China’s new digital currency is a Trojan horse “disguised as a payment mechanism,” says Erik Bethel, a global finance professional who served as the U.S. representative to the World Bank. “There are a lot of ways that the Chinese government could use this as an instrument of surveillance, tying it to their social credit score, and ultimately keeping an authoritarian regime alive, in effect, forever.”
As the Chinese Communist Party rolls out China’s new digital yuan, it could soon strongarm other nations to adopt it, Bethel says.
And he argues the digital yuan could eventually threaten the U.S. dollar’s role as the world’s reserve currency, with devastating consequences for America and the rest of the free world.
Jan Jekielek: Erik Bethel, such a pleasure to have you on American Thought Leaders.
Erik Bethel: Great to be here. Thanks.
Mr. Jekielek: Erik, we’re at the Eve of the Olympic games in Beijing. We’re also just a few days away from China adopting its new digital yuan, which is, they say, going to revolutionize everything. And many people including yourself are a bit concerned about it. But before we go there, why don’t you tell us, why are you interested in digital currencies in the first place? And frankly, just the whole China economic picture.
Mr. Bethel: I began my journey in digital currencies when I was serving as the U.S. representative at the World Bank. I found that what the World Bank was doing was deploying close to $100 billion per year to help get people out of poverty. But only a fraction of that money was actually getting to its intended end beneficiary through perhaps a number of intermediaries or what’s diplomatically referred to as leakage in certain governments.
I thought to myself, what a better way to eliminate leakage and middlemen and corruption, but technology. And because of my position at the World Bank, I was able to invite people to come and speak to us ranging from Vitalik Buterin, the founder of Ethereum, to folks from R3 Corda and Hyperledger and the who’s who of cryptocurrencies and blockchain.
With the intention of taking World Bank deployments of capital and blockchain, enabling them to allow everyone to see in the ledger where the money was going, how it was being spent and so forth. That project is still currently at the World Bank. It’s ongoing. It just takes a little bit of time.
So that’s what initially got me into looking at this. I think if done right, it could be very liberating, but if done poorly, as in the case of China, it could be very bad.
Mr. Jekielek: And you’re no stranger to the Chinese reality. You actually lived there doing finance related work.
Mr. Bethel: My three kids were born there. Yes.
Mr. Jekielek: Well, tell me a little bit about that, your background and…
Mr. Bethel: I’m actually a product of the U.S. State Department. My dad was a career foreign service officer and he met my mom who was a Cuban foreign national working at the embassy in Havana in the 1950s. I grew up in Miami and partially in Latin America and learned to speak English actually later on in life. I grew up speaking Spanish until I was seven or eight.
When I finished my tour of duty as a Naval officer, my first job was at Morgan Stanley doing Latin America work. They deemed that I sort of looked like a Morgan Stanley banker, but I could speak Spanish. So they threw me in that arena.
Now, along the way, I was asked to join a private equity fund in China and I thought, “Hmm, this is interesting.” I went to China for the first time expecting to see a version of Mexico City or Sao Paulo. But what I saw in China was actually something far greater, which was a billion and a half people working, getting ahead and growing their economy. I saw a sense of optimism. I said, “This is going to be very interesting to see how this evolves.”
This was in the mid 2000s. My wife and I moved there and we spent the next seven years living in Shanghai. Our three kids were born there and we learned a great deal about the Chinese culture, obviously the language, the food, and I grew very fond of the Chinese people. Having said that, I’m not as fond of the Chinese Communist Party.
Mr. Jekielek: So that’s kind of the China side, and I’d love to build on that a little bit. I think I want to get you to talk about how you see the Chinese financial reality today. Before we go there, I want to talk a little bit about this Chinese digital yuan that’s about to be deployed. Right?
Mr. Bethel: Let’s begin with what is a digital currency. People have fanciful notions of what it is or what it isn’t. And it’s conflated with a lot of different things. So a central bank digital currency, which is what we’re going to talk about here, is not a cryptocurrency like Bitcoin, right? Nor is it a so-called stable coin like Tether. It’s not Venmo. It’s a legal obligation of a central bank. It is legal tender just in digital form.
So if you were to take a dollar, physical dollar bill and reduce it to its digital equivalent, that’s what that is. It’s an IOU of the central bank—something like 90 percent of the world’s GDP. Their central bankers are looking into a digital form of their own physical money. And the one that’s furthest along is drum roll, China. And they’ve been at this for eight years.
The final point I’ll make on this is that this is an inevitability, as far as I’m concerned. Just like cassette tapes became CDs, that became Spotify, there’s going to come a point in time where we’re going to look back on coins and bills as super anachronistic, right? Remember yesteryear? And we’re going to see them in museum pieces when we actually had pieces of paper. So it’s inevitable.
Now, back to China. During the Olympics, they’re going to launch their digital currency. This is a surveillance tool and it’s disguised as a payment mechanism. It’s going to allow the People’s Bank of China, their central bank to look into, peer into everyone’s purchasing history. So you might say to yourself, “Hey dude, whatever, I’m just buying Chardonnay and sushi.” But what if you’re not, right?
What if you’re an ethnic or religious minority in China? What if you purchase a Bible in China? There are hundreds of millions of Christians living in China in house churches. Maybe they give money to their pastor. There are a lot of ways that the Chinese government could use this as an instrument of surveillance, tying it to their social credit score and ultimately keeping an authoritarian regime alive in effect forever. And that’s very frightening.
Mr. Jekielek: And just very briefly, because there may be a few people out there who are not familiar with China’s social credit system that’s active right now. If you could just explain that.
Mr. Bethel: Yes, this isn’t a science fiction episode, a Black Mirror episode. This is reality where right now you have a credit score similar to what you’d have in the United States, right? If you want to get a mortgage, you look at your credit score.
But imagine everything in your life, whether or not you jaywalk, whether or not you pay your taxes on time, everything you do is processed and you’re given a rating and that rating determines whether or not you can travel or not.
So tens of millions of people in China over the last several years have been denied travel to visit their relatives because their social credit score wasn’t high. Now, imagine if you are a dissident. For all practical intents and purposes, you don’t exist. So that is the social credit score. Now, tack on the money element, and you can see how worrisome it could be for people.
Mr. Jekielek: And you don’t exist. Do you mean by that, that you have to try to pretend you don’t exist because you don’t want that system to be picking up your activities? What did you mean by that exactly?
Mr. Bethel: Well, you can be canceled. Let’s assume you want to get married. Do you think someone is going to want to marry me if I have a low credit score? That means I can’t really effectively get a good job. I’m not eligible to be a Chinese Communist Party member. Perhaps, I can’t buy a house. Perhaps, I can’t travel. So for all practical intents and purposes, I’m canceled, unless I tow the line.
Now, all of this is very worrisome. But you might say to yourself, “Hey, what happens in China stays in China. Their value system is different than ours. Why should we care?” Right? I can understand that perspective. But my concern is that they’re very good at exporting, especially their technology.
If we’re trying to ban TikTok and Huawei, imagine a technology stack that leverages the infrastructure that they’ve built for financial repression. Imagine the digital Chinese currency being exported to authoritarian regimes around the world. Think of Venezuela in this hemisphere, or Cuba, or North Korea, or Iran. Do you not think that the Nicolas Maduro regime in Venezuela would relish the opportunity to have a digital currency where their government, the Chavista government can peer into what the opposition is doing? Of course, they would.
To make matters even worse, sort of the cherry on top of the sundae, right now 80 plus percent of foreign exchange transactions are denominated in U.S. dollars. So Venezuela’s oil is sold in dollars. Zambia’s copper is sold in dollars. Saudi Arabian oil sold in dollars. Basically, every commodity is sold in U.S. dollars, which is one of the reasons, one of the main reasons, in fact, why the U.S. dollar is the world’s reserve currency.
Now, what if there was a means by which the Chinese technology for digital currencies could then be replicated in Venezuela? What if this technology were seamless such that Venezuela could sell and settle its oil and denominate it in digital renminbi? So what happens? You have to sort of think long term. It’s not going to happen immediately, but what happens over the next five to 10 years?
So if China’s allowed to propagate their digital technology for their digital currencies around the world, it could be very problematic from a national security perspective. And it’s the thing that nobody’s thinking about right now. There are a few people that are thinking about it, but not very many.
Mr. Jekielek: So what are the implications, again, just sort of briefly of this social credit system being attached to this entire financial structure of the digital… Because presumably that’s what they want to do. They want to integrate everything into this one currency, right?
Mr. Bethel: I’ll start at the high level and go down. For Xi Jinping and for the Chinese Communist Party, the operative framework through which the lens through which they view most things is control. You’ve got a billion and a half people, things need to be under control. One of the ways to do that is to have a social credit score that’s tied to the financial infrastructure like how you spend your money.
So that’s what’s going to happen in China, but it’s my concern that China is going to export this technology around the world. It’s going to hurt the cause of freedom. It’s going to prop up authoritarian regimes, and it could potentially undermine the U.S. dollar as the world’s reserve currency.
Mr. Jekielek: And there’s this other element here, right? Because we agree that any Chinese digital currency is going to have the entirety of transparency available to the state’s security apparatus instantly. And that’s the thing I keep thinking about that literally everything you will do, financially anything that your app can pick up through motion, through sound, through video, whatever, on the phone that you have, all of it will get fed into this giant AI system, which they’ve been perfecting and will change some of your ratings and people will make decisions.
Mr. Bethel: It’s going to change the character of an entire population. So you don’t do things or you do things based on how it affects your credit score.
Mr. Jekielek: I’m remembering Minority Report. Pre-crime basically. I can imagine an AI like this, just looking at statistics and saying, “Hey, look, I think this person might be predisposed to some sort of rebellious behavior. Maybe we should just take them off the street early before that happens.”
Mr. Bethel: Right Now, there are some that might say that China has come out with a number of statements saying that privacy will be embedded in their digital currency. Okay. Well, China also said that they wouldn’t interfere in Hong Kong’s domestic political issues. China also said that it would not build islands. It would never militarize the South China Sea.
So you can take them at their word, or you can look at the Communist Party of China’s track record. So they can claim that it’s not going to be used for repression and they can claim that it’s going to be completely private. But I leave it to others to judge.
Mr. Jekielek: It seems like even today, I mean, we want to talk about, for example COVID statistics. I’ll just pick that one because there seems to still be a lot of people out there today in our institutions, universities, health institutions that accept the COVID statistics from the Chinese regime at face value. It seems reasonable to me. So there does seem to be a lot of credulity despite the track record, which you’re outlining.
Mr. Bethel: I think the reason for that is that individuals tend to mirror. So they assume that if I’m transparent and honest that other people are as well. Right? I think that this is particularly prevalent in the Western world where people are generally nice and generally open about things and they don’t realize that there are actors throughout the world that don’t have the same value system. So we project, if they’re providing statistics to us, it must be real.
Mr. Jekielek: I wanted [to] go into what digital currency… Because you’re saying it’s inevitable that what digital currency would look like here and how would it be different? Because I’m sure a lot of people watching this show right now are thinking to themselves, “Well…”
Mr. Bethel: “I’m already digital. I already use Venmo, whatever.” Right?
Mr. Jekielek: Yes. Any digital currency, but also some of them are thinking that. I think others are thinking, how could a central digital currency be anything, but exactly what you just described—the Chinese regime is deploying? Frankly, I’m thinking that to some extent at the moment, okay?
So I want to touch on that, but before we go in there, because of your interest in China and your understanding of the realities of the Chinese financial system, I want to just talk a little bit about what is the reality today because I’m hearing everything from… I think it’s nine percent growth or something like this to the economy is a house of cards. It’s going to collapse any moment. And of course, reality is not necessarily on either of those ends, but how do you see it?
Mr. Bethel: In a nutshell? Beats me. I say this because the IMF came out with a report today or yesterday saying that the Chinese economy was looking to grow at 5.7 percent in 2022. And now it’s 4.8 percent. So these are wild shifts in percentages of growth. So who really knows?
Do we have Price Waterhouse auditing China’s books? No. We reflect our knowledge of China’s economic situation based on a lot of the statistics that come out of China itself. And certainly Wall Street has some thoughts on this and certainly the IMF does, but honestly, does anyone really know? I certainly don’t.
Mr. Jekielek: Okay. I guess the question is, do you think they’re overstating their success or they’re understating it? What would you expect?
Mr. Bethel: China has lowered the reserve ratio recently in the last month and a half or so and it has also lowered interest rates. So when you lower interest rates, and you lower the reserve ratio, the reserve ratio in a nutshell is how much do all the commercial banks have to keep in reserve at the central bank. Think of it as a rainy day.
When you lower that and you lower the interest rates, what the Chinese central bank is doing, and the finance ministry is, it’s encouraging banks to lend more money. Now, you do that because your economy isn’t doing so well. So when you tighten on the other hand, that’s a different story. But what we are seeing in China is a broad concern about where things are.
You have the second largest or one of the largest real estate companies in the world, Evergrande, that was a catastrophic, and I mean catastrophic failure. You’ve got the domino effect of other real estate companies looking at the same. You’ve got a very draconian leadership at the top of the Chinese government looking to squash industries at its whim, right? One day it’s the online education industry. Another day, Jack Ma disappears.
So you have all of these factors and that lack of stability is not good for China’s economy. So maybe the economy grows 4.5 percent this year. Maybe it grows three percent. Maybe it grows six. Who knows?
Mr. Jekielek: Given this instability. Typically, what you hear from industry leaders, business leaders—instability bad, stability good. Right?
Mr. Bethel: Unless you’re a hedge fund manager and you live on instability.
Mr. Jekielek: Right. Interesting point. Why are a lot of funds investing like crazy in China still this very day given the instability that you’re describing?
Mr. Bethel: Honestly, look, it’s a cognitive disconnect. And I think it could be a function of a number of things, right? So when you have the heads of Blackstone or Bridgewater or whomever. Like let’s take Ray Dalio. Ray Dalio has a very long history with China, going back many decades. And I think perhaps… I can’t speak for him, but perhaps he’s had such a long history in China and he’s made so many friends that it’s unfathomable to him that China would be going down the wrong path.
So there’s a confirmation bias, perhaps. I don’t know. I can’t speak for him. Maybe there’s an element of fear that you just saw Jamie Dimon a month and a half ago saying that JP Morgan would outlive the communist party, and then the next day frantically looking to retrace his steps and apologize profusely. So there’s an element of fear. And then there’s another element of greed.
So it’s hard to find a Western company or fund that is not either taking money from China, building a product, making stuff in China or trying to sell to the Chinese. And then on top of it all, the fund managers, CEOs, et cetera, they have a very short attention span and a short window, right?
It’s quarterly earnings or I’m not sure what the lifespan of the average CEO is, but let’s just work with China, kick the can down the road to the next CEO. And after three, four years of making a lot of money, I’ll retire to Florida and not worry about it. I’m insulated from all of this. So there’s a general level of shortsightedness.
Mr. Jekielek: Let me ask you this question, because a number of people who are very familiar with the financial realities of China have told me that once one of these large funds or companies, whatever invests over there, it’s virtually impossible to actually get that money out. It exists on paper, so to speak, it’s an investment. It’s a lot of money. Ostensibly it’s there. But to actually try to convert it back is not something that is easily done.
Mr. Bethel: There’s a closed capital account. Yes, that’s right. And the presumption is what they’re doing with the excess profits is that they’re reinvesting it in China.
Oh, there’s one thing I forgot to mention. Fund managers allocate resources on the basis of what’s known in the industry as an index. The main index that everyone has heard of is called MSCI. I’ll spare you what the acronyms mean, but it sprung out of Morgan Stanley several decades ago.
The index, think of it as a pie chart and the pie chart organized geographically. So China was a very small sliver of that pie and over time it’s increased. Fund managers are rated on how they compare, their performance compares to the index. So if the index has China’s share of the pie increasing, they have to allocate money to China and that’s trillions of dollars.
So I think the index providers need to really think through what it is that they’re doing because China is no longer at this point, an emerging market and in the Morgan Stanley MSCI emerging markets index, money that’s going to China could otherwise go to other emerging markets.
Mr. Jekielek: Well, they seem to be doubling down and adding more for a number of these funds anyway. Again, why shouldn’t they do that?
Mr. Bethel: At the end of the day, capital untethered from a moral compass is amoral, right? It just goes wherever there’s money to be made. I think when Matt Taibbi described Goldman Sachs more than a decade ago, the vampire squid sticking its blood funnel into anything that smells like money. This is exactly what capitalism is without a moral conscience.
So do we forget or do we consciously forget that there is human organ harvesting in Xinjiang. Is it a convenient thing that we forget? Do we even know that it exists or do we just want to make money in China and we don’t really care? And that’s a very sad thing to say about capitalism. Having said it, I’m a capitalist, just so you know. Well, let the person watching this, I am capitalist.
Mr. Jekielek: So that makes me think of what Chamath Palihapitiya said recently that these sorts of concerns like you just voiced are maybe not at the top of the list for many people in these kind of positions.
Mr. Bethel: I can comment on that. He is actually a brilliant guy. And while I may not always agree with some of his political beliefs, he’s a very smart guy. On the All-In Podcast, which is probably one of the top podcasts in the country, he said something to the effect that, “Xinjiang and the Uyghurs don’t fall on my top list of concerns.” And for that, he was crucified by the Twitter mob. And perhaps rightly so.
But one of the other podcast members, David Sachs alluded to something in that podcast where, by the way, Chamath did apologize to be clear. He said something that I thought was very poignant, which was, did Chamath expose an uncomfortable truth, which is if this doesn’t rise, if the genocide of an ethnic minority in China doesn’t rise to a high level of importance, the people that are going to Walmart tomorrow buying stuff made in China, do they not care?
Are we boycotting the Olympics? Are we all watching the Olympics or should we not? So people go about their daily lives. They might understand that something is going on in Xinjiang but to them it’s really an abstraction rather than something that’s real. And that’s an uncomfortable truth that I think we all need to deal with. And then other people try and morally equivocate.
They say, “Well, gosh, we work with other countries that are doing things that are equally as bad.” But I don’t think anything rises to the level of a million people in detention centers, forced organ harvesting, sterilization and erasure [and] a complete dismantling of an entire ethnic group. I don’t think people are realizing what’s going on. Again, it’s like an abstraction somewhere.
Mr. Jekielek: I’ve had a number of the people on the show discussing this issue. Arguably, there’s three genocides happening in China as we speak, not even just one. On that side of things, I think most people are… I would hope most people are agreed, but you would think that there would be broad sharing of the information, right? Across the society when a country you’re working with is doing. I think what we agree based on the UN convention. Genocide is the worst thing that humans can do to each other.
You would think there would be some kind of broader societal information about this, right? But the idea of never again, which was the idea of that convention is still here. We just passed Holocaust Memorial Day just the other day. I can tell you that that question still is kind of front and center for me.
Mr. Bethel: Well, there’s not a lot of information coming out of Xinjiang to begin with. The media is obviously not allowed to go there. The news reports aren’t coming out as frequently or as fulsomely as they should. Just today or yesterday, the UN Human Rights Commissioner, Michelle Bachelet, who was the former Chilean president, said that she was going to go to Xinjiang. The Chinese spokesperson said something to the effect of she’s welcome to come to Xinjiang, but not to investigate.
What is she there to do? Like eat shish kebab? But she’s going to go to Xinjiang, a place where genocide is taking place and she’s going to play basketball? I mean, what exactly is her purpose for being there? So there’s not a lot of information coming out of China and it’s really sad.
Mr. Jekielek: So this is a natural place to look back at the Chinese digital yuan, and then we’re going to take a little further into the digital dollar potentially. It’s precisely those technologies, which are being used in their most extreme way at the moment in Xinjiang that you’re concerned about. Right? So what is it that could prevent exactly these kinds of technologies from being deployed in a Western society? Especially one where there’s a heightened fear of censorship, of government control and so forth?
Mr. Bethel: So philosophically one of the beautiful things about blockchain and decentralization is that any kind of centralized network, whether it’s a currency or social media or whatever is a central point of corruption and also a central point of failure. We have social media companies who have a centralized means of eradicating any thought or comments that are antithetical to that company’s belief system. So they’re able to steer conversations in ways that benefit their own political leanings.
I’m not going to comment on their political leanings. I just think that you need to have freedom. In the same way, digital currencies, if done… Let me back up. Digital currencies have done well that could be a tremendous asset to society. You can at one level eradicate, or at least eliminate to a great degree, corruption, fraud, money laundering, criminal activity. You can do direct cash transfers to citizens. Instead of writing them a COVID check, you can actually zap money right into their digital wallet.
You can increase financial inclusion to the tens of millions of people. I think there are like 7 million Americans that don’t even have bank accounts, let alone the billions around the world that don’t have bank accounts. There’s financial inclusion. There’s a means for governments around the world to help collect taxes and eliminate fraud. So all of those things are good.
On the other side of the ledger, are we willing to balance all of the good for a lack privacy? And that’s really the concern that I have. Imagine a world where my transactions were open to the government and let’s assume that a future U.S. government is pseudo benevolent in the sense that, “Well, gosh, in the interest of my own health, should I be eating as many ice cream sundaes? Maybe my allotment for ice cream sundaes or porterhouse steak or wine, maybe that’s too much. And my future digital money had an allotment. What if I drive an SUV and in the interest of saving the planet and in the interest of climate change, maybe I shouldn’t be able to fill up my car.”
So I say that that’s pseudo benevolent because it is for the good of humanity and for my own good, but why is the government telling me what I should or shouldn’t do with my own life? And that’s a concern that I have. So whether it turns out to be real or imagined, time will tell. But I think that citizens need to think very carefully about how a digital currency could affect their personal lives.
Mr. Jekielek: So you’re a member of this digital currency chamber of commerce. Is it even possible to create some kind of a central bank digital currency, say the dollar that would actually maintain privacy, anonymity, prevent a government from, instead of zapping you money, taking your money in an instant. Or even an AI doing it just because something didn’t look good in the other stats that it was collecting.
Mr. Bethel: Yes. Look, I think the short answer is yes. I’m not going to get into the technical details of it, but there are account based and token based systems. In a token based system, you can be fully anonymous. And I think that an intelligent future digital dollar project would include a spectrum where over here you’re fully private and fully anonymous. And over here it’s fully traceable.
Now, there’s something in the middle. I understand and recognize that you have to balance the needs of privacy with the legitimate law enforcement needs of you don’t want people doing million dollar drug deals anonymously on their digital wallets, obviously.
So I think in the future, policymakers should consider that within a band of, let’s say zero to $10,000, whatever you do in your digital wallet is private. And from 10,000 to whatever, it’s pseudo anonymous. And then from that point on, it’s open for policy for the fed or whomever treasury to look at. So these things can be done. The question is how do you get all of the people around the table that matter to focus on intelligent designs for these digital currencies?
Mr. Jekielek: And that’s the thing. So right now the Fed is asking questions, right?
Mr. Bethel: Uh-huh (affirmative).
Mr. Jekielek: Or they want to know what do people think about it? You say it’s inevitable. So that’s interesting, right? Let’s assume you’re right. Let’s assume. So now that probably a lot of viewers and myself are thinking, “Wow, that’s really scary, right?” Because of this potential level of control, because of these, well, people will just say that it’s private and say that, but actually there’s always a back door where the government could at any moment just flip the switch and suddenly everything becomes the Chinese digital yuan so to speak.
But what are you telling them? Because I know you are telling them something. What is it? What are you telling them?
Mr. Bethel: Part of the problem that we have is that there are many chefs in the kitchen. It’s unclear who is calling the shots on the future of digital currency. So think about all the actors that you have. You have the Fed, the SEC, the CFTC, the OCC, that’s the comptroller of the currency, the banking regulator, Capitol Hill, the private sector, which includes the banks and the credit card companies. And everybody is opining on this, but nobody’s leading the bull by the horns.
The Fed had a report that came out and it was fine. It was a little underwhelming in the sense that it was supposed to have come out early to mid last year and it took nine months and everyone was anxiously anticipating what the Fed would say. And it didn’t say very much. You could take a couple of interns and give them a Red Bull over two weekends and have them watch crypto podcasts, and it would’ve been the same.
My recommendation, if I were able to move the needle on this issue at a senior policy level, would be to have the Fed and the treasury create what’s called a sandbox, a technological sandbox, and allow lots of different providers to work in that sandbox and test out their technologies. And the regulators can watch all of this take place and they can make intelligent decisions on what works, what doesn’t work over a period of time.
So allow technology companies to experiment in this very controlled sandbox and the regulators can be a part of the process. But to take a hand-fisted approach which is maybe some member of Congress says, “Oh, we’re never going to do that, or we’re definitely going to do that,” I think would be unwise.
Mr. Jekielek: The Chinese digital yuan is ostensibly going to launch very soon.
Mr. Bethel: Yes.
Mr. Jekielek: And actually, maybe you can tell me about this because the Chinese regime actually has all sorts of ways to coerce countries that it has, let’s say strong ties to through various means to actually potentially adopt the digital yuan. And some of them may want to, for the reasons you described earlier, like Venezuela.
Mr. Bethel: If I were to frame the context, I would begin with this. In 2013 or so, China embarked on its signature foreign policy initiative. It was called Belt and Road. Sometimes it’s called One Belt One Road. Sometimes called BRI, whatever. It’s got many names. But it basically works like this: create links and infrastructure from China arteries to different countries around the world. To date, there’s an estimated, I don’t know, $800 billion of money that’s flown into Belt and Road. No one knows the real number.
So most of Africa has received enormous amounts of money from China in the form of debt. So much debt that many countries will never be able to pay it off. And this is ironic because we did a humongous debt relief program in the early 2000s called HIPC, the United States, the World Bank, and a lot of the multi-laterals canceled out all of the debts to many emerging market countries.
So they began in the [year] 2000 with a balance sheet that was very healthy. And over time, what’s happened is that they’ve taken loan after loan after loan from China and now they’re falling over because they can’t pay their teachers and police officers because they have to pay off the Chinese.
So what China has also done is that they’ve attached collateralized obligations to these loans, such that countries like, take Sri Lanka have had to give China assets when they can’t repay their loans. Now, China has, because of all of this, they have an inordinate amount of leverage over most of the emerging market economies. It’s not inconceivable to suggest that China could strong arm a lot of these countries. Say Zambia is, a case in point, that owes China more money. It’s on the eve of falling down financially.
It’s not inconceivable for China to say, “Look, shave off a couple billion dollars from what you owe us and let us set up your digital Zambian dollar. Oh, and by the way, your copper exports, you don’t have to settle those in U.S. dollars anymore, you can settle them in digital yuan.” So this will happen around the world. And I think policy makers in the U.S. need to pay attention. This is really important.
Mr. Jekielek: What are the implications of, let’s not call it broad adoption, but let’s say widespread adoption, at least geographically of a digital yuan starting in a few weeks.
Mr. Bethel: Starting in a few weeks and then let’s extrapolate that to the next three years. In three years time, let’s assume you have 25 nations around the world that are using the Chinese digital currency technology stack. What are the implications? Particularly if these are countries that are exporters of commodities, when the dollar is no longer used for a lot of these exports, what does that mean for the reserve currency status of the dollar? How do we afford our current account deficits, our trade deficits? So these are questions that we need to answer.
Mr. Jekielek: What does it actually mean for the U.S. to have this reserve dollar status? And why is that threatened by, let’s say 25 smaller countries adopting the digital yuan as a settlement mechanism?
Mr. Bethel: Well, these are very complicated macroeconomic issues and I’ll try and distill them. I’m sure you’re going to have macroeconomists that are going to call you and say, “This guy doesn’t know what he’s talking about.” So I’m going to distill this to a simple form.
Current account deficits, other way or trade deficits generally aren’t good. If you’re a country, say for example, Germany that has a trade surplus, you expect your currency to be strong—simplistically speaking.
If you’re a country like, pick a Latin American country that has a massive trade deficit, your currency should be weak. The United States on the other hand, defies all of those rules of logic. It’s an outlier. We have huge trade deficits and yet the dollar remains stable. Why is that? And the reason for that is because every commodity on earth, I think with the exception of hazelnuts that are traded in Turkish lira will table that. But every commodity on Earth is traded in U.S. dollars.
So the dollar is the de facto currency, the medium of exchange, if you will, for 90 percent of all global commodities, right? So it creates an artificial demand for the U.S. dollar. So we can just keep printing dollars. To date, it hasn’t hurt us. But if the dollar goes from being 80 percent of this global FX trade to 70 or 60 or 50 then what happens? What pressure does that have on the U.S. dollar? How does it affect our ability to continue to print money?
If we can’t finance certainly our fiscal deficits and our current account deficits, in my opinion, the social contract that we have between government and citizens breaks down. And if you think the Antifa riots in Seattle or Portland were bad, imagine a world where we can’t finance veteran payments, social security, basic things that our citizens demand of their government. So it could be very bad.
Mr. Jekielek: What do you see at this point as the way for the U.S. and other free societies to fend off the digital yuan?
Mr. Bethel: I think it would be in the U.S’s best interest to get together with like-minded countries that believe in freedom and believe in privacy, and to create a common set of standards that promote freedom and privacy while obviously abiding by the law enforcement regulations that you need so that people don’t do illicit activity using their digital currency.
But a group of nations that gets together, think of them as a constellation of countries that abide by a certain set of principles that include the fact that governments won’t surveil citizens, that they won’t without a warrant that they won’t take money out of their citizens digital wallets.
So I think setting a common framework and a common set of ethical and moral standards is at the very least something that should be done.
Mr. Jekielek: Okay. So when it comes to common standards, I get it. When it comes to innovation, I completely get it except that in three years time, you’re telling me that the Chinese Communist Party might actually strong arm 25 countries or some number of countries into adopting the digital yuan or control coin as I’ve been calling it in my mind, as we’ve been talking here as it’s reserved currency, and that could actually threaten the U.S. position, which I trust infinitely more than the Chinese Communist Party using its controlled technology stack in all these places.
Mr. Bethel: Right. So my observation on that point is that the digital renminbi will very likely be used in foreign exchange transactions where you’re settling oil or copper, or cobalt, or soybeans, whatever the case may be. But the Chinese technology, the technology that powers the digital yuan, that technology is portable. You can go anywhere. So if you wanted to create a Ugandan shilling using the Chinese technology, it will still remain the Ugandan shilling, but it’ll be the Chinese tech that powers that.
And in the case of certain countries that can’t monitor this technology themselves, I’m certain that Beijing would be happy to host it in a cloud somewhere in China. So my concern from a National Security perspective is that now China has access to the payments of millions of individuals around the world, not just in China, but it extends that power to other places.
We’re already seeing that with Huawei. Huawei is being used as a surveillance instrument in dozens of countries, which is why we banned it.
Mr. Jekielek: Right. So if Americans, let’s say, now need to use the digital yuan to do settlement in some of these countries where it’s become a kind of quasi reserve currency for those countries, because China demands it, right? The Chinese regime demands. Is that technology now being used on Americans and people in other free societies?
Mr. Bethel: Of course, the technology is going to be used on Americans starting in a few weeks, right? Olympic athletes are all being asked to download the digital renminbi app. Inevitably, let’s fast forward several months, every American multinational working in China is going to have to use a version of the Chinese digital technology, the digital currency technology.
Let’s fast forward even further, a U.S. multinational, let’s say, an oil company working in an African nation will have to use eventually the digital currency of that nation, which might be powered by China. How can that be good for us?
Mr. Jekielek: But what do we do here? Because this is all sounding incredibly ominous to me.
Mr. Bethel: Well, I think at the very least, we should educate ourselves on what’s happening. To put our head in the sand and to assume that in a very arrogant, in a fit of hubris to decide that, “Well, we’re the United States and we have the U.S. dollar. Please, all this other stuff is nonsense. It’s not going to happen.” Let’s get our head out of the sand and let’s be a little bit more humble about our position in the world, especially when it comes to finance.
Clearly, I understand that we are, by far, the world’s largest financial market and that the transaction volume, whether it’s the U.S. bond market or the currency markets heavily favor the U.S. dollar. It’s going to take a long time for us to turn that system and move it in a different direction. Let’s educate ourselves, policy makers in particular, on what is happening, number one.
Number two, I don’t necessarily think that we can compete with a Chinese digital renminbi by being more like China. So let me underscore that point. I’ll even repeat it, right? The more like China we become, the less trustworthy we are. So people are going to say, “Well, if I can do the digital dollar and that’s going to be a surveillance tool or the Chinese E-yuan, and that’s equally a surveillance tool, what’s the difference?” Right?
So I think if we’re going to compete on something, if we should compete on privacy, on security, on the transaction speed, on settlement. I mean, if you think of a currency as an instrument of competition, what are the things that that currency has that make it competitive? And if we try and mimic whatever China is doing, I think we lose.
Mr. Jekielek: What you’re making me think of here is how important the messaging and the sharing of this information is because you can imagine that the Chinese regime is going to be going into overdrive explaining how, “Whatever the U.S. does develop is exactly the same as what we have. And you should run with us because we’re more stable,” for example, or whatever the propaganda would be. So there’s so many elements here that need to be considered.
Mr. Bethel: Absolutely. I think that if and when we develop, and I think it’s a when rather than an if, our own digital currency, I think we should be very clear with the American people and with the users of this technology, this is how we’ve designed it.
Perhaps even this might be a little bit heretical, but open source some of that technology. Open source means that you put some of the code out there for everyone to see, so that we can dispel any notion of China saying that we’re using this as a surveillance tool.
Mr. Jekielek: That’s an interesting idea, because I can imagine a lot of people being very suspect of any such developments, and they’re going to want to have some sort of confidence that they can trust this as well.
Mr. Bethel: Yeah.
Mr. Jekielek: I’m talking about Americans. I’m talking about free society people living in free societies.
Mr. Bethel: Correct. There’s going to be no adoption in the West. In China, they can mandate things to happen and they happen. And in authoritarian regimes, they can do the same thing. But in the West, I think you’re going to have to convince people, this is something that is going to be good for them. It’s more useful.
We live in an increasingly post-truth society, and trust is, I think, the underpinning of everything that we’ve been discussing. Whether it’s trust in our institutions, trust in media, trust in social media, trust in big tech. It’s been a travesty that over the years, the erosion of trust has gotten to where it is. I would like and I would hope that as we develop a digital currency, we imbue in it a value system that’s open and transparent, and that currencies are used for good and not for evil.
Mr. Jekielek: Well, Erik Bethel, it’s such a pleasure to have you on the show.
Mr. Bethel: Thank you for having me.
This interview has been edited for clarity and brevity.
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