Peter Thiel’s comments on bitcoin
Peter Thiel spoke on April 6th, 2021, at the Nixon Seminar on Conservative Realism and National Security. A rush transcript (subject to final editing or updating) is available here. Thiel said, in part:
And, even though I’m sort of a pro-crypto, pro-Bitcoin maximalist person, I do wonder whether at this point Bitcoin should also be thought in part of as a Chinese financial weapon against the U.S. where it threatens FIAT money but it especially threatens the U.S. dollar and China wants to do things to weaken it….perhaps from a geopolitical perspective, the U.S. should be asking some tougher questions about exactly how that works.
Media response to this jumble of words has been predictable: Thiel, it is claimed, said that bitcoin is a Chinese financial weapon:
In an exchange I had on Twitter with Balaji Srinivasan, he said, of Thiel’s comments:
balajis.com @balajis@shaig You could call it dry humor, or rhetorical overstatement, but he doesn’t actually think the Euro is a Chinese plot. Without that Euro preamble and context, the headline makes it seem like Thiel is proposing that BTC is some CCP-funded thing, which he isn’t, and which it isn’t.
I don’t know Thiel personally, and I believe that Balaji does, so I will defer to his judgment about Thiel’s intent. But I’m also not too interested in Thiel’s intent or the media’s reaction to his words. Rather, I am more interested in (1) China’s view of dollar hegemony, (2) the implications for bitcoin and the USD in a multi-polar currency world, and (3) how the US government should respond.
The United States benefits from the dollar being the currency of last resort. The economist Kenneth Rogoff recently wrote:
Considering how much the United States relies on the dollar’s special status—or what then-French Finance Minister Valery Giscard d’Estaing famously called America’s “exorbitant privilege”—to fund massive public and private borrowing, the impact of such a shift could be significant. Given that the US has been aggressively using deficit financing to combat the economic ravages of COVID-19, the sustainability of its debt might be called into question.
The long-standing argument for a more flexible Chinese currency is that China is simply too big to let its economy dance to the US Federal Reserve’s tune, even if Chinese capital controls provide some measure of insulation. China’s GDP (measured at international prices) surpasses that of the US back in 2014 and is still growing far faster than the US and Europe, making the case for greater exchange-rate flexibility increasingly compelling.
A more recent argument is that the dollar’s centrality gives the US government too much access to global transactions information. This is also a major concern in Europe. In principle, dollar transactions could be cleared anywhere in the world, but US banks and clearing houses have a significant natural advantage, because they can be implicitly (or explicitly) backed by the Fed, which has unlimited capacity to issue currency in a crisis. In comparison, any dollar clearing outside the US will always be more subject to crises of confidence—a problem with which even the eurozone has struggled.
If we take Rogoff’s argument at face value, clearly both China and the EU would like to see the world less dependent on the US dollar as a reserve currency. And, to Thiel’s point, given China’s support of bitcoin, then, from the perspective of American security interests, bitcoin can be seen as a kind of weapon to be used in the fight against US dollar supremacy.
China presently mines about 65% of the world’s bitcoin, as shown here:
(Sourced from: https://www.statista.com/statistics/1200477/bitcoin-mining-by-country/).
China tolerates bitcoin mining because doing so increases the strength of bitcoin’s network relative to the dollar. The more strong currencies there are (and, for this post, yes, we’re considering bitcoin a kind of currency), the less influence the US dollar has on the world’s stage.
Implications for bitcoin and the US dollar in a multi-currency world
Since so many financial transactions are denominated in dollars, the US federal government has access to information about much of the world’s financial dealings. And, to the extent that the cash in those transactions flows through a US bank or non-US bank regulated by the US government, the US government can assert its jurisdictional prerogatives over people doing business with one another. This is great from the United States’ perspective: it can prosecute war criminals, weapons traffickers, drug traffickers, terrorists, and other undesirables, even when those criminals don’t live in the United States.
From the perspective of other governments, and people those governments want to protect, this trackability is more bug than it is feature. Going back to China here: if more countries decide to dump the US dollar as a reserve currency, and start to use alternative currencies, such as bitcoin or renminbi, then those countries avoid the prying eyes of the US government.
If—and it remains a big if—bitcoin starts to be used as a currency demand for it should increase. Given its hard-coded limit of 21 million bitcoins, increased demand would of course mean higher prices.
What should the US government do?
I don’t have any great answer to this question. On the one hand, US government bureaucrats and politicians are too wedded to the institution of the US government to ponder the question of whether or how bitcoin is a replacement for the US dollar. Government functionaries are, unfortunately, not technologists, so they don’t grok why cryptocurrencies have so many advantages over fiat currencies. Nor do US government bureaucrats or politicians appear to care much about dollar debasement. Having worked their entire career for a government for whom currency supremacy is as much a given as is the oxygen we breathe, many people inside the US government can’t conceive of a world in which the US dollar doesn’t reign supreme. That concept just doesn’t compute.