by Billy Bambrough
This week, Treasury secretary Steven Mnuchin warned “significant” new bitcoin and cryptocurrency regulations are on their way, Minneapolis Federal Reserve president Neel Kashkari branded cryptocurrencies “a giant garbage dumpster,” and the Department of Justice called bitcoin mixing “a crime.”
However, the news has failed to much move the bitcoin price, which remains up almost 50% since the beginning of the year.
Treasury Secretary Steven Mnuchin told the Senate [+] [-]Finance Committee that the Financial Crimes Enforcement Network (FinCEN) is preparing to unveil new regulations around bitcoin and cryptocurrencies.
Mnuchin, who last year echoed U.S. president Donald Trump’s criticism of bitcoin and cryptocurrencies, told the Senate Finance Committee the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is preparing “significant new requirements” around cryptocurrencies and we’ll “be seeing a lot of work coming out very quickly.”
“We want to make sure that technology moves forward but, on the other hand, we want to make sure that cryptocurrencies aren’t used for the equivalent of old Swiss secret number bank accounts,” Mnuchin said, adding FinCEN and the Treasury Department more broadly are “spending a lot of time on this.”
Meanwhile, adding to the assault on bitcoin and cryptocurrencies coming out of the U.S. this week, Minneapolis Fed president Neel Kashkari said cryptocurrencies lack the basic characteristics of any stable currency.
“The reason that the dollar has value is because the U.S. government has a legal monopoly on producing the dollar,” said Kashkari, speaking at a Montana event after being asked whether he would want his 1-year-old daughter to be gifted a Treasury bond or a bitcoin for her next birthday.
“In the virtual-currency and cryptocurrency world, there are thousands of these garbage coins out there. Literally, people have been fleeced for tens of billions of dollars, and finally the SEC is getting involved in cracking down on this.”
The bitcoin price has climbed since the beginning [+] [-]of the year but remains far from its 2019 highs of around $14,000 per bitcoin.
Coinbase
Elsewhere, Department of Justice prosecutors this week branded bitcoin mixing software, designed to mask the origin of bitcoin transactions, “money laundering.”
In the indictment of Larry Harmon, who was this week arrested for his alleged involvement in a money-laundering conspiracy worth more than $300 million, the Department of Justice referred to Harmon’s Helix software as a “money transmitting and money laundering business.”
The bitcoin and cryptocurrency regulatory landscape in the U.S. has long been found stifling by the nascent crypto industry—with some choosing to more favourable regions such as Switzerland.
“Everyone in the know is already well aware of Europe’s clear guidance on crypto custody, exchange licensing, rules for issuance of payment, utility and security tokens,” said blockchain pioneer and managing director of Yeoman’s Capital David Johnston, adding, “European rules are very clear at this point.”
Social media giant Facebook, which last year revealed it will launch its own cryptocurrency, libra, in 2020, opted to base its independent governing Libra Association in Switzerland.
FINANCIAL COLLAPSE IN CHINA? IT IS NOT OUT OF THE QUESTION SAYS ONE CHINA OBSERVER
Will The Coronavirus Cause A Major Financial Collapse In China? It Is Not Out Of The Question Says One China Observer
Cary Huang, a writer for the South China Morning Post (SCMP), posted a February 16, 2020 article explaining his reasoning why he thinks a major economic collapse in China may be in the offing. For Mr. Huang’s full article, I refer you to the February 16 edition of the SCMP.
Mr. Huang begins, “Never before has China paid such an economic price for an epidemic as it has already done with the coronavirus; and, the damage is spreading,} [well] beyond Wuhan. While “it is too soon to assess the full [economic] impact of the virus,” he adds, one can make some reasonable guesses as to what the economic downside might be — and, it isn’t pretty. For example, the “SARS [epidemic] cut two percentage points of China’s real GDP growth in the second quarter of 2003 and caused $50B worth of damage,” Mr. Huang wrote. And Mr. Huang warns, “the economic damage from the coronavirus outbreak will be far more severe than that of SARS, or any other previous epidemic, for a number of reasons.”
“First, Mr. Huang writes, “the Chinese economy is four times a big as it was in 2003, so its losses and the impact on the global economy are likely to be correspondingly larger. China’s gross domestic product accounted for around 16 percent of the global total last year, while it was just four percent in 2003. A rough estimate, is that the coronavirus outbreak will cause at least four times the [economic] loss of the SARS epidemic in 2003.”
“Secondly,” Mr. Huang observes, “the timing is far worse. The coronavirus outbreak took place just days before the Lunar Year Holiday, when hunderds of millions of Chinese [some estimates claim 2.3B] travel domestically and internationally, to attend family reunions and festive events. SARS happened in the second quarter of the year, when there was far less [econmic] activity to disrupt. What’s more,” Mr. Huang adds, “China’s economic shift away from manufacturing and exports to concentrate on services and consumption, means it will be even more vulnerable to falling domestic demand caused by the epidemic and the government’s responses.”
“Thirdly, China’s rapid urbanization means Chinese [citizens] are much more likely to travel domestically and abroad than they were two decades ago [in 2003],” Mr. Huang writes.
“Fourth, the magnitude of the government’s response has been unlike anything ever before seen,” Mr. Huang notes, with entire cities effectively on lockdown,” quarantine. Wuhan for example, is a city of some 11 million, and a major transportation transit point to other parts of China. Mr. Huang notes that “56 million Chinese citizens,” are currently living under these restricted conditions. “At the peak, provinces accounting for almost 69 percent of China’s GDP were closed for business,” according to Bloomberg Economics. “There were no such measures in 2003,” Mr. Huang notes.
“Fifth, rising U.S./China trade frictions will magnify,” the negative economic impact of the coronavirus. And, as I have noted, “the epidemic may well trigger an exodus of international companies, as many firms were already rethinking their presence in China, due to the U.S./China tensions, and rising costs,” Mr. Huang wrote.
“Sixth, for millions of small and medium-sized enterprises (SMEs) in China, the nightmare may be just beginning,” Mr. Huang warns, “as many small manufacturers fear foreign customers will shift orders to other countries due to disruptions in production and delivery. If the disruptions go on long enough,” he warns, “it could trigger a wave of bankrupticies among SMEs, which contribute more than 60 percent of China’s GDP, 70 percent of its patents, and account for 80 percent of its jobs nationwide.”
“Finally,” Mr. Huang notes, “the epidemic will weigh on banks, in the form of non-performing loans, adding risk to the banking system, and pressure to the country’s towering debt pile, which stood at more than 300 percent of GDP at the end of 2019. Given the accumulated costs of decades of state-driven lending, an ever-inflating property bubble, and vast industrial over-capacity, the risk of default on the country’s 99.1 trillion juan of outstanding bonds, is increasing. Corporate bond defaults already hit a record in 2019, amid an economic slowdown.”
Mr. Huang warns/concludes, “a worst-case [economic] scenario cannot be ruled out,” including the potential for “a major economic meltdown.”
I hope for everyone’s sake, Mr. Huang is wrong. A China economic meltdown of the magnitude he fears, would have negative econonic consequences around the world, and the U.S. would not be immune. Short of such a meltdown, I do believe the negative econimic consequences of the coronavirus outbreak is going to be felt in China for a considerable period of time. And, the diversification of the supply-chain by international companies to elsewhere in southeast Asia — Vietnam, South Korea, Singapore, etc. — may well accelerate as a result of this outbreak. And, many of those losses may never be recovered. China’s Communist Party leadership is facing perhaps its toughest leadership challenge in quite some time. If this epidemic does not simmer down very soon, things could get ugly. RCP, fortunascorner.com
What the Trump Defense Budget Gets Wrong About Future Wars
The massive 2021 Department of Defense budget that the White House sent to Congress clocks in at $740.5 billion, with $705.4 billion earmarked for the Pentagon – the remainder to the Department of Energy and other government agencies for national security projects. As always, the preparation of the request to Congress was a long and tortuous project, spearheaded by the Secretary of Defense and his team through an interminable series of reviews. Each of the services fought hard for its share of “topline” (a Pentagon term for the entire U.S. defense budget) in an annual ritual that at times can resemble a circular firing squad. The theme of this year’s exercise was to reshape the military for combat with Russia and China (so-called “peer competitors”) and prepare for a “new era of great power competition.” The Joint Staff’s leading “budget” officer, Vice Admiral Ron Boxall, said that we are “now looking forward to a higher-end fight against an adversary that will have a higher capability.”
There is some cutting of older force structure (planes, tanks, ships) in order to ensure higher levels of readiness (the ability of the platforms to actually get underway and perform operationally). The Air Force, for example, says it wants to cut some of its older planes and drones (B-1 long-range bombers; A-10 tactical attack planes; F-16 and F-15 fighters; C-130 cargo planes; and some of the high-flying Global Hawk spy drones). [Disclosure: I consult for defense contractor Northrop Grumman.] The other services will make similar cuts, which makes sense to open up funding for both readiness and new systems.
A big-ticket item is almost $30 billion for nuclear weapons, nearly a 20% increase over 2020. This will buy the Navy’s top priority warship, the new COLUMBIA-class ballistic nuclear submarine; the B-21 stealth bomber; and upgrades on a variety of nuclear warheads. This will be a controversial section of the bill as it is a continuation of the current strategic triad structure of ballistic missile submarines, long-range bombers, and in-ground intercontinental missiles. It does not show any new strategic thinking about nuclear weapons. The decision to make lower-yield nuclear weapons is likewise controversial, because most analysts believe such weapons are destabilizing in that they could encourage nations to use nuclear weapons in situations short of a doomsday scenario. Not a good prospect for the world.
It is a huge amount of money, and the projected requests for follow-on budgets show roughly 2.2 percent increases each year through 2025 to $768 billion in the final year of the plan.
Does all of that make sense?
Ultimately, despite making a huge spending request, the budget as presented relies too much on traditional big platforms and fails to go far enough in addressing emerging defense needs. At heart, it follows a conservative philosophy of clinging to what is known and comfortable. This is somewhat understandable – think of it like mountain climbing: you don’t want to let go of something until you are sure you have a good new grip. But now is the time to take risk and at least let go with one hand while you reach for a new perch in the technology wars that are underway, especially between the U.S. and China.
There are three key areas in which the Department of Defense should be investing.
One is unmanned systems – this includes not only airborne “drones” but also space solutions and unmanned vehicles on the surface of the sea and at great depths in the ocean. Using unmanned systems will decrease both the cost (the most expensive element over time in a combat system are the people) and the vulnerability of forward operations. Unmanned will also allow us, over time, to leverage advances in machine learning and artificial intelligence that are coming.
A second critical element is additional investment in special and elite forces. Large infantry formations are unlikely to have effect in the future – we do not share borders with any of our principal adversaries. While the new Space Force is a good initiative, we need a Cyber Force as well. The real battlefield of the future will likely be in cyber – the ability to attack critical infrastructure, our financial systems, our educational and medial establishments, and individuals. The wars of the future will not turn on massive tank battles on the high planes of Asia, but in the electronic passages of the internet.
Third, another crucial missing element is what may be termed “soft power.” That is medical diplomacy, humanitarian relief, building schools and clinics, counter-narcotics, “rule of law” seminars, and a myriad of military-to-military engagements that do not require combat operations. All the geographic combatant commanders do such operations, but both U.S. Southern Command (Latin America) and U.S. Africa Command excel at this. As usual, this is an underfunded area in the budget, despite the importance (and cost-effectiveness) of such operations. As my good friend General Jim Mattis has said, “If you don’t fund the State Department fully, then I need to buy more ammunition ultimately.”
Do we need some traditional platforms (particularly maritime and long-range air) capable of conducting combat operations – in extremis – against our opponents on the Eurasian landmass like Russia and China? Yes. But we would be better advised to focus on cyber, special forces, and unmanned systems while continuing to improve our soft power tools and build on alliances with partners and friends. That will be the best way in which we can create lasting security in this turbulent 21st century.
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