Will China Disrupt The Monetary System With A Cryptocurrency?

Will China Disrupt The Monetary System With A Cryptocurrency?

Daniel Lacalle 16/11/2019 8

A state-owned cryptocurrency is, in itself, a contradiction in terms. The main reason why citizens want to use cryptocurrencies or gold is precisely to avoid the government or central bank monopoly of money.

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For a currency to be a world reserve of value, widespread means of exchange and unit of measure, there are many things that need to happen, but the first pillar of a world reserve currency is stability and transparency.

China cannot disrupt the global monetary system and dethrone the US dollar when it has one of the world’s tightest capital control systems, a lack of separation of powers and weak transparency in its own financial system.

The U.S. dollar is the most traded currency in the world, and growing according to the Bank of International Settlement. The Yuan is 4% of the currency trade. This is because the financial balance of the US is the strongest, legal and investor security is one of the strongest in the world, and the currency and capital markets are open and transparent.

Unfortunately for China, the idea of a gold-backed cryptocurrency starts from the wrong premise. China’s own currency, the Yuan, is not backed by either global use nor gold. At all. China’s total gold reserves are less than 0.25% of its money supply. Many say that we do not know the real extent of China’s gold reserves. However, this goes back to my previous point. What confidence is the world going to have on a currency where the real level of gold reserves is simply a guess? Furthermore, why would any serious government under-report its gold reserves if it wants to be a safe haven, reserve status currency? It makes no sense.

The Yuan is as unsupported as any fiat currency, like the U.S. dollar, but much less traded and used as a store of value. As such, a cryptocurrency would not be backed by gold either. Even if the government said it was, and deployed all its reserves to the cryptocurrency, what confidence does the investor have that such backing will be guaranteed when the evidence is that even Chinese citizens have enormous limits to access their own savings in gold?

China’s gold reserves are an insignificant fraction of its money supply. Its biggest weakness comes from capital controls, lack of open and independent institutions safeguarding investors and constant intervention in its financial market.

China’s Yuan may become a world reserve currency one day. It will never happen while capital controls remain and legal-investor security is limited.

A version of this article first appeared here

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  • Alex Turner

    Libra 2.0, but from a model that Facebook wants to further develop when it grows its own cryptocurrency towards mainstream adoption.

  • Ben Ellis

    Exciting and terrifying.

  • Adam Walker

    Wow, I guess Cryptocurrency adoption is coming sooner rather than later

  • Mike Pritchard

    Thanks for covering this Daniel

  • Rikki Woods

    Quite informative !!

  • Paul Gibson

    If it's state run, it's not true crypto.

  • Mike Lane

    Great article Daniel..thanks for sharing

  • Steve Broadhead

    Very well thought out

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Daniel Lacalle

Global Economy Guru

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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