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The U.S. Tech-Dollar... Is Silicon Valley A Destructive Option
The strength of the dollar comes from its users and holders, but their choice to use and hold it comes from their faith in its value. That faith has traditionally been driven by the warm feelings people get around the pillars of the dollar, such as: US politics, the US economy, the US people, the might of the US military to keep peace, its world reserve currency status with the international banking system and its petro-dollar status. With five out of six of those backers of the faith appearing to be occasionally taking day trips to Crazy-ville; it could be said that the warm feelings behind the dollar have seen better days. Yet the buyers of our debt and the users of our dollars appear to be continuing on a steady path despite our annual interest payments now surpassing the trillion-dollar mark. Is there another pillar keeping the dollar steady, such as the “tech-dollar,” and if so, could it prolong the dollar’s reign? The “Tech-Dollar” May be Our New Dollar Crutch It is in this dollar climate that a new backer may emerge, the US tech-dollar. I personally think that the US entrepreneurial fighting spirit is mercenary in its nature and not philosophically tied to any particular currency, but as luck would have it, the dollar is the devil these talented entrepreneurs know. So now that it appears that the US tech sector is possibly gearing up for a larger run at the financial services world with “US Fin-Tech,” there is a chance that the dollar may become the unsuspecting benefactor of an advantage built by proximity. Could the Tech-Dollar be More Relevant than the Petro-Dollar In a well written piece by a tech entrepreneur on substack, it is clearly laid out that the enterprise business of the world wide web is largely run on software packages priced in US dollars. These business software solutions that are used to power commerce around the world, require US dollars to purchase them and appear to be another strong leg that we are standing on that allow us to print dollars without significant ramifications. However, of the $96T spent across the globe last year, approximately 1% was on enterprise software, 10% was spent on energy and 23% was spent on financial services. So according to the math, the tech sector would have to aggressively go after some of the entrenched banking incumbents’ highly protected market share for the tech-dollar to materially become a serious challenger to the petro-dollar. The only reason that I can see for the highly lobbied US banking regulators to allow attacks on the incumbents to happen, is if it was part of greater measures to save the politicians and strengthen the dollar. For perspective, consider the force that an industry that controls 23% of global GDP can wield. So, what has changed? The Question that Wasn’t Being Asked? Since the first crypto purchase of pizza in 2010 for 10,000 bitcoins was executed, a world of new possibilities has been upon us, but possibly the biggest gift that was given to us was the gift of a great question, “Is the current financial system still a good and healthy system?” For years this question was typically asked by silver and gold bugs who all seemed to be aging out of mainstream conversation, but the Bitcoin experiment brought this question right back to the forefront. In 2015 I was quoted in Forbes Middle East saying that the world has never moved backwards in technology efficiency if given enough time and that the bitcoin experiment has showed that more could be done in basic banking for less energy and expense. At the time I had hoped that some of the GCC countries would open their doors and welcome the new technology and its ecosystem of developers, but I also knew that the Western bankers and the US dollar were not going down without a fight. What is the Value of a Good Question? At the heart of this fight was the efficiency of peer-to-peer transaction trust. In one corner we had (and still have) an archaic banking system that requires countless human interventions with countless flaws that is regularly hacked and charges ridiculous fees for electronic transfers. In the other corner we have a system that can perform the equivalent of an international wire transfer for a fraction of a cent, in a fraction of the time, with a higher level of security than available in the current system. On top of that, the possibilities of smart automated contracts go on endlessly, but I digress. Each time the merits of decentralized digital banking were sung, a question was forced upon anyone listening, “If this is revolutionary, what goes on in regular banking?” And just like that, the magic act of US banking had lost some of its power. Unfortunately, digital “crypto currency” banking was not only about banking services, it was also about a completely separate and independent currency that could be traded outside of the global tax systems. Poking the Biggest Bears The top governments on earth are predicated on a couple of basic sovereign privileges; the right to a standing army, the right to manipulate their judicial system, the right to tax their people and the right to manipulate their currency (hidden tax). Whenever any of these government rights are challenged the country instantly finds itself in a form of mortal combat, as the country may no longer exist if enough damage is done to any of these four pillars of its existence. This was precisely the fight that the US government, and all large governments, found themselves in during the 2021 crypto-currency bull-run when the last two of those pillars were threatened. Several attempts had been made prior to this bull run to kill the new digital “crypto currency” sector with branding exercises, threatening regulations and tax scares, but digital currencies were still gaining momentum. Unfortunately, for the governments, the underlying technology had shown too much promise for the tech sector to let it go and the world was gaining an education on the deficiencies in traditional banking practices. Unfortunately, for the digital currency space, these governments have incredible resources at their disposal when they take aim at something. So, a long-term fight was formally initiated that will not go away and will likely fundamentally change the world and the way we operate, but in the short-term the dollar had (and has) to figure out how to remain competitive. The current boxing rounds seem to have produced the following results:
These results appear to have fueled the following events: July 20th, 2023 -Fed Launches FedNow The federal reserve bank, the privately owned “bank of banks” for the United States found themselves in need of an update to help slow down the general threat of a migration away from the dollar and US banking. When they realized that the full scale roll out of the United States Digital Currency “USDC” was not going to happen in the near future they scrambled to offer the “FedNow” program. After 92-years of presiding over the special privilege of determining how much money different banks would be making, they have suddenly offered the ability to securely transfer money for pennies versus tens of dollars. This opt-in service for all US banks, is a stop-gap measure to slow down the migration away from the current banking system into digital currencies outside of their control. However, only a small fraction of the banks have agreed to the service because fees extracted for basic electronic transfers from one domestic account to another represent large portions of the bloated income for many US banks, despite it being a free service for many other developed and emerging nations. Did we mention that 22% of all monies spent on the planet each year goes to financial services. August 2nd, 2023 – “Apple Bank” Hits $10 billion On October 20th, 2014, Apple Pay was launched creating a digital / physical payment platform for all iPhone holders. The feature was launched as a convenience feature with no real threat to the financial services industry. In 2022, after mainstream questioning of banking services, Apple starts discussion on Apple Pay Later. On March 28th, 2023, the Apple Pay Later service is launched, and a clear crossing of the tech-finance boundary was crossed. The significance of this cannot be under-estimated as companies like apple have user data that banks could only dream of, which means Apple could be the most profitable lender in the space with their data advantage to avoid bad loans. On April 17th, 2023, Apple introduced its High Yield Savings account, a clear step into the world of banking, and within 106 days had over $10 billion in assets. This makes Apple both the largest FinTech company and the fastest growing challenger bank in the world; and provides strong merit to Citibank’s CEO Jamie Dimon calling out Apple by name in an investor letter as one of their biggest competitors going forward. Elon is on the Move On April 14th, 2022, after the 2021 crypto hysteria and Apple announcement to cross the tech-finance barrier, Elon Musk initiates conversations to purchase Twitter and concludes the purchase 190-days later. On July 31st, 2023, Twitter was rebranded “X.” Many people are unaware that X.com, was the name of Elon’s 1999 “financial everything company” that merged with Confinity to make PayPal, and it is no coincidence that Elon has rebranded the bird with the same name. When Elon bought Twitter, a company that had never turned a profit, the global press was confused on the economics and wrote it off as a mis-guided free-speech passion project. However, it probably should have been assumed that this century’s most successful entrepreneur may have had a plan. From a free-speech philanthropy perspective the purchase became a partial PR disaster, however, from an instant user-base standpoint Elon paid $46 billion dollars to have direct access to a trusted platform that was already on 400 million phones around the globe. If his plan is to dust off his playbook from 24 years ago and move into the financial services space, he just shaved a decade of work off his product adoption timeline. The first clue that this may have been a financial play was when he turned twitter into a two-way payment model when they initiated user verification payments and then started sharing advertising revenues. With his background, the twitter platform and the current environment of tech companies being allowed into the finance space, it appears that Mr. Musk may be riding a bird into the “trillionaire” spot after a sports car, a rocket and a boring machine only got him part way. August 7th, 2023 – PayPal is Allowed to Launch a Crypto On-Ramp Twenty years ago, Paypal recognized the need for secure online digital transactions and created the first mainstream digital wallets to be used on the internet. On August 7th PayPal announced that it had launched a stablecoin digital currency based on the USD, something that was supposed to be the domain of the US central digital currency (US CDC or USDC). Currently there a multiple stablecoins that are pegged to the currency that they represent, but this appears to be the first one attached to a large trusted outward facing consumer brand. An example of preventing a large consumer brand from moving into the digital space happened in 2019 when regulators stopped Facebook, now Meta, from launching Libra, a Facebook based digital currency, stating that it could upset global financial stability. The prevention of Libra proved that dangers of cross-border currencies are clearly recognized as a threat to the sovereign currencies, but the allowance of PayPal seems to be a recognition of concessions needing to be made to possibly buy some time for the dollar. However, this was not a small move, as PayPal has been recognized as the second largest non-bank global lender, behind Visa, with over $74 billion dollars in accounts and over $3.7b in daily transactions as of June 6th of 2023. The Entrenched Incumbents As much as this article has focused on the door being opened for tech companies to move into finance, it’s worth noting that the incumbents in the space are not small and will not go easily. As of March 2023, JP Morgan, the largest bank in the US, has $3.744T in assets and processes $9.8T a day in transactions, which according to S&P rankings is only good enough for the number 5 spot on the list of the top 100 global banks. Though these entities are old and slow moving, they are deeply entrenched in the inner workings of each government’s legislative sausage factory and dethroning them could be tricky. And even though its probably time for change, nothing has been discussed about the possible ethical dilemmas of moving the world’s largest holders of personal data into the controlling positions with capital, but that is another topic for another article. Going forward the questions will be focused on the chess moves of the world’s strongest technology brands as they create more stream-lined financial services for the world before they inevitably gain enough power to break from the dollar it into some form of digital currency. The Tech-Dollar If I was a betting man, I would assume that the tech-dollar is going to become a larger factor in the international status of the US dollar’s stability, banking services will become more frictionless, and the dollar’s reign as the world reserve currency will probably be extended for an additional decade. However, these benefits will come at a price. This scenario could play out as the ultimate “deal with the devil” for the dollar, as it will give companies like Apple even more power to negotiate with governments. Before Apple even hit its recent $10b in banking assets mark, it was estimated to be equivalent to the fiftieth country in the world by rank of GDP. Removing these barriers that have kept tech companies out of the financial services sectors is probably not the wisest of moves on this front, but supporting US financial institutions with average annual bonuses that are 5-X the average US household income was probably not going to work out for the long run either. As they say in Louisiana, “Little pigs get fat and big hogs gets slaughtered.” So where does that leave us? What to do… Things are in a very precarious position at the moment. It appears that the door that was not open for Facebook in 2019 has been cracked open for Apple and PayPal and that Mr. Musk has also jammed his foot in there with the speed of a Jehovah’s witness after someone accidentally answered the door. It is likely that banking services will improve, but I am not sure that I want my credit score based on my search history. While this all plays out it will probably be important to keep a couple things in mind.
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