What Does Jerome Powell’s Second Term Mean For Crypto?

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In this issue

  1. Cryp­to and Jerome Pow­ell: More of the same?
  2. El Sal­vador: Vol­canic concerns
  3. China’s dig­i­tal yuan: Brazen scammers

From the Editor’s Desk

Dear Read­er,

Many of you in North Amer­i­ca will this week be cel­e­brat­ing Thanks­giv­ing. Many may be feel­ing a lit­tle less than thank­ful, how­ev­er, as cryp­to prices remain range-bound, down from the gid­dy highs of last month.

Some may also be dis­cour­aged by the reap­point­ment of a cryp­to-skep­tic to the top job at the Fed­er­al Reserve. Jerome Powell’s sec­ond term at the helm of the U.S. cen­tral bank means the Fed will retain a boss whose dis­like of cryp­tocur­ren­cies is well-documented.

Yet there’s a bright spot for cryp­to enthu­si­asts. The Fed’s first order of busi­ness as the year draws to a close will be grap­pling with accel­er­at­ing infla­tion, com­pelling it to push up inter­est rates, which should boost the appeal of cryp­tocur­ren­cy as a hedge against a depre­ci­a­tion of the U.S. dol­lar and oth­er fiat money.

And although the re-nom­i­nat­ed Fed chief has been cau­tious about the devel­op­ment of a dig­i­tal dol­lar, Lael Brainard, picked as the Fed’s vice chair, is well-known for her sup­port for a U.S. cen­tral bank dig­i­tal cur­ren­cy (CBDC), which could help still-hes­i­tant investors over­come lin­ger­ing doubts about cryptocurrencies.

No cryp­to-hes­i­tan­cy has been on dis­play in the Bit­coin test-bed nation of El Sal­vador, which this week announced the cre­ation of “Bit­coin City,” a built-from-scratch town fund­ed by BTC bonds and run on geot­her­mal ener­gy, which is also used to pow­er some Bit­coin min­ing in the tiny Latin Amer­i­can country.

Nor have we seen any­thing like hes­i­ta­tion at China’s cen­tral bank as it con­tin­ues rac­ing ahead of the West — and, most notably, far ahead of the U.S. — in devel­op­ing its dig­i­tal currency.

How­ev­er, Beijing’s e‑CNY jug­ger­naut has recent­ly encoun­tered an unwel­come twist on its road to roll­out, with some fraud­sters attempt­ing to cash in as the new cur­ren­cy gains traction.

The prob­lems are minor. But as the cryp­to mar­ket feels a touch of win­ter, any set­backs for China’s new CBDC may at least give Amer­i­can dig­i­tal cur­ren­cy enthu­si­asts dis­cour­aged by the U.S.’s lack of progress on a home­grown CBDC a sense of Schaden­freude, if not actu­al grat­i­tude, just in time for Thanksgiving.

Thanks to our dear read­ers, as always.

Until the next time, 

Ang­ie Lau,
Founder and Edi­tor-in-Chief
Forkast.News


1. Time for thanks — or more Fed turkey?

President Biden Announces His Nominees For Federal Reserve Chair And Vice Chair
U.S. Pres­i­dent Joe Biden is opt­ing for con­ti­nu­ity at the Fed with his reap­point­ment of Jerome Pow­ell (left) to the top job and Lael Brainard (right) as his sec­ond in com­mand. Image: Alex Wong/Getty Images

By the num­bers: Jerome Pow­ell — over 5,000% increase in Google search volume. 

Jerome Pow­ell appears cer­tain to serve a sec­ond term as chair­man of the Fed­er­al Reserve, hav­ing been nom­i­nat­ed for the U.S. cen­tral bank’s top job by Pres­i­dent Joe Biden. The pres­i­dent nom­i­nat­ed Lael Brainard as the Fed’s vice chair, putting an end to spec­u­la­tion that she would take over the reins from Powell. 

  • Under Pow­ell, the Fed cut inter­est rates to near-zero in March last year as the Covid-19 cri­sis began to unfold. Powell’s chair­man­ship of the cen­tral bank also just last month saw a 6.2% year-on-year surge in the con­sumer price index, the biggest increase in infla­tion in more than 30 years.
  • The specter of infla­tion has gained increas­ing­ly wide­spread recog­ni­tion as hav­ing helped to buoy Bit­coin as a store of val­ue and an infla­tion hedge

Forkast.Insights | What does it mean?

Under Pow­ell, the Fed­er­al Reserve’s stance on cryp­to — and the cre­ation of an Amer­i­can CBDC — has been dis­tin­guished by an atti­tude of caution. 

He has demurred on devel­op­ing a native dig­i­tal cur­ren­cy, leav­ing the pri­vate sec­tor to do much of the leg­work, and has tak­en a dim view of the cryp­to indus­try, say­ing ear­li­er this year that it was lit­tle more than a “vehi­cle for spec­u­la­tion.”  

Mean­while, Chi­na has sprint­ed ahead with pilot pro­grams and is expect­ed to roll out a ful­ly-fledged ver­sion of its dig­i­tal yuan dur­ing the Win­ter Olympics, which Bei­jing is host­ing in Feb­ru­ary. It has also banned all oth­er cryp­tocur­ren­cies and cracked down on the entire dig­i­tal asset indus­try as part of its efforts to ensure the pri­ma­cy of its CBDC. 

But as Pow­ell pre­pares for a sec­ond term at the Fed, he appears to be soft­en­ing his stance on cryp­to. In recent com­ments on sta­ble­coins, he appears to have shift­ed from hos­til­i­ty toward a pref­er­ence for reg­u­la­tion. He has even described them as akin to unreg­u­lat­ed mon­ey-mar­ket funds or bank deposits — a marked depar­ture from his pre­vi­ous char­ac­ter­i­za­tion of cryp­tocur­ren­cies as pure­ly spec­u­la­tive assets. 

What­ev­er one’s views on cryp­tos in gen­er­al and sta­ble­coins in par­tic­u­lar may be, Pow­ell is right to be cau­tious about let­ting com­plete­ly loose an indus­try that so far has regard­ed reg­u­la­tion as more like a noose than a leg up.


2. What’s that sulfur smell?

El Salvador Mines Bitcoin Using Energy From Volcanoes
El Salvador’s announce­ment of a Bit­coin bond to fund the devel­op­ment of a city at the foot of a vol­cano has seen the val­ue of the country’s debt tum­ble. Image: Alex Peña/Getty Images

By the num­bers: Bit­coin City — 5,000% increase in Google search volume

El Sal­vador, the first coun­try in the world to adopt Bit­coin as legal ten­der, is pio­neer­ing anoth­er world first — build­ing a devel­op­ment named Bit­coin City at the base of a vol­cano in the country’s south­east. The new city, locat­ed in the shad­ow of the Con­ch­agua vol­canic peak, will be fund­ed by Bit­coin bonds issued on blockchain tech­nol­o­gy firm Blockstream’s Liq­uid Net­work, a sidechain of the Bit­coin net­work. The esti­mat­ed cost of the project is 300,000 Bit­coins (around US$17 billion). 

  • Bit­coin City will run on geot­her­mal ener­gy gen­er­at­ed from the vol­cano, like an ongo­ing Bit­coin min­ing pilot at a geot­her­mal pow­er plant. 
  • The Inter­na­tion­al Mon­e­tary Fund has tak­en a more sober view of the Sal­vado­ran government’s plan to put Bit­coin at the cen­ter of the country’s econ­o­my, this week releas­ing a state­ment laden with warn­ings relat­ing to Bitcoin’s volatil­i­ty and risks to con­sumer pro­tec­tion, finan­cial integri­ty and stability. 

Forkast.Insights | What does it mean?

El Salvador’s embrace of Bit­coin has so far been a very local affair, with many reports focus­ing on uptake — or lack there­of — in the nation of 6 mil­lion peo­ple. That all changed with the announce­ment of Bit­coin City. 

The gov­ern­ment of Pres­i­dent Nay­ib Bukele has been on a debt-fuelled spend­ing spree that last year pushed its dol­lar-denom­i­nat­ed debt-to-GDP ratio to more than 90%, far above the low-70% range in which it had remained sta­ble dur­ing the pre­vi­ous five years. The val­ue of that debt plunged on news of the planned Bit­coin bond issuance, falling to its low­est lev­el ever, as investors pon­dered whether the bond sale would cut the coun­try off from a financ­ing deal with the Inter­na­tion­al Mon­e­tary Fund. 

Bukele’s gov­ern­ment had been in talks with the IMF over US$1.3 bil­lion of financ­ing, but it appears that it has all but closed the door to any such deal through its deci­sion to bet its future on Bitcoin. 

“Giv­en Bitcoin’s high price volatil­i­ty, its use as a legal ten­der entails sig­nif­i­cant risks to con­sumer pro­tec­tion, finan­cial integri­ty, and finan­cial sta­bil­i­ty,” a spokesper­son for the IMF said on Mon­day. “Its use also gives rise to fis­cal con­tin­gent liabilities.”

The chal­lenge ahead for El Sal­vador is whether it can keep its econ­o­my afloat dur­ing its tran­si­tion to Bit­coin, or whether cred­i­tors will sim­ply pull the plug on the country’s ambi­tious cryp­to experiment.


3. Chancers in China

China Issues New, Hard-to-forge Yuan Notes
Fraud­sters in Chi­na appear to have picked a fight they can’t win in tak­ing on the all-pow­er­ful party-state’s dig­i­tal cur­ren­cy. Image: Chi­na Photos/Getty Images

China’s e‑CNY roll­out has run head-on into the real­i­ty of a get-rich-quick men­tal­i­ty, with police in Inner Mon­go­lia hav­ing bust­ed a tele-scam involv­ing more than 8 mil­lion yuan (US$1.25 mil­lion). Author­i­ties also claimed that the sus­pect had been involved in e‑C­NY-relat­ed mon­ey laun­der­ing for an over­seas fraud ring. 

  • “The entire point of CBDC is to crack down on fraud­u­lent mon­ey con­veyance. Why crim­i­nals aren’t aware of that yet is sur­pris­ing to me,” Shang­hai-based fin­tech con­sul­tant Richard Tur­rin told Forkast.News. “All Chi­nese crim­i­nals should be aware that e‑CNY is the last place you should put stolen money!”
  • At least sev­en dig­i­tal yuan-relat­ed fraud cas­es have emerged across Chi­na, includ­ing in Xin­mi, Jiang­su, Fujian, Guizhou, Hubei and Hunan.

Forkast.Insights | What does it mean?

In the 18th cen­tu­ry, Eng­lish philoso­pher Jere­my Ben­tham came up with a rev­o­lu­tion­ary design for a prison that allowed a sin­gle per­son to observe all of its inmates simul­ta­ne­ous­ly. He called it the Panop­ti­con, a name derived from the Greek word “panoptes” mean­ing “all-see­ing.”  

China’s dig­i­tal yuan — e‑CNY — is Beijing’s attempt to cre­ate a dig­i­tal ver­sion of an all-see­ing eye. Lit­er­a­ture on the state dig­i­tal cur­ren­cy has made it abun­dant­ly clear that it’s designed to be a tool for the author­i­ties to use to observe and stamp out activ­i­ties they deem to be ille­gal or unde­sir­able. In Bentham’s day, the Panopticon’s guard house was to be shield­ed by one-way glass, pre­vent­ing pris­on­ers from know­ing whether they were being watched or not, thus forc­ing them to behave as though they were under con­stant, per­va­sive surveillance. 

It seems, how­ev­er, that China’s dig­i­tal yuan isn’t quite hav­ing the same effect, which could mean one of two things — either that the Com­mu­nist Party’s total­iz­ing sur­veil­lance is work­ing per­fect­ly, catch­ing crim­i­nals in the act, or that the country’s crim­i­nal fra­ter­ni­ty is unfazed by it. That would high­light a more fun­da­men­tal prob­lem — that crim­i­nals keep engag­ing in crim­i­nal behav­ior, even when they’re being watched. 

Ben­tham nev­er saw his inven­tion come to life. Instead, in his lat­er years, he cri­tiqued pow­er and con­trol and how prone it was to abuse more broad­ly. Had he seen China’s 21st-cen­tu­ry solu­tion to total sur­veil­lance, he might be ask­ing those same questions. 

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