Asia | Bitcoin & Crypto | China | Politics & Geopolitics
This is the third of my notes on digital currencies. Although I had not intended them as such, these notes have effectively become an annual survey of the evolving use of digital currency. In 2017, the focus was on the Bitcoin bubble and how it might evolve (badly). In 2018-19, it was on the emerging second generation of private sector digital currencies – stablecoins.
In 2020, the focus returns to the first-generation digital currencies. This is due to post-COVID fears of inflation in traditional major currencies caused by the widespread de facto adoption of modern monetary theory (MMT). Focus has also been on the emergence of central bank digital currencies (CBDC). China has benefitted in both areas: it had the best COVID crisis among the major economies, and it is leading CBDC development.
V1: Bitcoin’s Second Wind
The price of bitcoin has returned to its highest level since early 2018, when the 2017 H2 bubble was bursting (Chart 1). The bitcoin price fell by 74% through 2018. It then rose sharply through 2019H1 before collapsing again through mid-March 2020.
The most recent inflection point up since then corresponds to the surge in the monetary base in DM economies. Economic policy post COVID has become extraordinarily easy in the DM world, with both monetary and fiscal policies wide open. DM budget deficits in 2020 will be in the 10-20% of GDP range (with the US at the higher end). These deficits are being entirely financed through monetary base expansion – a policy approach advocated by MMT. Early in 2020, the US administration warned that the policies that Bernie Sanders was advocating in the Democratic Party primary campaign – which included a massive increase in government spending on health care and social support – would lead to runaway inflation. Within weeks, the COVIC crisis had caused them to adopt the very policies that Sanders was talking about phasing in over several years. In these circumstances, it was unsurprising that Bitcoin enjoyed a burst of investor interest as a hedge against the risks of both higher inflation and the potential for losses on DM government bonds – the traditional safe asset in the system. Since mid-March, bitcoin has outperformed gold, an alternative hedge (Chart 2).
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Regarding the Shenzhen pilot case, PBOC couldn’t use AliPay and Wechat Pay wallets because of the nature of the DCEP distributed – the e-money had a time constraint, i.e. if it were not spent with a certain time, it expired. Once spent, it becomes fungible with the regular e-money already in existence. And yes, PBOC confirmed that AliPay and WeChat Pay will continue to play important role in the DCEP project. Not sure what you mean when you say “The response to the tool was poor”.