The U.S. needs to counter Libra with government backed crypto
Never did the expression “beat them at their own game” have more importance than with the Congressional hearings regarding cryptocurrencies. Now is the time for the U.S. government to act by issuing a government-backed cryptocurrency regulated by the Federal Reserve Bank.
The move would alleviate what could potentially become one of the most significant long-term threats to the U.S. economy—the creation and ownership of cryptocurrencies by global entities.
That would make these entities the custodians and power brokers of large ecosystems and economies.
Large commercial entities such as Facebook have the resources and scale to drive mass adoption and ubiquitous acceptance of a single cryptocurrency across the globe quickly. While Facebook’s Libra is front and center with Congress, legislators are missing the biggest issue. The concerns being voiced are around the stability of these types of currencies and consumer privacy.
While those concerns are indeed important, the biggest dilemma and issue with cryptocurrencies is the implication to the U.S. dollar and economy. Commercial enterprise-issued cryptocurrencies could potentially unhinge the dollar’s global dominance.
The only mechanism to eliminate that threat is a U.S. government-backed cryptocurrency. That would neutralize the threats posed by commercial enterprises.
The commercial threat has a one-two punch. The first punch comes from mass adoption and ubiquitous acceptance, which works to devalue the dollar.
The second punch comes from a shift in power/control of economies from government to commercial enterprises.
While mass adoption of any single cryptocurrency could be a long way down the road, it is a real potential threat to global economic stability. As a cryptocurrency gains acceptance, it picks up intrinsic value. Not value in the traditional sense whereby the currency itself is worth more, but value in the sense that more people find it useful and become less dependent on hard cash and fiat currencies.
The best analogy is the adoption of payment cards and accounts across the globe. While payment cards and accounts have not completely displaced cash, they have gained ubiquitous acceptance and have continued to eat away at the use of cash and checks.
The value of the cards is very apparent in the stock prices for companies such as American Express, Discover, MasterCard, and Visa. These companies make their money on the transaction fees from the cards, and as card adoption and use rise, so does revenue for the companies.
Increasing or decreasing the number of cardholders and card use has a mirroring effect on a company's bottom line and stock price. For example, when Costco didn’t renew its contract with American Express, Amex's stock dropped and projected earnings were restated.
Similarly, the value of a particular cryptocurrency comes from utility and adoption. Having a U.S. government-issued cryptocurrency would mitigate the exposure from reducing the use of the U.S. hard currency around the world and potentially increase the U.S. backed cryptocurrency adoption.
The U.S. government would be cannibalizing its own hard cash for a virtual currency without giving up any leverage or strategic advantage. The U.S. government could gain greater adoption as developing economies move toward digitalization.
A U.S. government cryptocurrency would also be regulated and under the jurisdiction and monetary policy of the U.S. Federal Reserve System. Similar to the EU’s attempt to use the Euro to bypass U.S. sanctions with Iran, crypto currencies have global trading ubiquity.
Because a commercially issued cryptocurrency is not regulated, users can circumvent government laws and regulations.
Cryptocurrency knows no borders and is not bound by government fiduciary responsibility to a country of origin. Once a cryptocurrency becomes an acceptable form of tender to consumers and businesses alike, it eliminates the potential need for conversion to a fiat currency, such as the dollar.
Having a U.S. government backed-cryptocurrency would be akin to a fiat currency, which in this would be the U.S. dollar. This would mitigate some of the risk associated with a non-fiat based ubiquitous global currency.
Cryptocurrencies put the power and control of a tender’s value and the markets it serves in the hands of the creators. If it is a commercial enterprise, it eliminates the need for a central banking system that regulates and monitors monetary policy.
The U.S. central banking system, created by the Federal Reserve Act in 1913, was established to provide financial stability and soundness to the country. Financial stability and soundness of the U.S. economy has remained the primary mandate for the Federal Reserve System, which has independent control over the country’s monetary policy.
Commercially issued cryptocurrencies undermine that system. While commercial organizations may attempt to clearly articulate how cryptocurrencies would be backed and could be stabilized, there are many conflicting interests.
Ultimately creators of cryptocurrencies can have far-reaching direct and indirect influence over the underlying investments backing the tender. Not only can the cryptocurrency creators change the investment structures and instruments, they can pour their own capital in or out of these instruments and investments to alter the value of the currency. A U.S. government-issued cryptocurrency eliminates the possibility for commercial entities to directly and indirectly control the currency value. This neutralizes the potential conflicts of interest coming from commercial entities, preserves the government’s monetary policy role, which ultimately protects the citizenry and economy.
It would be difficult to convince anyone that cryptocurrencies are going away. Therefore, the race is on for global acceptance and dominant market share. The market leaders that drive adoption fastest will become powerful strategic global economic players and influencers. Given the implications to the U.S. dollar from mass adoption combined with the ability to control the tender’s inherent value are serious threats to the U.S. markets and economy, the U.S. government should be that leader. That is why it is time for the U.S. to win this game and step in by issuing a U.S.-backed cryptocurrency before any other entity parlays the market opportunity.