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Family offices need to get wise on the cryptocurrency revolution

Even after Nixon took it off the gold standard, fifty years ago, the US dollar’s role as the world’s reserve currency has never been in question. But its influence is likely to diminish as the crypto revolution gathers pace. Family offices may be well advised to start rethinking their exposure.

There is no shortage of fintech businesses that see huge potential in digital diversification in the public and private sectors. The latest fundraising, on 17 August, was announced by Bitpanda, a trading platform based in Austria, who took $263 million, taking its notional value to $4.1 billion, more than treble the $1.2 billion struck in December. 

The CBDC revolution is causing concern in the US because peer-to-peer digital currency deals could undermine the status of the dollar as a reserve currency which has helped to take on massive debts

The funding round was led by Valar Ventures, led by Peter Thiel, billionaire founder of payment system PayPal, and Palantir, the data analytics firm. Alan Howard, founder of hedge fund Brevan Howard, invested along with Jump Capital and LeadBlock Partners.

As well as cryptocurrencies, Bitpanda can access a vast range of digital assets for clients. One of its newest is Mana, a “currency” used to purchase real estate in Decentraland, a virtual reality site recently sponsored by Coca Cola. In another offering, Bitpanda can buy and sell tokens issued by Klaytn, currently advising South Korea on its proposed digital currency offering. 

Bitpanda’s rival, Coinbase Global, has suffered a share price fall of 23% since its overhyped float in March but still boasts a market value of $53 billion as it seeks to profit from developments in the private and public sector. Official US minutes show that Coinbase chief executive Brian Armstrong met Federal Reserve chairman Jerome Powell in May to discuss developments. In a presentation, Armstrong said: “Central bank digital currencies are going to be really big.” And he wants to host them.

Other banks and payment systems are taking advantage of bullish sentiment. Revolut’s $800 million fundraising in July took its notional value to $33 billion.  Stripe, valued at $95 billion, raised $600 million in March and recruited as an adviser Mark Carney, former Bank of England governor and digital currency advocate. Traditional banks are more restrained but James Pomeroy, chief economist at HSBC, says digital currencies could be in control in 15 years. Facebook is moving ahead with Diem, a digital payment system.

JP Morgan chief executive Jamie Dimon says he is not a fan of bitcoin, but his bank has developed JPM Coin, a digital ledger. JP Morgan is also a backer to ConsenSys, a blockchain expert advising central banks in Thailand, Australia and elsewhere on digital currencies.

Atlantic Council, a US think tank, says 81 countries, representing 90% of the global economy, are looking into central bank digital currencies (CBDC) issued through e-wallets. It says the US needs to raise its game.

Ali Jamal, founder of family office adviser Azura, warns the move cannot be stopped: “The Federal Reserve is going to come with electronic currency The Swiss will come with something. Everyone will.”

China is leading the world’s global economies in creating a digital currency because it is determined to keep control of the reinvestment of consumer savings. 

Economic commentator Vivek Kaul points out that China has one of the highest capital reinvestment rates in the world, amounting to 43.3% of GDP in 2019, against a global average of 24.4%. It is not comfortable with this capital being diverted into crypto.

Digital currencies can also generate a large quantity of consumer data. They allow banks to fine-tune the money supply by creating and deleting currency.  They make it easy to create negative interest rates to boost an economy. Central banks would also gain greater influence on the money supply by directly issuing digital currency. Cash used to perform this function, but it has lately been losing its influence to the banks, whose sub-prime derivatives triggered the 2008 financial crisis.

The exercise of creating a digital currency could monetise public sector debt, although the market’s reaction to macro-economic issues cannot be escaped. Venezuela’s digital currency, unveiled in 2017, has not changed the country’s reputation one bit, although it did help small transactions. Crypto supporters have always argued that limits on bitcoin issuance would make it safer than a national currency exposed to mismanagement and inflationary risk.

China’s attack on fintech and crackdown on miners, who use enormous amounts of energy to verify crypto transactions underline its determination to create a digital yuan. The fact that President Xi Jinping personally authorised the move underlines his view of its importance.

China is planning to let visitors to its 2022 Winter Olympics use its digital yuan if they supply passport details to the People’s Bank of China. According to reports, its digital currency has been tried out in transactions worth $5 billion.

Countries in the Caribbean, led by the Bahamas, have already launched digital currencies. Cambodia is diluting its reliance on the dollar by launching a CBDC. El Salvador wants to do so using bitcoin. Fourteen countries including Sweden and South Korea are working on CDBC pilots. The European Central Bank has expressed strong interest in the idea, as has the Bank of England. 

The CBDC revolution is causing concern in the US because peer-to-peer digital currency deals could undermine the status of the dollar as a reserve currency which has helped the US to take on massive debts. CBDC could also weaken the US Swift network which is required for banking services across the world and can be used to impose financial sanctions.

In a 30 July article for Project Syndicate, Harold James, a respected professor of history at Princeton University, said he had no doubt about the direction of travel. 

 “We are moving toward a new monetary order based on information. We may learn to manage the new system faster than we did in the aftermath of the Nixon shock. But the outcome – a world in which the dollar has been knocked from its global pedestal – could be far more shocking.”

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