“Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Anselm Rothschild said in 1970. The Rothschild family rose to prominence in the 18th century, controlling and establishing the financial and banking systems of Europe.

Recently, various interesting articles have discussed digital dollar, digital yuan, or Facebook’s Libra. On the list are BlockTrend’s “America uses USDC to bypass the Venezuelan Government,” PeckShield’s “USDC invades Venezuela, will USDC’s lead in digital currency continue?” and Li Lihui’s “CBDC’s cross-border spillover effects.” Also worth reading is “Facebook’s Libra to launch next January, dollar-pegged stablecoin and wallet already built,” an article that echoes the Financial Times’ report.

It is more than gratifying to see an increasing number of people interested in exploring a significant impact of Central Bank Digital Currency (CBDC): How strong currency may overwhelm weak regimes.

What is sovereignty, and what does it mean to a country?

Speaking of countries, one must inevitably mention sovereignty. So what is it? Legislation is a crucial element of it, but so is the right to issue money, hence leading to Mayer Anselm Rothschild’s saying, “Let me issue and control a nation’s money and I care not who writes the laws.” When a country possesses a strong currency, it gains the power to invade a weak regime by taking advantage of a nation’s “fiat money market share.”

In 1999 Ecuador abandoned its monetary sovereignty and officially adopted the U.S. dollar as its legal tender — yielding part of its sovereignty to the U.S. The same happened to Puerto Rico, El Salvador, Zimbabwe, Guam, the Republic of Palau, and even Cambodia.

India is also a country whose people love the U.S. dollar, but the Indian government takes active interventions to mitigate the U.S. dollar’s influence. Reserve Bank of India (RBI) has implemented capital controls, foreign exchange market interventions, extended control over domestic banks, and limited personal U.S. dollar account opening. Starting from October, India’s latest policy levies a 5 percent tax on foreign remittances that exceed 700,000 Indian Rupee a year. All these actions taken by the Indian government and RBI are meant to stop the U.S. Dollar from infringing India’s sovereignty. How will the U.S.Dollar accomplish the goal? The answer is: with U.S. banknotes. The Indian government may restrict the bank from opening personal U.S. dollar accounts but is incapable of stopping the inflow of paper money.

What is the true purpose of Central Bank Digital Currency (CBDC)?

To truly grasp the essence of CBDC, we may have to first talk about paper money. Of all the money you spend every day, how much of it is actually in the form of cash? In Taiwan, perhaps roughly 10 percent (Note 1). This shows that a substantial part of the New Taiwan dollar is already digitalized and deposited, withdrawn, registered, paid, traded, loaned, and given digitally.

If that is the case, why would the Central Bank issue digital New Taiwan Dollar, and why would there be a need for CBDC when a currency of a nation is primarily digital?

CBDC is not merely a digital currency but connotes the idea of “digital cash.” What benefits does cash bring, and why is there a need for its digitalization? For nations with strong currencies, cash can be leveraged to infringe on other nations’ sovereignty. In India’s case, the government exerts itself in banking regulations and restrictions simply to avoid the U.S. dollar from overwhelming its banking system. Yet with U.S. banknotes, America has a way to bypass banks and exert its influence on India.

With the rapid rise of virtual currency and blockchain technology, CBDC can bypass banks just like banknotes — only in a digital form. All it takes is for an individual to download an ERC20 wallet app!

How will CBDC overwhelm less powerful countries?

Dollar-pegged digital currencies such as USDT, USDC, PAX, BUSD, Facebook’s Libra, and the digital yuan issued by the People’s Bank of China are all capable of or already seizing less powerful countries. The people have the right to decide the form in which their wealth should be saved. In other words, if the people embrace these new currencies, it will be challenging for the government to make preventions. The government may regulate banks or even stop cash printing, but it would be much harder to stop ERC20-compliant digital currencies.

But isn’t this how technological developments have always been?

In the past, people needed a carrier license to make a phone call. Now, everyone on Taiwan Line, WhatsApp, WeChat, and Telegram to send messages or make phone calls. The app WeChat not only doesn’t have a carrier license but operates from China. Another example would be from the TV and film industry. One was required to apply for a license and also be overseen by the Government Information Office to start a TV channel. During specific airtime, the content needed to be children-appropriate, without containing swearing or adult material. However, now everyone has the right to start their channel, produce programs, and decide their content on Facebook, Youtube, Twitch, 17Live, Swag, and other platforms.

Now, let’s come back to currency and sovereignty. In the past, a weak regime could try to prevent a strong currency from infringing its sovereignty via bank regulations. Now, with the popularization of CBDC, people worldwide can download any ERC20 wallet and swap any fiat currency. As strong currencies gain popularity, it will no longer be a matter of currency and sovereignty but a new round of competition in world politics. Dollar-pegged currencies and digital yuan will grant people more options. In 2021 it is expected to see the United States and China, the two most powerful nations, further challenge weaker countries’ sovereignty and fiat currency conditions. Meanwhile, the new round of rivalry among these two superpowers will turn white-hot.

Author: Wayne Huang, Yoyo Yu, Winston Hsiao @XREX

This article was published in Mandarin on BlockTempo on Nov 28 2020.

Note: There is around 2 trillion NTD paper money and 19 trillion NTD commercial bank money. Thus paper money roughly accounts for 10 percent of the currency in circulation.