in Them
David Roche: [00:15:00] Because they don’t trust the existing fiat currencies. They see what is going on between central banks and governments, governments spending money they don’t have and central banks providing governments with the money to do so. They see an instinctively that this is a debasement of fiat currencies. They also see the rise of government control. And not only is it the CCTV cameras everywhere. If the government controls currency, then the government can control how you spend it. And it also can keep increasingly tabs on you through how you behave. So, the second issue is that people want to get out of the way of governance, and that was a function which was given to the individual by having the anonymity of cash. If you went around the place with 500-euro notes in your pocket, you could basically do what you like. There was no way the government could trace what you did. But now there are no more 500-euro notes. Now why is that? And the answer is because the growth in demand for traditional cash anonymity has been rising outside of the countries which issue it. So, you have to go to the Russian mafia to find out why they all love for euros. Now, what digital currency does is it increases the anonymity of cash. Because people in all sorts of activities, they might be legitimate, they might be antisocial, or they might be just plain, downright criminal or fraudulent. They can achieve anonymity using digital cash. That’s one reason, but it’s not the only reason. The perfectly legitimate reason is that people do not trust fiat currency anymore, and above all, they do not trust the people in charge of the fiat currency, be they central bankers or ultimately, governments.
Neil Koenig: [00:17:12] So, trust is the central theme. Whether it’s fiat currency or a digital currency?
David Roche: [00:17:24] Yes, it’s a network of credibility. It only has value because you believe it has value. And the guy next to you believes it has value, so you can transact with him or pass it all to him. That’s the only value really, which is embedded or underlying, or underpinning is perhaps the best word about fiat currencies and crypto cards. The cryptocurrency’s network is a lot smaller and therefore it is a lot more volatile and immature.
Neil Koenig: [00:17:54] What is the scale of digital currency at the moment? How does it compare?
David Roche: [00:18:00] Oh, it’s fractional. It’s around three trillion dollars, which is a lot of money if I lay it out in your front garden. But in terms of the global economy, it’s still very small. And within that, you can then carve that up into all sorts of different types of digital currency because there are many different types, not just name brand names, but there are digital currencies. As I mentioned earlier, stablecoins and so on, which are different in nature, and they’re only about 10 percent of the totality of cryptocurrencies. So, this is very much a young, inchoate type of phenomena. It’s not anywhere near maturity yet, and I think if you imagine maturity, then you have to say, well, if it goes in that direction and gets to that sort of spread, then it will have the network, which will give it the credibility of a fiat currency. Otherwise, I don’t see the logic.
Neil Koenig: [00:19:04] How fast is it growing?
David Roche: [00:19:08] It’s probably increasing by 20 times over two years.
Neil Koenig: [00:19:14] So that is quite fast?
David Roche: [00:19:15] Oh, yes, that’s quite fast!
Neil Koenig: [00:19:18] And the authorities, the traditional central bank authorities, are worried about it?
David Roche: [00:19:23] Oh, very well. First of all, you’ve seen an absolute war. You’ve had every worthy central banker in the world and government minister in the world dumping their load on cryptocurrencies. Now, that’s what caused Bitcoin earlier this year to almost halve in value because they expressed which is perfectly legitimate, that these things are very volatile, that there are a lot of people involved in them who don’t know what they’re doing. They’re clueless and they’re taking risks. They said that the volatility of the currency could destabilize the entire economic system and financial system of countries and that there were also, of course, quite a lot of nasty people involved in this, who probably belong behind bars. All of which are true. But there is one other truth. And that is these currencies rival those established incumbent politicians and central bank’s power because it replaces it. And that is what they’re really worried about. And of course, you can see that they’re not actually against the idea of a cryptocurrency because what have they done as a principal reaction? They have created, or are creating or, are studying creating a central bank digital currency, which is in a world full of acronyms? It’s called a CBDC.
Neil Koenig: [00:20:59] How do they work?
David Roche: [00:21:01] Oh, well, now they can work two ways, but the big thing is the state is in the cockpit. So, they issue the cryptocurrency, which is held in an e-wallet, which is basically like having a portfolio of e-assets by a bank, a commercial bank. That’s one way of doing. Then the commercial bank will lend or give or provide access to the currency for its clients, be they corporations or individuals. So, you have a two-step process. Then there’s another alternative, which is a one step process. Now what that does is that everybody, you, me and possibly even your cat has its own account at the central bank. So, that you bypass the commercial banking system, and the central bank puts money into your account and your e-wallet is fed. And of course, borrows and gives back money e-currency that is, digital currency directly to the central bank. So, you have two parallel systems.
Neil Koenig: [00:22:11] Does this offer any advantages to central banks and governments?
David Roche: [00:22:17] Well, the obvious one is if they don’t do it, they won’t be issuing currency to as many people, or I have the same control over monetary supplies before because digital currency is not going to go away and the growth rates we’ve mentioned, it’s going to continue to eat into their traditional role as monetary policy makers and controllers. So, the answer is, they’ve got to do something. But the other thing which is down the road, and which is feeding cryptocurrency, the private sector version of what the central bankers and governments are trying to do is this, if the central bank can track what’s in your wallet, they can also track you. Whereas if you own a private sector digital asset, that can’t. So, let’s take a country which we will not name because of course, nobody is quite as nasty as that, which has a central bank which issues digital currency, central bank, digital currency CBDC to its commercial banks or, directly to its citizens. This gives it two things. One is it can find out, either through its commercial banks that it controls them, which in the country we’re talking about, which is, of course, non-existent, it does. It can find out exactly what these people are spending their money on, where they’re going or what they’re doing with their time. Did they contribute to any sort of nasty political organization, etc.? But the other thing is they can control you.
David Roche: [00:23:55] And the reason they can control you is because let us say I am the chief honcho of one of these nasty economies. And I find that the economy has an output gap, which basically means is not producing enough stuff to make the people happy and therefore to keep me in power. That’s called an output gap. Then what do I do about this? And the answer is I give my central bank digital currency to you. And you have to spend it on the goods and services that I want you to spend it on by such and such a date or the value of that digital currency in your account will fall to zero. Now the way to really run this, is to make sure that your son in law owns the factory, which makes the things like spaghetti, for example, that I want you to consume more of. I want you to eat spaghetti six times a day. So, I’m going to give you money to buy spaghetti. And if you don’t buy the spaghetti, you’re going to not have the money anymore because it will fall to zero. And if you do spend the money, then my son in law will get richer. And if I ever become not the honcho of this nasty state, then the son in law will support my lifestyle in a Caribbean Island.
Neil Koenig: [00:25:10] So, are there any other advantages for governments and central banks from their kind of digital currency?
David Roche: [00:25:21] Well, it would ensure stability of the financial system, and that is something which individuals may like. In other words, you won’t wake up one day and find that you’re the value of your Bitcoins with whom you with which you want to buy your breakfast has suddenly fallen by 30 percent, so the cost of your breakfast has gone up 30 percent. Because a central bank digital currency is a national currency. It’s just in an e-currency format, but it is pegged one to one against the national currency. So, for example, an e-CNY, which is the digital currency in China, is effectively a CNY. It is a one-to-one relationship. It is not going to change, and the central bank of the government sits behind this. So, this not only creates stability in the financial system, it can’t be damaged by the volatility of cryptocurrencies, but it also has an advantage for people in that they can be sure that the value of their digital currency will be the same tomorrow in local currency terms as it was yesterday.
Neil Koenig: [00:26:36] It’s the difference, though, between a traditional fiat currency issued by a central bank and a central bank digital currency just really a question of semantics or theology?
David Roche: [00:26:53] No, I think the ability and convenience of a central bank digital currency is much greater than a fiat currency because you being at least hypothetically in the UK, are used to a sophisticated society in which everybody, nearly, has a bank account. But don’t forget that most of the world’s population does not have a bank account. Now, the advantage of a digital currency is you can store it in your phone. It’ll be stored in a digital account, so it’s not going to disappear if you lose your phone. But the reality is that it brings people into the banking system, gives them the flexibility, and allows for transactions in ways which are fiat currency really does not.
Neil Koenig: [00:27:37] Also, because presumably you’ve got this intermediary that’s necessary for operating a fiat currency electronically, in the sense that you’ve got to have an account with a commercial bank, haven’t you today on the whole to transact electronically?
David Roche: [00:27:57] Well, yes, but it will become no. Because as the network grows, I mean, let’s assume for a minute that you live only in a world with only fiat currency. But it is today’s world. How many times have you had to reach into your pocket to get cash to pay for anything? 90 percent of the time you don’t. You never touched the money. Well, cryptocurrency, if it does become a medium of transaction, will eventually get to that state. It’s not there at the moment. There are things I can buy and transact for in cryptocurrency on my phone. In fact, I actually paid a lawyer acting for me on a real estate sale in Ireland with cryptocurrency, phone to phone the other day, because every time I send a bank transfer, the Irish banks lost it. So, the answer is today, yes, it’s hard to go around the place paying for everything in cryptocurrency, but what you’re asking me is, is there a future on the horizon when you will be able to use cryptocurrency without having to run to a bank and change your Bitcoin or your Ethereum into a national currency? And the answer is yes, there is. That really depends on the acceptance of two parties to whatever transaction you’re talking about accepting a cryptocurrency. I think that will come but it has to come as a result or be the cause of greater stability in the value of cryptocurrencies. Otherwise, they are not great transactional tools, and they are also still very slow. At least Bitcoin is very slow. Ethereum is not that slow.
Neil Koenig: [00:29:45] You mentioned stability and there’s another new development, stablecoins, what are they? How do they work?
David Roche: [00:29:54] Well, stablecoins are actually cryptocurrencies, but they are fixed against another asset. Let me explain how that works. Most Stablecoins are in the US, and most of them are fixed against the US dollar. Now what that means if you want to have a stablecoin, so you want to make sure that you have a crypto asset, a cryptocurrency, but you don’t want the valuation to go up and down like “a yo yo like” Bitcoin does, or other cryptocurrencies do. So, you invest in stablecoin. You go to a stablecoins issuing company and you say, I want 10 of your Stablecoins and you give them, let’s say for simplicity, 10 dollars. They have to keep those 10 dollars in a US currency asset. Normally that will be cash, or it will be a money fund or, some form of U.S. currency short term asset, an asset in which you can get your dollars back quickly, some hold bonds. There are a few which hold another form of cryptocurrency like Bitcoin, and I wouldn’t describe that as being a stablecoin, but it is rated as stablecoins. So, essentially, what happens is you get a cryptocurrency, you hand over us dollars to the company issuing you with the cryptocurrency. That company has to invest those ten dollars in a short-term US money asset, which ensures that your currency in crypto is backed by a U.S. dollar asset, which means that if you want to get your money back, you can go and cash it in for a US dollar. Theoretically, there are a lot of problems with this concept, and of course, because it has been discovered that a few of these companies didn’t have the assets, after all, and so on and so on and so on. Again, we’re dealing with very immature types of currency. We’re a long way from leaving the Wild West.
Neil Koenig: [00:32:17] So, what are the pros and cons of these different offerings in the market?
Central Bank Cryptocurrencies
David Roche: [00:32:24] Well, the pros for a central bank cryptocurrency are that it gives you stability. You’re basically owning the national currency, whatever that Central Bank is responsible for. And it won’t vary in value. So that’s the pro. The negatives are that if these powers to issue cryptocurrency do not get you out of the way of the risk that central banks will debase the national currency anyway, so they can debase it through issuing too much of it or, the government spending too much money and borrowing too much of it from the central bank and I can go on. So, that’s the plus and the minus of a central bank digital currency. The plus and the minus of a private sector digital currency. Is, one transactability. Can you really go around the place like you do, with a UK bank deposit and spend and use this money without ever actually seeing it in a cash form, coin are banknotes? And the answer is it’s still very difficult. It’s slow. And the fact that the value of cryptocurrency is highly volatile, means the price you paid for something yesterday is not necessarily the price you’re going to pay tomorrow. So, that’s a big disadvantage. The advantage is the flip side of everything I’ve said about central banks. You get out of the way of government, and you get into a currency, which is determined purely on the basis of transactions. And as we started in the beginning, blockchains of transactions between people who agree to do so. And that currency is then out of national power and people like it for that reason now. They can like it for good reasons. In other words, there can be sound reasons for them to be like that. Or they can be criminals.
David Roche: [00:34:20] It can go from one extreme to the other, but that’s why they do it. There is another factor which we have not dealt with and that if you’re an overseas worker and you want to transfer money from, let’s say, Hong Kong, and you want to send it to the Philippines. Well, if you go to the traditional means of doing this bank transfers or Western Union. They frankly will rip your guts out. They may charge you something like four or six percent to make these transfers. With a cryptocurrency, you can do it for nothing. You basically can do it at market exchange rates for that particular cryptocurrency. And if your people at the other end of this transaction can pick up that currency, then they can either take it to a Philippines bank, or whatever they can spend it. The transact ability as low. So, from the point of view of foreign workers and foreign transfers, that’s a big advantage. There is also another advantage. If you happen to be a happy inhabitant of Venezuela, then would you prefer to have bolivars (national currency of Venezuela) or have cryptocurrency? Well, it’s obvious. So, effectively what you do is when the national authorities, or the national dictatorships have destroyed the economy and destroyed the currency, if you own crypto, to the extent that that asset is as I say, is not, you know, going through the floor or something like that, you probably will end up a lot better off. So, the lack of trust and shall we call it Tin Pot states, is another way in which cryptocurrency can serve a useful social purpose.
Neil Koenig: [00:36:10] Why should we care about this development? How big an impact is it having on the global economy, on global politics at the moment? And how much impact do you think it’ll have in the future?
David Roche: [00:36:26] Well, there are a lot of chapters in that particular book. I don’t, for instance, think that creating a digital euro, or a digital yuan renminbi Chinese currency will replace the US dollar just because the Fed is being quite slow in developing a central bank digital currency, certainly compared to a lot of other central banks. But approximately 80 central banks worldwide are studying the possibility of introducing their own digital currencies. I don’t think that changes the status of the dollar as an international reserve because essentially, the central bank digital currency is the national currency, and if people don’t want to hold it now, why would they want to hold it, then it makes no difference. However, if you are a powerful state like China, you can make sure that the Thai tourist industry accepts your e-Y digital currency because you’ve got the power. It’s the same for Belt and Road initiatives. You can lend the money in in digital yuan and make sure that the people building the railways in parts of Africa will repay the loans in digital yuan. You have no U.S. dollar exposure there. So, you can force through a certain increase in your global power as a reserve currency because of your political power. And that might raise the share of the yuan in international transactions and reserves and financial flows from two to eight percent. But it’s not going to take the dollar down from 60 percent to six. That’s just not how it’s going to happen because to do that, both sides of the transaction have to agree. We don’t want to have the dollar anymore. And you know, people have been saying that since Valéry Giscard d’Estaing described the US dollar as the privilege, exorbitant, the exorbitant privilege, and it still is.
Neil Koenig: [00:38:39] So, the geopolitical impact of digital currencies is possibly muted, or at least for the foreseeable future. What about other effects? You know, for consumers, it’s a risky thing for consumers, isn’t it?
David Roche: [00:38:57] It’s a risky thing, particularly for naive investors. People bring me up who are kind of not traditional investment managers, or investment people and they say, Look at Bitcoin, it’s sixty-five thousand dollars, should I get in now? And the answer is no! Not because I’m making a judgment about whether it’s going to be fifty-five thousand dollars or one hundred and sixty-five thousand dollars in a week. Without that judgment, it’s because you don’t know what you’re doing. And that is a point has been made by financial regulators and central banks, and it is correct. There are an awful lot of people involved in putting money in this, and I think consumption is the least of the risks for the individual. It’s the investors who are putting their, you know, their ability to survive in old age or even maybe tomorrow morning at risk by going into assets they do not understand, which are not regulated at present and for which you have no failsafe, no backup from the government. I mean, if your favourite bank on UK High Street goes belly up, you can be quite sure. That no matter how thick your government is and by recent standards, it can be pretty thick. They are not going to let depositors lose. So, I think that is what you forego by going into a crypto asset as an individual, and that is a side of it, which I think will take quite a while, the growth in the network, the growth, and the credibility to overcome.
Neil Koenig: [00:40:45] Finally, are there any real advantages, any lasting advantages from this development? I mean, do you think it might in the end be a way of influencing governments and central banks to behave more responsibly?
David Roche: [00:41:00] I don’t think the growth of digital currency will stop central banks and governments behaving in accordance with how the architecture of the global economy has changed since the pandemic. I think the pandemic is now on course to become a permademic, not something that topples the world. But it never goes away. So, it is rather like driving a car with your foot on the brake. It may not bring the car to a halt. But it will create a nasty burning smell and limit your speed that I think is where we’re going on the pandemic. Ok, now what does that mean? It means we’re stuck with big governments, big debts, the need to pay social transfers in order that people who are less fortunate than others can have a decent life. And the only way to keep that going is to keep the cost of capital, the cost of debt below the rate of inflation. In other words, you stop credit markets, and you stop central banks from repricing the cost of capital because otherwise the size of government, the size of its debts are unsustainable. Right? Do I think the cryptocurrency can bring this to a screeching halt? I don’t think so. I think other factors can bring it to it can collapse as a system. It can move towards a Sovietization of the system, where we don’t really have any growth, where the state pretends to pay, and we pretend to work sort of scenario with lots and lots of money printing.
[00:42:57] But it’s kind of a grey world, which is low risk, but which is very low efficiency, low productivity, low growth. You can go that way. Now those things can lead to other things like the transfer of power from the state to people on the street and from democracy to some form of rather nasty dictatorship and so on. But I don’t think cryptocurrency is the key mover. I think it is the architecture of the economy which we have inherited from COVID. I think that’s important. If we wanted to look at what a cryptocurrency does and does not do for us. To be fair, it gives people a greater degree of freedom to either act like idiots, or to get out of the way of the state, which is encroaching increasingly on not only their ability to transact, but their ability to invest. So, you have to say if you value freedom, then cryptocurrency can be a part of that freedom. The negative side is, that there is fraud involved in this. It’s still the kind of Wild West like the creation of the dollar in the 1830s, when every state has its own dollar, and they were fluctuating like mad.
It is All Dependent on How it is Used and Applied
David Roche: [00:44:22] It’s the same sort of thing. It’s at the same degree of maturity. But because people will continue to want to avoid the state and the state control, which state sponsored cryptocurrency will give, then I think you can say that this is a major plus from having a private sector digital currency because it limits the power of the state, and it provides anonymity to people who will lose that anonymity as a state increasingly moves towards things like central bank digital currency. So other advantages? Yes, the disadvantages we know. They’re volatile. They’re immature. They have not achieved the network which they need to be a real rival to fiat currency, but I say yet. And they involve fraudulent and criminal activity. And most of all, because it affects the most people, they can destabilize the financial system and the economy for everyone. So, there is a balance sheet. But again, like any other technological innovation, it’s misuse like Facebook for hate speech and so on. Its misuse is horrific. But that does not say that the tool of itself is horrific. The tool can be good or bad, depending on how it is used and how it is applied.
Neil Koenig: [00:45:50] David Roche, thank you very much.
Credits: ideaXme interview in audio, video and text format by Neil Koenig.
If you enjoyed this interview you might also enjoy Neil Koenig’s interview with Keith Clarke, CBE, Decarbonise or Get Left Behind.
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