Plus, Britain’s Drastic Move to Tackle Energy Price Inflation
Welcome to your Sunday digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world.
First up this week…crypto.
This is undoubtedly a difficult moment for crypto. Prices are down across the board amid wider concerns about inflation and the likelihood of the U.S. and other major Western economies sinking into a recession.
But despite these negative near-term predictions, it’s important to remember that crypto remains the long-term future of finance.
Just ask the CEO of Mastercard.
During an event this week on the sidelines of the World Economic Forum, an annual gathering in Davos, Switzerland of the world’s richest and most powerful political and economic leaders, Mastercard head honcho Michael Miebach was asked whether the SWIFT payments network would still exist in five years.
SWIFT is one of the most widely used platforms for cross-border payments in the world. It is integral to the global economy as we currently understand it.
In fact, removal from the SWIFT network was one of the punishments levied against Russia for its invasion of Ukraine. This severe penalty effectively denies sanctioned Russian banks access to international markets.
However, despite how important SWIFT is today, it may not be long for this world.
During the Davos event, Miebach implied that SWIFT would soon be replaced by central bank digital currencies (CBDCs)—digital versions of our sovereign currencies like the dollar, but based on the same blockchain technology as bitcoin and all other cryptos.
This statement reportedly drew gasps from attendees. And later, a Mastercard spokesman tried to downplay the comments.
But let’s be clear: Miebach simply said the quiet part out loud…
CBDCs would allow for instantaneous, secure global payments. This technology is proven. It’s why we can safely send bitcoin around the world in moments, while traditional bank wire transfers take days.
So, a CBDC system would be vastly cheaper and faster than SWIFT or any of its other competitors in the traditional wire transfer space.
Both governments and major corporations know this…and they are busy preparing for it.
Miebach just let the cat out of the bag a little early. Governments aren’t yet ready to tell us that all physical money is about to go bye-bye, to be replaced by crypto versions. But this is our future.
Could all this happen within the next five years?
Considering that 80 of the world’s leading economies are studying or have already launched pilot programs on CBDCs, five years sounds about right to me.
Sticking with CBDCs for a moment…
One of the big question marks about this digital currency future is what will happen to stablecoins.
These are cryptos that are designed to track an underlying sovereign currency on a 1:1 basis, such as U.S. Dollar Coin (USDC), which tracks the U.S. dollar.
Think of them as existing, private sector versions of CBDCs.
The issue of stablecoins has come into sharp focus of late due to the collapse of the stablecoin TerraUSD, and its associated cryptocurrency Terra (LUNA).
Unlike USDC, which is backed by physical U.S. dollars or other equivalent, real-world assets, TerraUSD maintained its dollar peg through a complex algorithm centered on LUNA.
This was an innovative approach to building a stablecoin, and it was widely praised across the cryptoconomy. But ultimately the system was flawed as someone seemingly figured out how to game the algorithm to create a death spiral for LUNA.
It’s important to note that USDC and other major stablecoins like Tether have remained pegged to the dollar even amid the current market volatility.
However, the collapse of UST has caused considerable soul-searching in the investment world about the role and future of stablecoins.
Helpfully, we got some clarity this week…from the Federal Reserve of all places.
Speaking to House lawmakers this week, Fed Vice Chairwoman Lael Brainard said that a CBDC could coexist with and be complementary to privately operated stablecoins.
This is also the future I envision.
A world that allows only a government-operated digital currency would harm innovation and undermine public financial privacy. We don’t want a world in which Uncle Sam tracks every transaction we make…something that would be possible if we are forced to operate solely in a Fed-controlled crypto dollar.
Privately owned stablecoins, on the other hand, could allow us to maintain some of the financial privacy we now enjoy, while giving us access to the innovation that crypto facilitates.
That’s the future I see unfolding…a world where the government operates a CBDC, while private-sector stablecoins and other cryptos are regulated, but given space to flourish.
Finally this week, an important development related to inflation from across the pond…
Britain this week announced that it was going to levy a massive, new tax on the profits of oil and gas producers.
The energy profits levy of 25% is effective immediately and could potentially last until 2025.
The head of the U.K. Treasury, Rishi Sunak, said that oil-and-gas companies were making “extraordinary profits” amid the current commodity super-cycle, and that the levy is expected to raise more than $6 billion in the coming year.
The money is set to be used to partially fund a £15 billion relief package to assist households with soaring energy bills.
I have three hot takes on this.
First, this shows just how serious the inflation crisis is becoming. The U.K. is not the only place to make this kind of drastic move, with similar policies that cap prices or tax profits enacted in Italy and France.
Second, this kind of special levy is a seriously dangerous, ill-advised step. Yes, energy companies are making record profits. But most of these companies plan to reinvest a big portion of these profits in new exploration or infrastructure, which will help reduce bills…which will help tackle inflation. So, taxing profits will merely stifle investment in exploration.
Third, government levies and giveaways are not going to solve inflation. Flooding the economy with money is exactly the problem that caused the inflation crisis in the first place. Handouts don’t fix inflation. If government wants to spend money, it should invest in new energy infrastructure, whether renewable or nuclear.
The problem with that course of action is that it takes time. Politicians know that time is something they don’t have. So, they will do what they always do…protect their jobs above all else.
Ultimately, however, short-sighted interference with the markets in this way is likely to make the inflation problem worse, not better.
That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website.
Enjoy the rest of your Sunday.