Why the U.S. needs crypto to win a currency war with China | Electric Capital co-founder explains

I worry that the US government trying to compete on technology on equal footing against China basically means that you lose.

This year, China became the world's first country to begin actively testing its own digital currency. The digital yuan is controlled by China's central bank, the People's bank of China. It allows cheap and instant payments without the needs of a bank account. This has the potential to significantly disrupt cross border transactions and international trade. The latest report report from crypto venture firm Electric Capital suggests the digital yuan will pose a serious threat to the US Dollar's dominance on global markets. The firm believes the Chinese government is seeking to replace the USD denominated settlement layer used by most of the world.

It shifts global trade and these financial markets to start thinking about being denominated in rmb.

Can the US stand up to the challenge in the upcoming digital currency war?

The US government should just offer a set of features inside currencies that the Chinese government can't offer.

And what side, if any, should the crypto industry choose in this conflict? To answer these questions, I tracked down the co founder and managing partner at Electric Capital, Avi Shalgarg. Hi everyone, my name is Giovanni. Welcome back to our show. Today I have the pleasure to be joined by Avishal Garg, the co founder and partner at crypto venture firm Electric Capital. How are you doing today?

Fantastic. Good to see you.

Talking about central bank digital currencies, we are seeing that China is currently leading the race with its digital rmb. The country is also testing a digital currency denominated payment system and its own blockchain services network. So you said that for crypto to survive, the crypto community needs to join forces with the US government to prevent China gaining too much power in the future global financial system. So why should the crypto community do that?

Yeah, it was a paper that we wrote, great research. So it was a paper that we wrote and it basically said, look, let's walk through the game theory of this. We now know that China is going to launch a digital currency system and the Chinese government is by the way, as a background context. There's no value judgment associated here. This is purely from a game theory perspective. Let's just think through how this might play out. And if you have a bunch of rational actors, assume the Chinese government is rational, assume the US government is more or less rational, assume entrepreneurs are more or less rational. How should this play out? What is the optimal move here for each party? The given here is that the Chinese government has built this digital currency system. It's a two tier system on the central bank side. It's really a way for them to control M0. Can you turn the dial on how much money printing there is? It goes out to commercial banks and fintechs and then they get it out to retail. And the idea in the short term I don't think is to get to a reserve currency that might be on their long term plan, I don't know, but I don't think that's the short term goal. The short term goal is to have a settlement layer. It's the ability for them to really, really quickly settle things in rmb. And that's real utility that's valuable for fintechs but it's also really valuable for them on their belt and road initiative. The investments that they're making all along the Gulf, into Europe, throughout Western Africa, Eastern Africa, as part of their national strategic initiatives. And so imagine you go to somebody in one of these countries, let's say you go to an oil trader somewhere in Europe or Kenya or something and you say, hey, wouldn't you like to be able to get your money back faster? Why are you using this old system where you have to go to a broker and do this oil trade and then they have to figure out how it converts from shillings to USD and then it settles and then it converts back from USD and it takes seven days for you to get your money back. Why don't you just use our system and you'll get the money instantly, you'll get it in 20 minutes. Wouldn't that be great? And that actually is real value for those people. And what it does is it shifts global trade and these financial markets to start thinking about being denominated in rmb. And it allows the Chinese government to have just amazing access into what's happening in these markets and potentially amazing leverage over who gets to participate in those markets. So that's all a given. Like that's happening. And it's remarkable, I think that the Chinese government is really, really amazing when it comes to adopting and using technology. And so that's happening. So now if you play that forward, you say, okay, well if that's happening, what is the right thing for the US government to do? Well one, they should probably start building a digital central bank, digital currency of their own. But the reality is that's going to take a long time, it's going to take many years. So that's not like a thing that you can just flip on. And it works in 12 months. So effectively the Chinese system, with a CBDC and a settlement layer which is what the US should build. It's going to be in market for five to 10 years before the US really gets its own alternative out the market. So then if you're the Fed, you start saying, okay, well what are my alternatives? Well, I think your option two, which you should probably do, is to embrace crypto dollars. We know one of the killer, killer things that's happening in crypto right on top of Defi are these stablecoins. And so I think what the government should do is instead of trying to push back on these things like Celo or Libra or usdc, they should just embrace it. They should actually say, you know what, let's get crypto dollars everywhere. Because that's actually the fastest way to get to market. That's a US dollar that's sitting in a US bank account under jurisdiction of the US and let's get those things to market as quickly as possible. And I think if they embraced it and sort of green lighted it, you would see a lot of innovation happening very quickly and it would happen inside US jurisdictions. That's kind of prong two of the plan, I think that the US government should have.

So you're basically saying that the US government, since it's going to take many years to develop their own native digital currency, they could kind of bypass a little bit this process by adopting the already, already existing dollar based stablecoins in.

Order to, and just green light it. And all they have to do is say, you know what, we're not. As long as it's sitting in a US bank, as long as it's backed by crypto dollars, here are the rules. Follow these rules and you're good to go. Rather than having it sort of get mired in regulation and just be kind of gray and people don't know whether or not they can do it. Give people bank charters, let them custody these dollars. I think the OCC actually did a great job here by allowing people, the Office of the Comptroller of the Currency inside the Department of Treasury recently allowed banks to custody crypto keys. I think that's the kind of stuff where if you just said, yeah, actually we want you to do this, what would happen is all of these dollars would, instead of sitting inside with something like tether in an unaudited account somewhere in the world, who knows where it is, it would actually move to US banks. You could actually audit these things and everybody would have certainty that that money is actually sitting there. And that's actually better than the alternatives inside the crypto land, right now, in my opinion, and it's better than the US Government's best option to try to create their own central bank digital currency. Because you could do that tomorrow, you can move relatively quickly. And in 12 to 24 months, I think you could basically greenlight all of these crypto hybrid dollars that are sitting with real US dollars backed in a bank, but they're available on top of Ethereum or anything else. And then the third prong of the strategy is, well, how do you actually compete? Right? Like, yeah, a lot of the world wants dollars. A lot of these markets would love to have crypto dollars. But I think if you think about this from a startup lens, startups don't win by just offering the same thing that the incumbent offers or doing more of the same. Startups win because they offer something that structurally the incumbent can't offer. And so I think if you sort of look at the world through that lens, what should the US Government do to offer something to the world that structurally the Chinese government cannot do? And this, I think, touches a little bit on sort of our privacy conversation as well, which is the US Government should just offer a set of features that inside currencies that the Chinese government can't offer, for example, privacy, or they're not going to be able to take your money away without sort of due process. Right. And so it starts to actually look a lot like the crypto ecosystem, which is you should have sovereignty of your money, you have protection from seizure, you have a degree of privacy. And so actually, I think there's a case that if the US wants to compete against this Chinese initiative globally, the best way for them to compete is to actually embrace the best features of cryptocurrencies and really push these as sort of an offensive tool against the Chinese dcep, because you can offer things that the Chinese DCEP will never offer, like true privacy. And if you do that, actually there's a huge market that will say, you know what? These two things are pretty good. But this other thing gives me a bunch of features that they can't get with the Chinese DCEP system. So I'll just use this sort of crypto system. And if that were to happen, what the US Government gets is all of the innovation that's going to happen happens inside the U.S. right? You get 20 more coinbases. Binance really should exist inside the U.S. and so from the U.S. government perspective, I think it's actually the right thing to do.

So you're basically saying that we should trust the US Government when it comes to Privacy. However, the US Government has not always been such a champion of people's privacy, just enough to remember the NSA surveillance program uncovered by Snowden, or the attempts made by US Officials to stop Facebook to include strong encryption into its messaging services. So can we really trust the US Government when it comes to privacy?

Yeah, it's a great question. I think you're exactly right. I mean, I think every government in the world sort of deals with this tension of essentially, you know, security versus privacy. And I think it requires a little bit of reframing. I think, you know, part of the reason that happens is that a lot of people, especially policymakers in these countries, are not really deep on the technology of it. And so they. They tend to think about things like, well, I don't want terrorists to be able to do xyz, which is absolutely a very reasonable thing, or I don't want, you know, people to be able to evade taxes. And I think if you start enumerating their concerns and you say, okay, people shouldn't have, you know, people should pay their taxes. People shouldn't do illegal things. People shouldn't, you know, give money to terrorists, that kind of stuff, I think actually we have the tools to solve that, which is the US Government has control over the fiat on ramps and on ramps. And so actually, between kyc, aml, and in terms of actually getting money into the banking system, the US Government already has tremendous tooling there to be able to do all of that. And so I think the question that the government has to ask is, it's not, hey, trust me as a government, because I think if they do that, you're right, people will say, well, do I really trust the US Government or do I really trust the Chinese government? This thing is faster and better. Maybe I'll use just a faster product. So if you don't compete on sort of like novel dimensions like privacy or security, you're kind of competing on equal footing. And I worry that the US Government trying to compete on technology on equal footing against China basically means that you lose. And so if you think that the US Government might understand that, they might say, you know what? This is not an area where we have the technological edge right now. Then I think they're forced into thinking about what concessions can the government make from their perspective that offer benefits that the consumers might be willing to take. So I think there's actually a path for the government to offer things like privacy, especially if people. And this is where I think the interaction with the crypto community comes in, is I think the onus is on the crypto community to explain to the government why they can offer really great privacy and also achieve all of their objectives. So, for example, can you create systems where you can create view keys? So if the IRS thinks that you're dodging taxes, you generate a view key and you send it to the IRS and you say, no, no, no, look, I paid all my taxes, right? But it's not default open. What's happening is the US Government, just as it does today, says, hey, I think maybe you didn't pay your taxes, and so now I'm going to audit you. So it's not a default open system. It's a system that you can probe. Like, the US Government doesn't get all of your financial transactions. They don't see everything sitting in your bank account. They don't get every credit card transaction. And so, you know, I think it's actually not that dissimilar from the system that we have today, which is if the government has reason to think that you might be doing something illegal, they can subpoena you, they can go after your records, but it's default. You ascent, people are innocent. And so it's actually a very similar system here. But I think the crypto community has to go make that case to the government. Say, actually. And people like Coincentre are doing a great job of this already, I think. But I think there's actually more room for everybody else, especially on the technology side, to come in and say, no, no, no, actually we're very well aligned here. And actually, these systems work very similar to the existing systems in existing finance already. The government doesn't get to see everything. It's only if the government thinks that somebody's doing something illegal do they get to probe. And actually, you can build systems that work exactly that way today and actually make them very secure.

Avishel, thanks a lot for talking to us. That was very interesting.

Pleasure. Thank you for the time. Cointelegraph, like subscribe and Hodl.