Historically, financial repression — where the state dictates the movement of capital through various control mechanisms — was considered a phenomenon relevant only to developing economies. Those had weak institutions and captive savers, unlike the advanced world that had spent five decades dismantling exactly those controls.

These days, however, that distinction is going away. Financial repression is returning to the rich world, driven by necessity. What we are witnessing is a late-cycle response to a fundamental crisis: national debt levels have reached a point where they can no longer be outrun by productivity or curbed through traditional cost-cutting. And when a system-wide expansion plateaus, the state must transition from market-led allocation to a coordinated — often coercive — effort to ensure the survival of the financial superstructure.

Total debt-to-GDP now runs to roughly 255% in America, above 300% in France, and near 400% in Japan. Two levers are most often contemplated to solve the equation: austerity, or an increase in productivity. Both seem somewhat blocked. Austerity died politically in the populist backlash of the 2010s; no government that wants to survive an election will now try to cut its way out. And the productivity surge that is meant to grow nations out of their liabilities has not yet arrived, AI technological promises notwithstanding. Consequently, it’s good old inflation that has emerged as the sole remaining lever to shrink debt-to-GDP ratios. If history is any guide, it’s now all but certain that most governments around the world will try and inflate away the real value of state liabilities while nominal GDP continues to rise.

That said, inflation only works as a debt strategy under one condition: savers cannot escape it. And financial repression is precisely how economists label the apparatus that stops savers from escaping inflation: a technical matrix built to keep domestic savings from fleeing into hard assets or foreign markets. Broadly speaking, it consists in five different levers:

1. Impose negative real interest rates. Hold nominal rates below inflation: 1% paid to the saver against 4% inflation is a 3% annual levy on wealth, which liquidates a quarter of real purchasing power over a decade without a single line in any budget.

2. Make sure the money has nowhere to hide. Through modifications to Basel III, pension rules, and insurance solvency frameworks, regulators “nudge” — the polite word for compel — domestic institutions into holding low-yield sovereign bonds regardless of what a free market would price them at. Captive buyers do not demand a premium for financing the state; that is the point of making them captive.

3. Repress wages, which results in repressing domestic consumption. Germany did it to defend export competitiveness: after the Hartz reforms, output kept growing and pay stopped, and the gap surfaced as corporate profit. China did it harder and for longer, through suppressed deposit rates, a managed currency, and wage restraint, and now has the lowest household share of GDP in the world.

4. Rebrand the whole thing as innovation policy. Britain’s Mansion House Compact channels pension money into private equity; France’s Tibi initiative points domestic savings toward strategic sectors. Both are sold as forward-looking industrial ambition, but they’re really financial repression in disguise — guaranteed capital to destinations an open market might decline to fund.

5. Run it long enough that it stops looking like policy. Japan is the proof of concept. For three decades it has kept government yields far below what an open market would have demanded, by ensuring that domestic banks and pension funds absorb the debt — the central bank alone now holds roughly half the outstanding stock. This is what a successful developed-world cage looks like from the inside: a quiet, permanent arrangement in which the saver funds the state and everyone calls it prudence.

As these walls are now rising everywhere in the world. They create an existential threat to any nation dependent on the free movement of international capital.

The American Dilemma: Dependency and the Funding Shock

For decades, America has enjoyed “exorbitant privilege,” a position where its structural trade deficit is automatically funded by capital inflows from foreign holders of dollars seeking US assets. This automatic recycling of global savings into Treasury bonds and American stock has historically allowed the US to fund itself without domestic capital controls.

The arrangement worked for two reasons: America offered the world’s deepest and most sophisticated capital markets, backed by the rule of law, and foreign savings could move there freely. Remove either condition and the system ceases to function as it did. Whatever becomes of America’s relative appeal, the second condition is already beginning to fail. America remains one of the world’s most attractive destinations for investment, which is precisely why more governments are trying to stop domestic capital from flowing there.

Indeed the idea that capital should move freely is now being dismantled, wall by wall, by a growing number of nations. Every sovereign cage erected abroad shrinks the pool of voluntary buyers for US debt, because savings trapped in Frankfurt or Tokyo or Beijing to fund domestic deficits are savings that will not turn up at a Treasury auction. Curb the financial flows, and the automatic bid America has leaned on for half a century starts to thin, resulting in a slow subtraction and, ultimately, a funding shock.

Instead of waiting for market forces to voluntarily align, Washington is choosing to act proactively. This is the pivot that defines the rest of the story: from a defensive privilege that depended on others’ goodwill to an offensive instrument that manufactures the incoming flows so as to keep funding the US economy. Increasingly, that instrument runs on rails made of software.

The Offensive Shield: Software-Defined Narrow Banking

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Venture capitalists like to analyze technology in terms of waves. For them, each new wave is an opportunity to reposition, find interesting companies before anyone else starts paying attention, and generate precious alpha as a result.

The current wave, for instance, is the rise of agents, enabled by everything AI now contributes to software development. Before that came others: cloud computing, mobile internet, social media, B2B SaaS, the metaverse, and many more. Some produced great companies and outsized returns, while others proved disappointing.

In the early 2000s, one massive wave helped pave the way for a Silicon Valley renaissance: open source software. The dotcom crash of 2000 had been interpreted by many as a clear signal that there was no “there” there, that the idea you could build profitable businesses on the internet was merely an illusion. But then a small vanguard of software engineers started to share software libraries and lines of code with their peers for free, with license to reuse and modify. Over time, that movement contributed to both a massive collapse in the cost of software development and a dramatic improvement in the quality of code. It eventually fueled the rise of a new generation of startups and led to a decade during which, to borrow Marc Andreessen’s words, software would eat the world. A massive success!

One reason open source became a movement is that, in 2004, Tim O’Reilly, a respected publisher and conference host, brought it into perspective by explaining why sharing code for free made economic sense. His landmark article Open Source Paradigm Shift, based on a keynote he first delivered at the annual technology conference of private equity firm Warburg Pincus, drew on historical parallels and business strategy concepts.

Above all, it explained how you could still make money from something shared for free: open sourcing a layer in any value chain commoditizes that link and displaces competition toward another layer where one or more players hold a sustainable advantage. If you have something that others don’t, your best strategic move is to open source an adjacent layer and force everyone to compete with you within the layer where you hold the upper hand.

O’Reilly was writing about software, but the logic he described is indifferent to its raw material. One could say it even applies to money in general, and stablecoins in particular. And this is exactly the reason why we have been revisiting O’Reilly’s landmark article recently. On June 30, 2026, a consortium of more than 140 companies, including Visa, Mastercard, Stripe, Coinbase, BlackRock, and BNY, announced OpenUSD: a stablecoin nobody owns, with no fees to mint or redeem, no volume caps, and the reserve yield handed back to partners rather than kept by a single issuer. In other words, an open source stablecoin.

The announcement immediately drew two reactions. First, the trade press read it as a shot at Tether and Circle, and the market agreed with unusual speed, sending Circle’s stock down more than 17% within hours. Then came the backlash: several named “partners” turned out to have signed nothing; the governance is a curated board of incumbents, not a commons anyone can join by showing up; the word ‘open’, critics argued, is doing marketing work rather than describing a structure.

Both reactions are fair, but they are also too small. Whether OpenUSD ships, stalls, or collapses under its own consortium politics is a question about one product only. What we’re interested in here is the broader perspective. Stablecoins were already open-source money of sorts: they run on permissionless, open-source blockchains — Ethereum, Solana, and their peers — that nobody owns and anybody can build on. By contrast, what had not been open until now was the layer immediately above the rails: issuance, that is, where Tether and Circle sit.

Whatever OpenUSD’s fate, it is the first serious attempt to push the openness one layer up the stack, and to make issuance open source. The question worth asking is not whether this particular consortium succeeds. It is: how far up does the openness travel — and what happens to the money underneath it, and to every currency that refuses to play the same game?

The commoditization play, twenty years on schedule

When O’Reilly wrote his essay back in 2004, the goal was merely to explain why Linux was eating the software industry from below. His core claim was that software turns into a commodity the moment it has to speak a shared protocol, whether HTTP, SMTP, or TCP/IP.

Two decades on, the article reads as a template for building a competitive advantage on top of a commoditized layer in any value chain. A commodity, by definition, is something interchangeable, sourced from more than one producer, that a customer can swap for a rival without noticing the difference. Once a layer becomes a commodity in this sense, the profits don’t disappear into thin air; instead, they typically relocate to an adjacent layer.

O’Reilly borrowed the mechanism of that relocation from the late Clayton Christensen, then a professor at Harvard University and the famed author of the book The Innovator’s Dilemma. One of Christensen’s well-known theoretical concepts, which he labeled the “law of conservation of attractive profits”, holds that when a product becomes modular and commoditized at one stage of a value chain, attractive profits reappear at an adjacent stage.

This happened several times in the history of computing: IBM commoditized the personal computer in 1981 by opening its architecture to clone manufacturers, then lost control of the industry to Microsoft, which owned the layer just above the hardware. Dell later commoditized the hardware itself and won the market by embracing thin margins rather than fighting them. And of course, open source software later did the same to proprietary software. By commoditizing the act of writing code, it shifted competition to the adjacent, user-facing layer, where firms compete on user experience and network effects.

Stablecoin issuance today sits where proprietary software sat in 2003: it is closed, and it is concentrated, with Tether and Circle holding roughly 83% of the market between them. Their business model is disarmingly simple: take deposits, buy (mostly) short-dated Treasuries, keep the yield — whether to fund other ventures as Tether does, or to redistribute it to partners as a marketing fee as Circle does. Operating the issuance layer is lucrative precisely because it has not been commoditized: USDT and USDC are not perfectly interchangeable, and switching costs in integrations, liquidity, and compliance let both issuers hold on to reserve income that a true protocol-level market would compete away.

That reserve margin is exactly what OpenUSD is aiming at. The consortium doesn’t even need to be truly open — a genuine commons where anyone can join and shape the rules — to do the damage. It only has to open the standard wide enough to break the current Tether–Circle duopoly. A fixed set of members who then compete against each other inside walls they built together would be enough to turn issuance into a commodity.

Of course, OpenUSD is, for now, only an announcement. Still, Circle’s stock fell the instant the market grasped which way issuance was heading — toward the losing side of Christensen’s law, where a service becomes a commodity and its margin collapses. Nothing about how issuance works has changed, and nothing has yet shipped; the market is simply pricing in what issuance might become. Watching investors reprice Circle in a single afternoon, on the strength of a press release, was watching the shift O’Reilly described twenty years ago arrive exactly on cue.

How far up does the openness go?

Again, the stablecoin rails were open from birth. Permissionless blockchains are open-source software in the strictest sense: public codebases, forkable, maintained by distributed communities, owned by no one. The monetary instruments that run on them, however, are the opposite of open source. Tether and Circle built proprietary stablecoin businesses on a commons — the oldest move in the open-source playbook, and a profitable one for as long as nobody opens the layer you occupy.

OpenUSD’s value proposition is to open that layer too. Even if it fails, the idea will not die with it; the economics that produced it — 83% concentration, reserve yield held by two firms, switching costs as the only moat — will produce another attempt with a different logo. Then there will be attempts to commoditize even beyond issuance.

The agent frameworks now being built to let software transact autonomously are, for the most part, already open source. Settlement and compliance infrastructure could follow the path of web servers. Wallets and distribution, in turn, could be commoditized in much the same way that web browsers were. In the end, if these software-dominated layers are all commoditized through open source, Christensen’s law suggests that profits will migrate to whichever adjacent layer still depends on scarce resources. That would confine scarcity to the physical world: robotics, logistics, energy, and the machines that carry out what agents decide and stablecoins settle. As stablecoins become open infrastructure, layer by layer, they will become embedded in those physical systems, serving as the default settlement rails for real world commerce while competition and value creation shift to the assets and operations that cannot be commoditized.

This leads to the final question. If the rails, issuance, wallets, settlement, compliance, and agent frameworks all succumb to commoditization through open source, what becomes of the currency itself? Is the dollar simply the next layer in the stack, or is it something fundamentally different?

The dollar is the protocol beneath the stack

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We have come to Tether from opposite ends.

Marieke spent years at Circle, Tether’s rival, and carried the industry’s scepticism about it almost as a professional identity: the opaque reserves, the Bitfinex entanglement, the attestations that fell short of audits. Later, running the NEAR Foundation, she became a Tether customer and worked to bring USDT to the NEAR protocol. She now advises startups and non-profits that Tether funds. Finally, in October 2025 she went to the Plan B conference in Lugano and left convinced that something large was under way, something most of finance was missing.

As for Nicolas, he works in venture capital and is now watching Tether burst into the space, leading large rounds in companies such as Neura Robotics, with no obvious link to stablecoins1.

We have reached the same conclusion by these different routes. Tether is one of the most consequential financial institutions of the decade, but mainstream finance still does not treat it as one. What follows is our case for taking it that seriously.

The Machine That Prints Its Own Float

Tether issues USDT, a digital dollar. Customers hand over conventional dollars to get it, or convert other assets into dollars to get it. Tether puts those dollars into short-dated US Treasury bills, held through Cantor Fitzgerald, the Wall Street firm that buys and holds the bills for it, and keeps the yield. None of that yield reaches USDT holders, and none ever has.

For most of Tether’s life, when its holdings were tiny and interest rates were low, this earned little. But at today’s rates, on close to $190 billion of tokens outstanding, the arithmetic changes. Tether reported more than $13 billion in profit for 2024 and around $10 billion for 2025, on a staff of roughly three hundred. No branches, no loan book, no credit risk worth the name. Some call it a hedge fund that happens to issue a stablecoin.

As for Circle, Tether’s most direct competitor, it earns the same spread between a zero-yield token and interest-bearing reserves. But the two firms differ in what they do with the money. Circle spends it on credentials: compliance, institutional relationships, the standing to serve as regulated infrastructure. As a result, it is listed, MiCA-compliant for both USDC and EURC, and holds its reserves in BlackRock money market funds. It also hands a large share of its yield to distribution partners such as Coinbase, a cost Tether does not carry.

Beyond its core product, USDC, Circle has now actively started to build the entire stack required for money to move: from proprietary purpose-made Layer 1 blockchain ARC, to Circle Payment Network and more recently Circle Nanopayment, a gateway for stablecoin payments.

In short, Circle goes deep in building the stack that the future of money requires. Meanwhile, Tether seems to spend its money on everything else.

Tether’s (Bleak) Worldwiew

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Jess Hoversen grew up in Chicago. At ten, walking past the Chicago Board of Trade on LaSalle Street, she decided she would work there one day. At twenty she did, starting as an intern at the exchange and then trading currencies as the pits gave way to the screens, mostly in financial futures and options. She moved to MF Global as an FX and bond strategist, and watched the firm’s European debt position bring it down in 2011. Wanting to serve in government, she joined the CIA, and spent thirteen years as an economist across the Agency and the Departments of State and Treasury, latterly as a Treasury and Office of Foreign Assets Control (OFAC) attaché in Bogotá. She is now chief economist at Column, a nationally chartered bank and technology company in San Francisco, where she writes the newsletter Hegemoney.

Jess is one of the few people to have seen dollar power from both sides of the desk, as a trader who priced the currency and as a national security economist who helped wield it. On the floor she learned that currencies move on interest rate and growth differentials. At MF Global she saw a third force. When a colleague called the euro Europe’s answer to centuries of war, she realized a currency is also an instrument of statecraft. Her work centres on what sustains that leverage for the dollar. Most commentary asks whether the dollar is losing its reserve status; she thinks that is the wrong measure. The better question, she argues, is where the dollar is dominant rather than why, and whether anyone in Washington is still working to keep it there.

In this conversation, Jess explains why the fixation on reserve status misreads the dollar, and why its use as a vehicle currency, the rail two countries reach for when neither wants the other’s money, is the better gauge. She reads the surge in central bank gold as a sign of a new geoeconomic paradigm rather than a transactional rival, and argues that payment infrastructure now sits alongside economic size and deep markets as a pillar of dollar power. She dates the turn to alternatives to 2014 and the response to Crimea, draws the parallel with the eurodollar market of the 1960s, where even eurodollars had to touch the US system whilst many stablecoins now may not, and reads China’s aim as survival and alternatives, with Panda and Dim Sum bonds as the signposts to watch. She warns the United States to steel-man both sides of the trade-imbalance debate before repeating Europe’s mistake on austerity. Her case throughout is that the dollar erodes slowly, one per cent at a time, and that Washington has been too complacent to contest it.

Jess writes Hegemoney and is on Substack, and on X at @JessicaHoversen.

Marieke: Hi, I’m Marieke Flament.

Nicolas: And I’m Nicolas Colin.

Marieke Flament: And this is the Currency of Power podcast, the companion to the Currency of Power newsletter, where we dig into currencies, power, and the people connecting the two.

Today’s guest is someone uniquely positioned to discuss the power the dollar holds and what could realistically alter it. Jess Hoversen is the chief economist at Column, a nationally chartered bank and technology company in San Francisco. Jess writes analysis on geoeconomics and the dollar at Hegemoney, a Substack newsletter we’ve been really enjoying. For 13 years, Jess served as a senior economist at the Departments of Treasury and State and at the CIA. She’s also a former FX strategist and derivatives trader. Jess has years of experience in sanctions, international currencies, financial infrastructure, SWIFT, international payment systems, tech, and the macro conditions around the dollar. The perfect guest for Currency of Power. Jess, great to have you with us.

Jess: Thank you both so much for having me. It’s a real pleasure to be here, and I really appreciate the opportunity to talk with you today.

“Currencies are not just a tool of commerce, they are a tool of leverage”

Marieke: Thanks, Jess, for joining. We’re really looking forward to the conversation. Today’s episode should run in three parts. First, we’ll go into your background and your story, which is always interesting to hear. Then we’ll go into why dollar dominance is actually more durable than most people think, and the mechanics of the power that comes with the dollar, which you write a lot about. And then we’ll talk about the pressure points, the things that could challenge that power, and the role that tokenization and stablecoins play in the whole landscape. So the main theme is what actually sustains dollar power and what could realistically alter it. Let’s get started.

Jess, fascinating background: Treasury, State, CIA, lots of different things. Now you write on geoeconomics, you author a newsletter, and you work at Column. Tell us about you.

Jess: All right, let’s go. When I was 10 years old, my mother and I were walking across the street on LaSalle in Chicago, where I’m from. I looked at this beautiful building and I said to my mom, “I’m going to work there one day.” It was the Chicago Board of Trade (CBOT). She said, “Wait, what? You said you were going to be a ballerina.” She thought I wasn’t serious about anything, but I really was. I’ve always been fascinated by money and economics, and I knew really young that this was something I was going to do. So when I turned 20, I started an internship at the CBOT and I never looked back. I fell in love with markets and currencies, and I knew I was going to spend my professional life learning as much as I possibly could about them.

I started off as an FX trader. We did a lot of trading on the screens, because I was in the markets at a time when they were transitioning from pit trading to screen trading. It was still an exciting time to be a derivatives trader. The agricultural pits were still full. The majority of derivatives trading happened in those pits, and it was so exciting to hear the roar of the crowd, literally, when trades would go. I did a lot of financial market options and futures, a lot of FX futures and options, and a little bit of commodities, but mainly financials.

After about four years, I realized I needed a deeper understanding of how markets work to be a better trader. So I left the floor, sadly. I had a fun jacket and everything, just like the movies. My badge number was HOVE, H-O-V-E, which I loved, because all traders have a little acronym for their name so you could write down who you traded with, and mine was HOVE. I still have the jacket. They don’t let you keep the badge, unfortunately. Then I started a job with the now defunct MF Global. I think we were the only US firm to collapse in the European debt crisis, so that is a real badge of something. I don’t know if it’s a badge of honor, but it’s a badge of something.

Through that position I learned a lot more about market mechanics. What drives currencies? What drives financial markets? What are the factors? Currency markets tend to have two main drivers: interest rate differentials and growth differentials. But the deeper I got in my career, the more I realized there’s something else, and that something else was national security and geoeconomics. So, having been on the floor, having studied markets and worked as an FX strategist and a bond strategist, I needed something else. I also knew I wanted to spend time in government service. I really thought I wanted to join the Air Force, but I’m afraid of flying, and that’s a prerequisite. So I didn’t, but I wanted to serve my country. How do I do this? I put in an application and joined the Agency.

That was a fascinating part of my life. I spent 13 years total in government, moving around between different organizations, and that really fulfilled that third bucket of what drives currencies. Because if it’s not growth or interest rates, it’s something else, and that something else is geoeconomics. I spent a lot of time trying to understand the nexus between national security, capital markets, and the US dollar. I really capped off that experience by working as the Treasury and OFAC attaché down in Bogotá, Colombia, because that felt like the tactical implementation of dollar power.

When we think about why the dollar is a powerful tool of coercion, it’s because we can block access to our financial markets. Working for OFAC gave me that tactical experience: how do we run an investigation, what do we target, how do we deeply understand the executive orders that give OFAC the permissions to target certain entities and individuals, and how do we understand the evolution of sanctions. I want to say it was around 2014 or 2015, Jack Lew wrote a really interesting piece in Foreign Affairs. I think it was one of the first times a US policymaker started talking about the potential for over-weaponization. That was also right around the time of the BNP Paribas penalty, $9 billion. I think it was 8.9, but everyone likes to round.

Nicolas: Jack Lew was Secretary of the Treasury back then.

Jess: Yes, a sitting Treasury Secretary writing about the potential for over-weaponization. Watching that evolution and working at OFAC really helped me understand that concept much more: how we use sanctions, why we use them, and their impacts.

Then I joined Column. After 13 years in national security, I actually thought I was going to retire at the Agency. I thought I’d stay there the rest of my life, walk out with a small celebration of donuts and coffee, and go off into the sunset somewhere in West Virginia.

Then, through Happenstance and mutual friends, I met William Hockey, the founder of Column and also the founder of Plaid. I had never heard the private sector’s national security mission articulated in such a powerful way. I thought, Column is the epicentre of national security in the financial system. William really understood that there are three major theatres of economic competition: technology, energy, and finance. Column’s entire mission is to build a better bank, and better banks are what will put us at the forefront of that financial competition mission. After just one meeting, I knew I had to do this. It felt like that extension, because when you spend so much time in national security, you still crave mission. Column’s mission was so strong that I knew this was the next step, and it felt right. So here I am, writing Hegemoney.

Marieke: Tell us the link between the two. Help us understand the link between the newsletter and the mission of Column.

Jess: Column started as an infrastructure bank, designed to empower fintechs to build on top of the US financial system. William is a strong patriot, as are the employees of Column, and the mission evolved from “How do we enable fintechs” to “How do we enable the dollar.” How do we build this bank so we can be the tip of the spear in financial competition and national security?

Our core business, the bank, is building that faster, better bank. I think 90% of all our payments are processed in under 24 hours. You can’t be competitive without efficient, fantastic technology. That’s the first piece: the infrastructure for the dollar.

The second is access. We’re a correspondent bank. Despite the many attempts to move away from correspondent banking, it’s still like gravity. I like to say the payment law of gravity is that all dollars have to be cleared on US-regulated infrastructure, and despite the changes, correspondent banking has been the mechanism that fulfils that law of gravity. Column is actively creating that access point.

The third piece is research and outreach, and that’s where Hegemoney comes in. William recognized there are a lot of ways to talk about the dollar, as you both know, since you write about it so prolifically. I love your newsletter, which is another reason I’m excited to be here. But it’s another thing to frame it for a technology audience, for policymakers, which I have a ton of experience doing, and for the financial community.

For one example, you often hear that the dollar’s reserve currency status is going away. It’s thrown around so carelessly and flippantly. But if we look at the roles of the dollar, there are multiple avenues. How do we actually diagnose dollar dominance? After many conversations with William and Sean, our editor, we sat down and said we need to create a newsletter that talks about the dollar the way we think it should be talked about. So Hegemoney is the third point of the trident in Column’s national security strategy.

Nicolas: I have two small questions to make sure our conversation is accessible to a broad audience. Can you explain more about correspondent banking? It’s a very US-specific dimension that no one in Europe really understands. We clear payments here within the European Union very fast and without all those complications. So I know correspondent banking, but can you explain what Column provides in helping with that?

Jess: That’s a great point, and I often forget that Europe has a highly integrated system. I guess we like tradition, what can I say. We inherited it from the Medicis, so we’ve got to hold on to it.

Correspondent banking is essentially when a US bank provides a dollar account for a foreign bank so they can clear payments through us. We act as a gateway to the US payment system, whether it’s ACH or Fedwire. For foreign banks to clear dollars, they need access to the Fed payment system, and the Fed does not hand that out prolifically. It’s usually US financial institutions, or banks like Deutsche that have access through their US branches or subsidiaries. Generally it’s a US firm that actually has access to what we call the Fed master account. Foreign banks don’t have that, so they need an account at a US institution.

It has been in decline. Since 2010 or so, the BIS data shows correspondent accounts have shrunk by 20 or 30%. We’ve seen alternatives pop up to fill the gap, but at the end of the day the payment law of gravity when it comes to settling dollars is that you must clear through a US-regulated financial system.

Nicolas: My other question is at a higher level. Can you define geoeconomics for us? Everyone’s vaguely familiar with geopolitics, and over the past month everyone’s starting to get interested in this new vertical, geoeconomics. Gillian Tett is writing a lot in the FT about it. How do you define it?

Jess: I think it’s the intersection between economics and politics. That sounds cliché, but if you think about almost every war ever fought, most of them are a resource struggle. When we think about competition, growth, and even collaboration and multilateralism, it still comes down to how we create prosperity, and prosperity is a function of economics. As the world shifts into a new paradigm, whatever we call it, I look forward to whoever finally names it, because it’s no longer Bretton Woods. It’s not post-Bretton Woods or the Washington Consensus. It’s a new world order. Mark Carney tried “principled & pragmatic” policy, P3, which I love. Why are we not using that? It was fantastic. But we’re not. In this new world order, relationships appear to be more transactional, and we’re no longer assuming everyone is acting in good faith.

Marieke: Fascinating. Let’s go into the depths of the topic, since you’ve already started on it. Dollar dominance. I don’t know if you can share more, but when did you actually realize, hands-on, that the dollar was a system of leverage? You alluded to it a little. I’d love it if you could walk us through that moment when you realized it’s way more than just a currency.

Jess: I love that question. When I was a derivatives trader and even an FX strategist, I thought this was a market function. Currencies tie the world together. It’s how we do trade, it’s what links us, it’s the flow of funds. But it was actually when I was at MF Global that I realized currencies are a political tool. MF Global had, it’s not a secret, a very large European debt position, which is what ended up taking the firm down. Those bonds paid out completely; they never defaulted, they were never restructured.

John Corzine was the former CEO, and we were talking about the position. I’d been pretty neutral on the euro, not bearish, only because despite the economic struggles, the ECB was not engaging in the same level of quantitative easing as the Fed. From a balance sheet perspective, it was difficult to see how the euro weakened substantially. John said something: “The euro was Europe’s answer to centuries of war.” And I thought, you’re right, absolutely. That was it for me. The euro created a binding constraint, because why would you go to war with another country that shared your currency, whose fate directly impacted the economic fate of your own country?

It was really that moment, around 2011, which tracks. I realized I was missing this entire element of understanding currency markets. Currencies are not just a tool for commerce and finance, they are a tool of leverage.

Nicolas: I’m curious. I know we’re focusing on the dollar today, but you had that direct experience of the euro and trading on European markets, confronted with a crisis in 2011 that almost brought down the euro. How do you see the euro playing out? What are the tensions within the eurozone? What’s the role of Germany? Are we making the most of it, or do we need to find something else to make the eurozone work? I know those are big questions.

Jess: Let’s talk about the euro. I’m going to say something that I feel like everybody says, but it’s important: without debt mutualization, the euro can’t advance. You can’t have monetary unity without fiscal unity. The euro has prevented Europe from going back to war. It has brought everyone to the table. But I remember during the Greek financial crisis thinking that Greece essentially had a pegged currency. It was a floating currency, yes, but when your economics don’t match those of the strongest player in the union, it’s really difficult. There’s no adjustment mechanism, and they lack the fiscal adjustment. So that should be the priority for the euro, debt mutualization, and I’m one of a million people saying this.

Beyond that, it will be interesting to see to what degree Europe pursues a euro stablecoin. What I worry about with CBDCs and stablecoins is that we create a bifurcated infrastructure, where there’s one payment system for CBDCs and one for stablecoins. Because CBDCs are reserves, they will always be valued at one. Stablecoins can go under one. When you’re settling trillions of dollars, that matters a lot. That’s going to be difficult for interoperability. They’re effectively two separate currencies, so I worry about a bifurcation.

With the United States, we’re banned from pursuing CBDCs until 2030. The executive order is very clear. We’re full throttle on stablecoins. On CBDCs, we’re not advancing that until 2030, and I believe that’s both retail and wholesale, from what the EO seems to suggest. Europe has the opportunity not to be locked out of any payment system if it pursues both options, because it’s moving quickly on a digital euro. If it also pursues stablecoins, that would preserve its access to other types of settlement and payment systems.

“My local dive bar does not let me buy beer in gold dust”

Marieke: Let’s go back to the dollar. You write a lot about the power of the dollar and the misconceptions people have, for example that it’s all about reserve currency status. Walk us through the main misunderstanding people have about the power of the dollar.

Jess: I think the main misconception I read on FinTwit, and I hate that I’m this online, I could not have imagined in my 40s that I’d be so online and getting all these memes, but here we are. When I look at how the dollar is perceived, there’s a real misguided focus on reserve status.

Why was reserve status important in 1945? Because everything was pegged to the dollar and then to gold. The system required it. Even after the fall of Bretton Woods and the collapse of the institution in 1973, we went to a series of pegged exchange rates, which made reserves even more important.

Then came the Asian financial crisis in 1998. In the period from 1973 to 1998, countries needed reserves because that’s how you intervened in your currency and how you imported goods. Every development economist knows, and you probably learned this in Macro 101, that a country needs three months of reserves to be considered stable. That’s an indicator built into so many models.

But after 1998 and the collapse of the pegged exchange rates, I’m not saying reserves aren’t important, but they’re not as necessary. We are not protecting pegged exchange rates as much as we did before 1998. So what do reserves actually signify now? There was the surge of surpluses, the savings glut from around 2005, which Ben Bernanke talked about, and Brad Setser and Maurice Obstfeld have written on this at length. Because of globalization, the surge in global trade, and the interconnectedness of commerce, we did see a rise in reserves. So what do reserves reflect in that moment? They reflect the currencies that countries were using to engage in trade. That’s an important shift: reserves became an indicator of the currency being used in everyday trade.

Let’s talk about gold. If you’ve opened an article in the last five years, you’ve seen the surge in gold holdings. Now it’s about 25% of total reserves. When we look at reserves, other assets, SDRs, gold, and foreign exchange, gold is about 25%. That’s pretty significant. Ten or fifteen years ago it was only 10%, so that’s a huge rise. But why does it not matter as much? Because it doesn’t suggest the dollar is being used significantly less as a vehicle currency. What it reflects is the movement into a different era. We’re in a different paradigm, a geoeconomic-driven paradigm, and countries are protecting themselves from potential weaponization by holding gold. But as I wrote recently, my local dive bar does not let me buy beer in gold dust. Maybe they’d figure it out, I can’t say they’d say no, but gold is not a transaction currency. Not yet. There’s talk of tokenization, but you can’t use gold transactionally at a large, meaningful scale.

So why do I bring all this up? When we think about dollar dominance, we have to look at it holistically: reserves, vehicle currency, and funding currency. That’s how we diagnose the dollar’s status. Vehicle currency, to me, is the most transactional and useful measure of dollar dominance, because it shows that countries need the dollar to engage with one another. If I want to import avocados, a significant portion of US avocados come from Mexico, and that trade is done in US dollars. It shows that in order to get the things I need, I have to use this currency. That’s why I think vehicle currency status is more important than reserves these days. Reserves tell you what countries are using for their trade; vehicle currency is what they’re actually using.

What’s also fascinating is that when I sat on the FX desk at MF Global, you could see that the spread between exotic currencies was so wide that it always made more sense to go through the dollar. FX markets have changed now: they’ve become more electronic and digitalized, and it’s become easier to access pools of liquidity, so those spreads have shrunk. But generally, if I wanted to trade Brazilian real to Indian rupee, it just makes more sense to go through the US dollar than to try to make a market between those two. So if you think of vehicle currency as a two-pronged spear, the first prong is the currency you and I use to transact, and the second is the currency I use to drive from one currency to the next. Those are powerful and sticky.

Finally, on funding currency, our markets are enormous compared to other financial markets. They’re not comparable. Especially without mutualization in Europe, an Italian sovereign bond is very different from a German, Belgian, or Spanish one. The funding currency angle is really interesting because it shows people are willing to fund their businesses and financing needs in US dollars. So those are the three tools we need when we look at not why the dollar is dominant, but where the dollar is dominant. Because why the dollar is dominant is a very different story.

“We need an offensive dollar strategy”

Nicolas: What about sanctions? You know that space well, having been a practitioner in the US government.

Let me make a quick detour first. I used to say that when Trump was re-elected in 2024 and made it clear he intended to impose tariffs and wage trade wars on various partners, including allies, it forced us to dust off our macroeconomics textbooks. I learned macroeconomics at Sciences Po 25 years ago and never used it professionally until last year, when suddenly everyone was talking macroeconomics. When you revisit macroeconomics, you also revisit the events that led us to this paradigm shift you’re alluding to.

A key turning point seems to be 2014, when Russia invaded Crimea and the US responded with sanctions. Those sanctions were traumatic from a Chinese perspective, because the Chinese realized, if they do this to Russia today, maybe they can do it to us tomorrow. So they’d better work on making their economy, currency, reserves, and banking system immune to US sanctions.

How do you balance the two? Countries like China want to become more immune to US sanctions, but still everyone wants to use dollars for everyday trading because it’s so efficient and convenient. Paul Krugman made the comparison, quoting someone else [Charles Kindleberger], that when a French speaker and a Spanish speaker who don’t know each other’s language meet, they discuss in English. That’s the lingua franca that makes it possible for everyone to interact, and the dollar is the same.

So how do you balance the two? Are there tensions at the moment? Are there counterparties that refrain from using the dollar because there’s macro or systemic pressure from government authorities who want to avoid exposure to sanctions?

Jess: I love this question, and I want to circle back to the first thing you said, because 2014 is such an underappreciated date.

Read more

On 2 June, Alphabet, Google’s parent company, sold new stock for the first time since 2005. It announced an $84.75 billion raise, the largest in history and more than twenty times the roughly $4 billion it took in back then. Warren Buffett’s Berkshire Hathaway took $10 billion of it at a discount.

Alphabet had cash, just not enough of it. It held roughly $127 billion at the end of March, less than it now plans to spend in a single year. When the build outruns the balance sheet, even a company this rich has to raise the rest in the market. That build, of course, is AI.

Only a few days later, SpaceX went public in the largest IPO in history, valued at $1.75 trillion. OpenAI and Anthropic are preparing to follow. Washington and the firms’ own investor materials cast all three as national infrastructure, foundational capability the United States must dominate whatever the cost. The framing lifts them above ordinary products and into the language of strategic necessity.

Those events sit awkwardly inside the usual story about the US market, which says American stocks rise because American firms are the best in the world and that the market exists to fund them.

None of that seems to hold anymore. The US stock market now works less as a place where companies raise capital on their results and more as the world’s destination for spare money. Global capital comes here because nowhere else is big enough to hold it. Prices follow the volume and direction of those flows more than the earnings beneath them, pushed by the index funds and automated machinery that spread money across the market without judging value.

The newer development sits on the debt side. Foreign money has long helped fund the federal government, so that link is old. What is new is the machinery now taking shape to deepen it: dollar stablecoins, whose design turns every token issued into fresh demand for US government debt.

To see what moves the market, then, look past the earnings picture to the monetary one: money supply, capital flows, and the government’s borrowing needs.

The world’s surplus savings have nowhere to go but America

Let’s begin with where the money comes from. Michael Pettis, our most recent podcast guest, has argued for years that capital flows drive trade flows rather than the reverse. Surplus economies such as China, Germany and Japan hold down household consumption to support their industries, and the savings they cannot spend at home have to go somewhere. As Michael puts it,

If I am able to control my external account... then whether you like it or not, your economy will adjust to my industrial policy.

And so, most of those savings come to the United States, because no other market is deep or open enough to absorb them, directly or indirectly. The routing hardly matters: Chinese or German savings parked elsewhere displace other capital towards the United States, because the world’s surpluses must be matched by deficits, and America’s capital markets are both the most welcoming and the largest of all.

Oil exporters belong in the same story, even if they arrive by a different route. Kuwait, Qatar and Norway run surpluses because they earn a resource windfall and bank much of it rather than spend it. The source differs from China’s or Germany’s, a rent in one case and repressed demand in the other, yet the result is identical: saving that outruns domestic investment and has to go abroad. Most of their oil sells in dollars, which feeds a steady global demand for the currency. The dollars pile up and flow to the same place as every other surplus.

It’s true that the dollar’s grip on oil is loosening at the edges. A growing share of trades now settles in other currencies, mostly yuan, through channels that sidestep the Western financial system entirely. The shift is real but slow, since the convenience and depth of a dollar oil market are not easily undone. Even so, if that anchor keeps eroding, one of the steadier sources of demand for the dollar erodes with it.

Wherever the surplus comes from, whether from oil exporters such as Qatar or manufacturing powerhouses such as China, it converges on one destination. The United States runs a current account deficit of about $1.1 trillion a year, which supplies the world with dollars that have to be invested, and those dollars come back as purchases of American shares, bonds and property. The country works as a giant investment platform, an arrangement we can call “America Capital Partners”. By the end of 2025, foreigners held about $27.5 trillion more in US assets than Americans held abroad, close to 90% of GDP.

The dollars then spread across US assets, Treasuries, corporate bonds, shares and property. Foreign money lands first and heaviest in government debt, holding about a third of US Treasuries but under a fifth of the equity market. That weighting drives a kind of overflow mechanism. By taking so much of the bond supply, foreign buyers hold down the risk-free rate, which pushes domestic investors out of bonds and into shares in search of return. Foreign capital lifts share prices indirectly, through the rate, while the marginal buyer of US stocks stays American. Public-debt financing and asset-price inflation turn out to be two outlets for the same global plumbing.

Passive money and an inelastic market turn those flows into prices

A flow of money does not become a price on its own. It needs a mechanism, something that turns the inflow into higher prices. Two pieces of research explain how that works in today’s market.

We owe the first to Michael Green, another podcast guest. In his work on passive investing and its impact on the market, Michael estimates that passive strategies, index funds and their variants, now account for close to 45% of the US equity market. Unlike active investors, index funds make no judgment about what a company is worth. They are required to buy more of whatever is already largest, at whatever price the market sets. They are, by design, price-insensitive.

Take the SpaceX listing on 12 June. The stock did not join the big indices on day one, but the providers had already cleared its path. FTSE Russell rewrote its rules in May to fast-track giant IPOs and will add SpaceX to the Russell 1000 from 26 June, with MSCI following on 29 June. Once those dates arrive, every fund tracking the indices has to buy, whatever it makes of the company. Only the S&P 500 held the line: its profitability and seasoning rules bar a firm that lost $4.3 billion last quarter, so SpaceX stays out until at least 2027.

AkademikerPension, a Danish fund managing about $25 billion, saw the trap coming. Judging the stock grossly overvalued and catastrophically governed, with Musk holding some 85% of the votes, it struck SpaceX from its whole portfolio by hand, knowing the passive machinery would otherwise load the position for it. Most institutions did not bother. How ironic: escaping the system takes an active decision, and a passive investor, by definition, will not make one.

So with the trackers committed to buy and SpaceX fast-tracked almost everywhere, the stock arrives with weeks of forced buying lined up behind it. Musk need only rally early retail buyers, an art he masters to perfection, to make SpaceX a heavy index weight, and the passive funds then have to follow him up.

The second finding is what price-insensitivity does to a market. Work by Xavier Gabaix and Ralph Koijen, known as the inelastic markets hypothesis, finds that each dollar flowing into equities raises total market value by roughly five, on their estimate. In a normal market, rising prices attract sellers and deter buyers, keeping valuations anchored to reality. But when nearly half your buyers must purchase more of something simply because it got bigger, that stabilising mechanism breaks down. The market becomes inelastic, and a relatively small flow can move prices by a large amount.

AQR, a quantitative investment firm, puts numbers on the same point over a longer span. Its researchers Antti Ilmanen and Thomas Maloney found that US shares beat the rest of the developed world by about 4.7% a year over the 35 years to 2024, and that only a small slice of that gap came from American firms actually earning more. Most of it, 3.8 of the 4.7 points, came from rerating: investors agreeing to pay more for each dollar of those profits, so the share price climbs faster than the profit beneath it. The American lead is mostly investors paying up. The inelastic multiplier is what lets it run: money flows in, prices rise, the gains pull in more money, and the loop repeats. The market has run it for three decades, and AI is its current fuel.

The loudest story pulls in the most money

How should a public company play this game? If one dollar of inflow moves five dollars of value, the marginal dollar is worth chasing, and the surest way to win it is a louder story rather than a better set of accounts. The flow reacts to attention faster than it checks the numbers. So the rational move for any large company is to manage its own narrative and pull the flow towards itself.

Keynes saw this long ago, describing the market as a beauty contest in which the prize goes to whoever guesses what the crowd will favour. Robert Shiller gave it a modern name, narrative economics, the spread of contagious stories that move prices on their own. What people file under meme stock is the same mechanism seen from outside.

Elon Musk has turned it into a repeatable operation, using X, the platform he owns, to push Tesla, SpaceX and Dogecoin to more than 200 million followers. Each post is a flow event. When a dollar of inflow becomes five dollars of market value, controlling the story stops being mere communications and becomes the most leveraged instrument a chief executive has. The system is built to reward exactly this.

The gains have narrowed to a handful of AI names

Put the two together. The world’s surplus arrives in the US and flows into the largest, most liquid vehicles available, which means index funds. Those funds buy mechanically and without restraint, and because the market is inelastic, each dollar they deploy has an outsized effect on prices. The result is a market where valuations are driven less by what companies earn and more by the volume of money that has nowhere else to go, amplified by the loudness of the story being told.

One sector is playing that game hardest and winning it: AI.

Read more

Michael Pettis began his career on Wall Street, specializing in Latin America in the years after the debt crisis of the 1980s. By the late 1990s he was a managing director at one of the big Wall Street firms, running its Latin American capital markets. A few years later he found that the work had become repetitive, and he wanted to study an economy he knew little about, so he moved to China to teach finance. He taught first at Tsinghua University and then, for more than two decades, at Peking University. He remains based in Beijing, where he is a non-resident senior fellow at the Carnegie Endowment for International Peace. He is the author of several books, most recently Trade Wars Are Class Wars, written with Matthew C. Klein.

Michael is one of the few Western economists who follows the Chinese economy from the inside. His work centres on one question: why does China save so much and America so little? Most answers point to national character, but Michael points to policy. When a country holds down the household share of income through suppressed interest rates on savings, a weak currency, or wage restraint, the surplus it exports is the other side of the consumption it has taken from its own workers. A trade dispute, on Michael’s view, is a dispute over income between countries.

In this conversation, he explains why China’s overinvestment and its strong infrastructure are the same story, why infrastructure is a cost of growth rather than a source of it, and why financial repression pushed down the Chinese household share through the 2000s. He uses Europe, from Germany’s labor reforms to Spain’s credit boom, to show how these imbalances spread, and argues that deficit countries do not choose to deindustrialize but have it forced on them. He sets out his doubts about the dollar’s exorbitant privilege and about stablecoins, and reviews a century of precedents to reach the question he thinks the next round of talks will turn on: not how everyone wins, but who pays for the adjustment.

Michael writes for Carnegie’s China Financial Markets newsletter and on Substack, and is on X at @michaelxpettis.

We usually share these conversations in video, but a problem uploading the HD files means this one is audio only. Apologies for the change, and thank you for your understanding.

Nicolas: Hello, I’m Nicolas Colin.

Marieke: And I’m Marieke Flament.

Nicolas: And this is the Currency of Power podcast, the companion to the Currency of Power newsletter, where we dig into currencies, power, and the people connecting the two. Today our guest is Michael Pettis.

“Infrastructure is not a source of growth, it’s a cost of growth”

Michael, welcome. You’re a non-resident senior fellow at the Carnegie Endowment for International Peace, and you’re the author of several books, one of them being Trade Wars Are Class Wars with Matthew C. Klein. I think it’s the most recent, and it’s very much about the topic we will be discussing today, which is macro imbalances, macroeconomics in general, China exporting so much and the US consuming so much, and all the consequences of that situation all over the world, including, maybe, Europe.

We’d like to start with your journey. You’re based in Beijing. You’re a rare Western economist commenting on the Chinese economy from the inside, from the ground. Can you tell us what brought you to China in the first place, and what made you decide that you wanted to stay?

Michael: I started my career on Wall Street, where I specialized in Latin America. This was right after the global debt crisis of the 1980s. By the end of the 1990s, I was a managing director at one of the big Wall Street firms, in charge of Latin American capital markets.

At some point, it had become a little bit boring, in the sense that when I first started, everything we did was very new, had never been done before, so you had to put together the entire transaction. By the end of it, it was very cookie cutter. Every deal was the same as every previous deal. So I thought I would take some time off and learn something that I didn’t know much about. India and China were the two really big economies that I had very little familiarity with, so I decided to go to China for two years. I didn’t want to go as a banker. I had been teaching at Columbia University while I was working on Wall Street and I thought I could use that to teach a couple of years in China and get a chance to learn the economy from a point of view different to that of a banker.

I was very lucky. I was offered a position by one of the top two schools, Tsinghua University. But after two years, I decided that, although I’m a New York fanatic, I wasn’t ready to move back to New York yet. So I switched to Peking University, because people told me it was a very different school. Not really, but at the time that’s what I believed. And I’ve been there for 24 years.

Nicolas: Do you speak the language? Did you learn Mandarin?

Michael: Terribly. I can order a beer, I can tell a taxi cab what to do, but not much better than that.

Marieke: It’s really interesting, because you came at economics through a background as a finance person. You’ve been in the guts of the system. What different outlook does that give you when you look at teaching economics?

Michael: I stay away. I’ll tell you the truth, I’m very skeptical about academic economics, particularly of the so-called Anglo-Saxon variety, what’s taught in the US and the UK. I think it does a really good job of describing a world that frankly doesn’t exist, sort of an Adam Smithian world in which no one is big enough to intervene in the markets. But that’s not really what the world looks like. So my focus tends to be much more practical. The most famous course that I gave at Peking University was called the PBOC Shadow Committee, where the students pretended that they were the monetary committee of the Central Bank of China. We went through regular events occurring in the world, and we really spoke about how that affected investment, how that affected businesses, things like that. So as an economist I would fit much more in the world prior to the 1960s and ‘70s, which I think is the last time we were really good at economics, because I think we took a wrong turn in the 1970s towards a much drier, less useful understanding of economics.

Nicolas: That’s funny, because when Trump was re-elected in 2024 and conveyed the message that he was really serious about imposing tariffs and waging trade wars this time, I realized we all had to dust off our macroeconomic textbooks. I used to study macroeconomics at Sciences Po in 2000 and never used it for 25 years. Suddenly it’s become the main thing, and really a discipline you need to master to understand what’s going on. Maybe that’s the same impression.

Michael: It’s what I tell my friends. We have to reread Keynes. We have to read Joan Robinson, who I think is particularly important here; I think she did some of the best work on trade. We have to reread Ragnar Nurkse, we have to read Michał Kalecki, all of those ways of understanding macro, particularly within a globalized world, which is very different from macro in a non-globalized world.

Nicolas: So what does being based in China give you that other economists or analysts don't have? What do you learn? What do you observe on the ground that's difficult to decipher from the outside?

Michael: I’m very skeptical of the argument that the people who really understand an economy are the ones in the middle of the economy. I don’t think there is that much historical evidence that supports that. What happens is that if you live in a country you get many of the small things right that people who don’t live in your country might not get. But there’s no evidence that you get the big things right. If you look at the criticisms of the US in the 1920s, they mostly came from Europe. It was only in the 1930s that American economists started to recognize those criticisms.

If you look at something that’s very close to me, because my career started out of that, the huge borrowing and current account deficits of Latin America in the 1970s, it was mostly foreign economists, not a lot, but mostly foreign economists, who said this is completely unsustainable. In Japan, it was often Americans and Europeans who were the earliest to recognize problems in the Japanese growth model. In the late ‘80s, when Paul Krugman started saying there really are problems with this model, the standard response is something that we hear today: you’re a foreigner, you’ll never be able to understand Japan.

And I think we hear that a lot about China. But as I said, there is no evidence that an outsider is more likely to be systemically wrong than an insider. In fact, you could argue that maybe outsiders can be a little bit more open about some of the issues.

Now, having said that, I don’t want to say that my having spent 24 years in China is totally worthless. You do get a very different view. For example, I mentioned the small things. They’re not small, but they’re very specific. People have been telling China again and again that if you have a problem of deflation, it’s very simple, expand your money supply. That’s what they used to say to Japan in the ‘80s and ‘90s: it’s very simple, if you expand your money supply, everyone knows more money means inflation. And yet that hasn’t happened. Money has grown quite quickly in China, as it did in Japan in the late ‘80s and ‘90s, and yet they suffer from even deeper deflation.

The reason there is when it’s very useful to be close to a system. One of the first things you notice about the Chinese banking system, which was true about the Japanese banking system, is that unlike the banking system in the US and Europe, very little credit expansion is directed towards consumption. It’s almost all directed towards investment. So when you expand the money supply and expand loans, which is what happens in a really bank-centered system, then what you’re really doing is expanding supply more than you’re expanding demand. And as anyone can tell you, that’s disinflationary, not inflationary. So those are the kinds of things that you need to know about China. I’m not sure living in China gives you a particular advantage there, but if you specialize in trying to understand the Chinese economy, those are the advantages that you get.

Marieke: So what do you think we get wrong in the West about China? You mentioned deflation, the fact that the banking system is actually not the same. What other examples come to mind, things where there's currently the wrong perspective on what's actually happening?

Michael: I think sometimes people overestimate the power of Beijing to get things done. There is a perception that if Xi Jinping says jump, everybody in China jumps. It’s not really true.

Historically, there has always been a conflict between the power of the central government, whether it’s in Beijing or Xi’an or wherever it has been historically, and the power of local governments. That continues to be a very big issue in China. For example, a few days ago, the South China Morning Post had an interesting article about, I forget which industry it was, one of the industries suffering from involution, where Beijing has made it very clear you have to cut down capacity. And capacity is actually expanding, not cutting down, because local governments want to continue expanding domestic production. So all the yelling and screaming from Beijing doesn’t seem to have had as big an effect as you might have expected.

The other thing that I think people get very wrong is that they have two different stories about China, which they think are in opposition. You can argue that the bear case about China is massive overinvestment, obviously in the property sector, which has started to correct, but also in manufacturing and in infrastructure. And then you have the bull case for China, which is counterposed to that, and the argument there is, no, China is doing great. Look at its infrastructure, it has the best infrastructure in the world. Look at its technology, it’s catching up to the US in many areas and surpassing it in others. So it must be doing very well.

And the point there is that those two stories are not at all inconsistent. They could very well be the same story. When you overspend on infrastructure, you don’t get worse infrastructure, you get better infrastructure. The problem is, is it economically viable? Is it worth the cost? When you overspend on technology, you will get great technology, but it may bankrupt you. We’ve seen this before in the Soviet Union in the 1960s. The Soviets expended an enormous amount of resources on catching up and surpassing the US technologically, and they did in some areas. We all know about the famous Sputnik moment. And yet in the end, it didn’t really provide the productivity boost that Soviet officials were hoping would get them out of their domestic economic problems, I suspect because their great technology was never economically viable.

The same thing happened in Japan. I always tell people that the best way to understand China is to read as much as you can about Japan in the ‘70s, ‘80s, and ‘90s. I’m old enough to remember that in the late 1980s Japan easily had the best infrastructure in the world. Nobody compared to it. It also had some of the best technology in the world. Every cool consumer product in the 1990s was Japanese. And yet it still didn’t lead them out of the economic problems that the economy suffered. So I would argue that great technology is certainly a wonderful thing, but you can bankrupt yourself with great technology just as easily as you can get rich with great technology.

Nicolas: And what about scale in that case? Because China is much bigger than Japan ever was, more comparable to what the US was in the early 20th century compared to European nations. Can scale actually save you when the reckoning comes? Can China overcome the obstacles because its sheer scale makes it possible to impose new terms, a new paradigm onto how the economy works?

Michael: I think the scaling argument is one of those retrospective arguments. When an economy is growing very quickly, we look for reasons to explain that rapid growth. This is why it’s really useful to be obsessed about economic history in general, because scale isn’t as much of an advantage as you would think it is when you look at the historical precedents.

In terms of population, India is bigger than China. Those have been two huge countries basically for the last 100 years, longer of course, but in the last 100 years those are potentially the countries with the best scaling benefits, which they’ve used miserably. That hasn’t really been very successful. But more importantly, the extent of scaling isn’t a function of population, it’s a function of population times income. And Japan was 17% of the world in 1991. That’s what China is today. So when people talk about how massive China is, yes, it’s about as big as Japan was in the early 1990s, and that didn’t resolve Japanese problems. It’s hard to see why it would resolve Chinese problems.

For me, it’s a very simple arithmetic problem. If you take 50 euros of resources and combine it with 40 euros of resources and create 80 euros of value, it doesn’t matter how big you are, you’re losing money. There, I would say the poster child is the province of Guizhou in the south of China. You may know of Guizhou. It’s a beautiful mountainous province, a little bit richer than Cambodia, so it’s quite poor. And it has easily the most spectacular bridges in the world. More than 50 of the 100 highest bridges in the world are in this one little province, and approximately half of the top 10 are in this province. And yet it was the first province to go bankrupt.

The argument there is that there was this belief that infrastructure creates growth, that infrastructure is a source of growth. So because Guizhou is so poor, let’s massively spend on infrastructure and Guizhou will get rich. Well, it’s not that easy. Infrastructure is not a source of growth, it’s a cost of growth. If you could grow without spending money on infrastructure, you’d be better off. But when I say it’s a cost, that cost is only justified if the subsequent increase in productivity exceeds the value of building that infrastructure.

It turns out that more productive countries tend to benefit more from infrastructure than less productive countries, because you can basically say the value of infrastructure is the amount of man-hours it saves times the productivity per worker. In very low productivity countries you can absorb much less infrastructure productively than in high productivity countries. The reason Switzerland has more investment per capita than another mountainous landlocked economy like Bolivia is not because that infrastructure made Switzerland rich. It was because Switzerland was rich and was able to absorb that infrastructure. So the question then becomes, why is Switzerland richer than Bolivia? That’s the question that can win you a Nobel Prize if you answer it. But the simple answer is that Switzerland has the set of institutions, political institutions, legal institutions, financial institutions, that allow workers and businesses to operate at much higher levels of productivity. So what you really need is for infrastructure to keep pace with the growth in productivity, not for growth in infrastructure to replace growth in productivity. In China, you have the case where it’s really been increased spending on infrastructure that has driven much of the growth.

But then you run into a strange paradox, and Martin Wolf wrote about this in the Financial Times about a month ago. He said, how is it possible that a country that invests more than 40% of GDP is only growing at 5%? That’s, in theory, impossible. But that is what we see in China. And the only possible answer is that that investment is not real investment, it’s non-productive.

Just to give you a sense of how much of an outlier China is: investment is roughly 25% of global GDP, and that’s been a pretty consistent number. But it’s not the same in every country. Europe, the US, the capital-rich countries invest much less. They invest around 18 to 20% of their GDPs. Developing countries, poor countries, also invest much less. But there are countries that invest much more. Very rapidly growing developing economies growing at 6%, 7%, 8% might invest 32%, 33% of their GDP. That tends to be the high end. I once saw that South Korea invested as much as 39% of its GDP for one or two years, and that’s the only higher number. But China for the last 40 years, for the last 30 years, has invested between 40 and 47% of its GDP year after year after year.

And as in Japan in the 1980s, as in Brazil in the 1960s and ‘70s, all of that investment created significant economic activity that looked like growth. But we realized in retrospect that much of that investment, the famous bridges to nowhere in Japan, had no economic value. So they actually made the country poorer, not richer. Obviously, if you’re a very big country, there’s probably more room for you to invest in productive infrastructure. But there’s always a limit. And once you pass that limit, then all of this investment is driving GDP growth, but not real economic growth.

Marieke: It's really interesting, because hearing what you were saying, I'm thinking about AI, which is at the same time an infrastructure but also carries the wish that it will increase productivity. And listening to you, I was thinking, well, who is it going to bankrupt? Because when you look at the massive valuations that are floating all around the world, and the very different paths that China is taking from the US in terms of its AI investment and development, I don't know, do you have a view on the role that AI will play in the model you were describing?

Michael: If you look back at these technology bubbles, or, I shouldn’t call them a bubble, stages of the Industrial Revolution, periods when we saw very rapid growth in technology and very rapid growth in productivity, it’s interesting, because I used to track stages of global financial liquidity being driven towards developing economies. You’ve had many bubbles in developing economies, Latin America in 1925, several in the last 200 years. And there was an economic historian at Oxford, I forget his name, who listed stages of the Industrial Revolution where you saw very rapid increases in productivity and technology. I was amazed, because his stages exactly matched my stages. What it suggested to me is that a lot of this is driven by, for whatever reason, a significant increase in risk appetite, perhaps because of a massive expansion in liquidity. Several of these stages were driven by gold discoveries in the 19th century, for example. So risk appetite goes up and money pours into risky ventures, risky countries, risky everything. And then you have the bubble and the bust.

But not all technology bubbles have been bad. The railroad bubble in the 1860s in the United States collapsed in 1873, and yet the US was left with spectacular infrastructure. We’ve seen many cases of this. Remember there was a bubble in the 1990s for companies laying out the framework for the internet, the cables and all that. Most of them went bankrupt too, but they left the world with very good technology, which then presumably boosted productivity growth. So you can have good technology bubbles and bad bubbles. I would say real estate bubbles are almost always harmful for the economy. Infrastructure bubbles can be or cannot be, depending on their extent. And the same thing with technology bubbles. This is sort of a cop-out, because what I’m saying is that we don’t really know. Sometimes these are good things, sometimes these are bad things. I think we have to bear that in mind. But China really is different. The level of investment is just incredible. We’ve never seen so much investment pouring into an economy for such a long period of time.

“Whether you like it or not, your economy will adjust to my industrial policy.”

Nicolas: So the complement of that huge investment effort is low consumption. When people try to understand the macroeconomic situation, they always look for causality, and macroeconomics is difficult to understand for that reason, because it's a complex system of feedback loops, each loop feeding into the others, and we don't really know what started the whole thing. But I would say, after having read much of your work and listening to many of your interviews, that at the heart of it there's this phenomenon of very low household consumption in China. Is it fair to bring it back to that core phenomenon?

Michael: There are two arguments here. To simplify the world, let’s say there are two countries, China and the US. The US has very low savings, and China has very high savings. And globally, savings must equal investment. So by definition, if one country saves more than it invests, the other country must invest more than it saves. That’s definitionally true. It could be just an astonishing coincidence that the world always balances. It’s a little bit hard to believe. So if you don’t believe it’s a coincidence, then you must believe that there is some sort of causal relationship. Either high-saving countries force low savings elsewhere, or low-saving countries force high savings elsewhere.

Now, for many Americans, and I think for many people, it’s hard to believe in a world in which the US doesn’t have agency. As one of my professors told me many years ago, most Americans believe that either everything good in the world is caused by the United States, or everything bad in the world is caused by the United States. In fact, lots of things happen whether the US wants them or not. So for me, the question is, which way does causality flow between China and the US?

Here I’m very Joan Robinson. If I control my external imbalances, my external account, if I control my capital account and my trade account, then I’m able to create domestic imbalances, which are reflected in my external imbalances. Because normally, if I subsidize manufacturing at the expense of the household sector, I should run a trade surplus. That trade surplus should change capital flows in ways that probably will drive up my currency. As my currency goes up, households are better off and manufacturers are worse off, so I rebalance.

Now, if I don’t want to rebalance, I control my capital account, I intervene in my currency. So here’s the thing. If I control my external accounts and you don’t control your external accounts, then which way is causality likely to run? Probably from me to you. So I would argue in that case the source of the imbalances is more likely to be in countries like China that very sharply control their external accounts.

I would add to this that the decline in the household share of GDP wasn’t smooth. It began in the 1980s, when Chinese consumption was quite normal. Chinese savings were quite normal by global standards, and then it started coming down all the way until 2011. Then it went up a little bit until 2019, and since then it’s been coming down again. But the really sharp decline occurred in the 2000s, between 2002 and 2010. That’s when we saw an almost collapse in the household share of GDP.

So what explains that? That’s when China decided to clean up its banking system. In the 1990s, bad loans were such a problem that private sector estimates were that as much as 40% of the loans were bad. And the People’s Bank of China (PBOC) never really disagreed. They didn’t agree, but had they disagreed, they would have said something, and they didn’t. China, because it was initiating the IPOs of its four big banks, a really big political event in China, had to clean up the banks.

The way they cleaned up the banks was by shifting the bad loans to what were called asset management companies, which were themselves funded by the banks. So it didn’t really solve anything. But the way they solved it, if you look at real interest rates in China, they were hugely negative basically from 2000 to 2011. And when I say negative, I mean the GDP deflator in China was 8% to 10% during that decade, the nominal growth rate in China was 16% to 20% during that decade, and the deposit rate was 2.5% to 3%. So if you put your money in a savings account, much of it was confiscated through this hidden tax. The IMF estimated that as much as 5 to 8% of GDP was transferred every year from the household sector to the rest of the economy in the form of this tax. So to me, it’s not at all surprising that the income of the household sector, basically there was a huge tax on their savings, so their disposable income as a share of GDP dropped very rapidly. And as a result, we saw a huge surge in the Chinese trade surplus.

So to me, when people say that that must have been the result of domestic policies in the United States, I find that really hard to reconcile with what China was doing at the time. It was very specifically cleaning up the banking system using financial repression, and that had to have an impact on income distribution, which in turn had to have an impact on its external account, et cetera, et cetera.

So that’s really my big argument with, not argument, but I meet with a lot of European policymakers. In fact, next week I’ll be going to Brussels, and this is what I tell them. Again, it’s a very Joan Robinson argument, and the argument is this: if I am able to control my external account to the point where I can externalize the costs of my internal imbalances, and you don’t control your external account, then whether you like it or not, your economy will adjust to my industrial policy. So not only do I get to decide the industrial policy for my country, I get to decide the broad outlines of the industrial policy for your country. You get to choose whether you absorb it in the form of higher debt or higher unemployment, but you are going to lose manufacturing, whether you like it or not. And that’s something that I think is incompatible with a global trading system.

Marieke: I think it's fascinating, because we talk about repression also a bit at the individual level. But I can't help but look, with a 20-year perspective, at the fact that there's been a massive uplift in terms of poverty in China, and there are fewer people that are very, very poor. There's also a major amount of billionaires and so on. So how do we reconcile both things? Because on one hand, what you were describing does not sound great, but on the other hand, if you go witness it and look at some numbers, people seem better off.

Michael: And that was the story with Japan too. Japan lost 60% of its economy after the war, and by, I think, the 1960s, it had recovered it fully. That was a real recovery. Brazil, the first country I believe to be called an economic miracle, in the late ‘50s and ‘60s and early ‘70s, was growing very quickly and very healthily. It was only in the mid to late ‘70s that we started to see the problems emerge. The Soviet Union: we forget that in the 1960s, most intelligent people, not just in the Soviet Union but also in the US, from President Kennedy down, believed that the Soviet Union was going to overtake the US economically and technologically sometime in the 1980s. You can find it in Paul Samuelson’s first edition of his book on economics. I think he said 1984. So it’s always a bit of a surprise, because there have been real advances.

What I would argue is that a high-investment model, which all of those countries followed, is the medicine that the doctor ordered when you are significantly underinvested. Japan after the war, Brazil as a typical developing country, China, remember, when it began its reforms, had gone through five decades of first the anti-Japanese War, then Civil War, then Maoism. So China’s infrastructure, housing stock, and manufacturing stock was a total disaster. On the social basis, it was not so bad. It was relatively educated, very healthy, with political stability. So China, I would argue, entered the reform period hugely underinvested, in which case very high levels of investment are exactly what you need.

The problem is that when you have a very rapid growth in investment, and in China it was the highest growth rate in history, then at some point you close the gap between what you have and what you need. And that’s when you should shift your growth model. No country, by the way, has ever shifted its growth model in time. One of my favorite economists, Albert Hirschman, this was a problem that really puzzled him in the ‘70s. His conclusion was that a very successful growth model creates a very powerful constituency that benefits from that growth model, and they tend to block efforts to change the model, which is why you always overshoot.

Now, how can you tell if you overshoot? In China, as in Japan, there’s a very easy way of telling. Remember, I said that in China almost all lending goes to investment. So if you are investing productively, your debt can grow very quickly, but your debt-to-GDP won’t grow at all, because presumably that productive investment is creating real growth in the economy. If you look at China before 2008, 2009, debt grew very rapidly, but the debt-to-GDP ratio grew slowly, bouncing around. It really wasn’t a problem.

But it’s precisely around 2008, 2009, probably not a coincidence that that’s the global financial crisis, that you start to see an acceleration in debt and a deceleration in GDP growth. That should really puzzle us. If you saw that in the US or Europe, fine, because a lot of lending in the US and Europe goes to consumption. But in China, almost none went to consumption, it all went to investment. So that’s a real puzzle. And the only explanation I can come up with is that an increasing amount of this investment was non-productive.

Now, that should show up in the productivity data, and it does. Productivity growth has slowed very sharply since then, and even that’s overstated if you believe the GDP growth is overstated. So the story we see in China is a very good model that reached the end of its useful life, but they were unable to shift the model. Every country has had that problem. And they kept it going for far too long.

Nicolas: Before we discuss the deindustrialization and maybe the role of the dollar as a reserve currency, I'd like to embrace the perspective of a single household. If I'm a Chinese household, what prevents me from consuming more? What constraints do I feel that force this behavior on me? And if I'm an American household, what prevents me from saving more? I think it would help people understand better how the macroeconomic situation translates into individual behavior on the ground, both in China and the US.

Michael: Sure. The problem in China is quite simple. The household share of GDP is very low. So if you produce €100 worth of goods and I pay you €80, your consumption will probably be €70 to €75. If I pay you €60, obviously your consumption isn’t going to be that high, it’ll be lower than that. And China has the lowest household share of GDP in the world. So to me that’s pretty straightforward. There are variations in it, because if I’m more optimistic about the future, my saving rate might go down, and so my consumption rate will go up. If I’m pessimistic, which is where people are now, my saving rate will go up. But basically the long-term constraint on my consumption has got to be my income.

Now, why do Americans consume so much more than they should? There, I think it’s easier to look at Europe than at the US, because in Europe you saw a very clear example of what happened. Remember that when the euro was created in 2000, 2001, when the currency came out, a country like Spain, I was born and grew up in Spain so I focus mostly on Spain, but it could be Greece, it could be Italy, it could be Portugal, it could even be France to some extent, a country like Spain actually had a fiscal surplus and a tiny trade imbalance. And then something happened. Spain, Portugal, Greece, even France, Italy, suddenly they all went crazy and started spending like crazy.

If you read the German press in 2009, 2010, the problem with Spain is that they always go to the beach and have siestas and they don’t work. Well, that only started after 2003. And it started in all these other European countries at the same time. So that’s a remarkable coincidence until, and I’m sure you know this, you come to what was probably the real driver of all of this. And that was that in 2003, 2005, Germany implemented the Hartz reforms and the labor reforms.

You can call them labor reforms, but it’s a euphemism for wage suppression. Because if you look at the relationship between wages and GDP growth, before 2003, wages kept pace with GDP growth. And after 2003, GDP growth continued and wages stopped growing. So if the household income share of GDP goes down, something else must go up. And what went up? It was business profits, which surged. And of course, that means consumption will go down. So German consumption went down, not because the Germans became thriftier, but because they received a smaller share of what they produced. And the German savings rate soared.

Now, the reason Europe is so useful is because it’s a small experiment, in the sense that the creation of the euro and the rules governing the single market meant that most of the excess saving in Germany didn’t go to the US or anywhere else, it went to other countries within Europe. Interestingly enough, the countries that entered the euro with low inflation ended up exporting capital to the countries that entered the euro with high inflation, which makes sense if interest rates converge, because they become negative in the high-inflation countries and positive in the low-inflation countries.

So in a country like Spain, money poured into the country, into the banking system. And again, from a personal point of view, as late as the 1990s, getting a credit card in Spain was really prestigious. If you had a credit card, you would brag about it. By the end of the 2000s, if your children didn’t have multiple credit cards, then you were a total loser. Everyone had credit cards. So what really happened? Why did the Spanish suddenly go crazy? I would argue that it isn’t that the Spanish went crazy.

If you assume that Spain, like every country in the world, has a normal distribution of risk-taking, there are people who are too prudent, people who are not prudent enough, people who are overly optimistic, people who are foolish. You can always get the consumption rate to go up, not because the whole culture of the country changes, but because if you loosen liquidity conditions in the banking system, the banks are eager to expand lending, and the way you can always expand lending is by lowering your credit standards. So as money poured into the Spanish banking system, banks were under increasing pressure to do something with it. Some of it they used to fund pretty good infrastructure. Spain has decent infrastructure. Some of it went to fund the worst real estate bubble after Ireland’s. It also helped the Irish real estate bubble. And a lot of it went to fund the surge in consumption. I would argue that that’s the mechanism. When money pours into your country, when there’s a net inflow, by definition you need a gap between investment and savings. And that can happen in many ways. If you are a developing country whose investment is constrained by scarce capital, then money inflows could drive up the investment rate.

But in Europe, there’s no scarcity of capital. A recent ECB study asking businesses in Europe why they aren’t investing, none of them said, or very few of them said, because we can’t access capital. They mostly said because we don’t have demand, or the number two reason, which is the same reason in my opinion, because it’s not profitable. So if you go to these businesses that are not investing because they are not competitive with Asian countries, and you say, here’s money, build more industrial capacity, they’ll say, no, we don’t need more capacity, we can barely sell what we’re producing.

So if investment doesn’t go up, then something must happen to cause saving to go down. It’s got to balance. So what could happen? In the world of Keynes and Joan Robinson, it was very clear what would happen. Unemployment would go up, because as German manufacturers expanded their share of the Spanish market, Spanish manufacturers would close down and unemployment would go up. And remember, conveniently enough, unemployed workers have a negative saving rate. So that’s how you balance it. In the modern world, we don’t like unemployment to go up. So we have two ways of dealing with it. We can expand household borrowing through monetary policy, or we can expand the fiscal deficit. And Spain did both. The fiscal deficit went up and household debt went up. And that’s the way you balance without unemployment.

The problem is that in 2009, when Spain was no longer able to increase debt to balance its trade deficit, how did it respond? It responded in the Keynesian way, with a surge in unemployment. So I would argue that that’s really what drives up consumption. When people say that Americans are addicted to consuming, I would say no. If you have a banking system with very loose lending standards, like we did with real estate in 2003, 2004, 2005, you will get very risky, foolish behavior. So that’s really what matters. Sorry for that very long answer.

“Foreign inflows into the US are bigger than ever”

Nicolas: No, it's very clear, and also very interesting for us as Europeans to reflect on the role of Germany in all of that. So maybe coming to deindustrialization, I think it's pretty clear from everything you've said so far that the excess investment in one country, in that case China, or maybe Germany from when the euro was set up in 2002, triggers deindustrialization in the rest of the world, in countries that don't control their capital accounts. So is that the origin of that trauma, all the factories closing?

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In twelve months, we’ve published 40+ deep-dives, built a readership of 1,000+ subscribers with a 60% open rate — three times the industry average — and reached millions across LinkedIn, Substack, X and major media outlets.

Our work has been quoted in outlets such as Bloomberg, The Observer, Hidden Forces, Manager Magazin, L’ADN, Coindesk, Cointelegraph and The Big Whale. We’ve been invited to speak on global stages from SIBOS, Money2020, Paris Blockchain Week, Abu Dhabi Fintech Week, and the CV Summit. Major banks, fintechs, hedge funds, private equity firms and venture capital firms have made us trusted advisors.

Currency of Power launched with a provocation: the world’s financial order is being rewritten — not in treaty rooms, but in code. And almost nobody is paying attention to what that really means.

The ideas are spreading. The game is accelerating. So are we. One year in, we’re offering a 20% off a yearly subscription for seven days. You get every deep-dive and the full podcast, including the second half of each episode that only subscribers hear

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Over 40 deep-dives and podcast interviews, we’ve built out a coherent thesis about where global money is heading. Here’s the core of it.

The dollar is being digitized. Stablecoins are the mechanism that locks in US dollar dominance for another generation. What once ran on oil barrels now runs on bytes. The petrodollar got an upgrade, and the US currency is more dominant than ever.

China is building something new. Beijing is constructing an Electrostate: it exports digital and electric infrastructure rather than currency, holds gold, and builds intricate financial plumbing the world has yet to notice. While the US bets on software, China bets on infrastructure. While the US open-sources its currency, China open-sources its AI. These are mirror strategies, and both are deliberate.

As always, Europe is caught in the middle. Forced to choose between the petrodollar and the electroyuan, it has no significant stablecoin yet, no clear digital currency strategy, and a regulatory framework, MiCA, that is generating more controversy than confidence. Building a comprehensive tokenized money stack, with a wholesale CBDC, tokenized deposits and stablecoins, may be its best remaining shot.

A new monetary architecture is emerging. Wholesale CBDCs, tokenized deposits and stablecoins are layering into a new money stack. We are living through an unspoken Bretton Woods moment, one coded by engineers rather than signed by finance ministers. This architecture will underpin tokenised finance and an AI agentic workforce.

Our most read and shared articles reflect our thesis:

Pax means peace. The Roman Senate coined the phrase, the historians burnished it, and every hegemon since has borrowed the concept. Yet if you survey the world in 2026 — trade wars, export controls, chip embargoes, rare earth weaponisation, drone-contested borders, stablecoin legislation passed in the shadow of geopolitical anxiety — peace is the last word that comes to mind. Even the ‘Pax Silica Initiative’, launched in Washington in December 2025 with ambitions to be “what the G7 was to the industrial age,” carries the name of a peace that does not yet exist and may never arrive. Such a discrepancy is deliberate: every Pax in history has been imposed rather than negotiated. The question is always who does the imposing — and with what coin.

Every Pax Has a Coin

Strip away the military history, the diplomatic treaties and the cultural mythology, and what sits at the centre of every hegemonic order is a single monetary truth. What binds the order together is a coin, around which coalitions form and through which shared values acquire force.

Pax Romana. The denarius was Rome’s instrument of integration: it paid soldiers, standardised trade across three continents, turned conquered territories into economic participants, and made Roman power legible at every marketplace from Britannia to the Levant. When the emperors of the third century began debasing the silver content to fund frontier wars, the markets registered the end of Roman hegemony well before any decree acknowledged it. The denarius lost credibility before the legions did, and the monetary collapse of the third century preceded political fragmentation by decades. By 476, when Rome fell to Odoacer, the currency had long since died in the money changers’ hands.

Pax Sinica. China’s historical hegemony operated on a different logic but reached the same conclusion. The tributary system of the Han, Tang, and Ming dynasties was a gravitational monetary order: silver flowed inward to the Middle Kingdom as tribute, as payment for Chinese goods, and as proof of a peripheral state’s acknowledgement of the centre. The Ming-era decision to fiscalise the tribute system, demanding payment in silver rather than symbolic goods, turned an ideological hierarchy into a monetary one. Participation in the Pax Sinica turned on silver rather than ethnicity: it meant trading with China, which meant accepting China’s terms. Here too, the currency functioned as the architecture of the order.

Pax Americana. After the collapse of the Bretton Woods system in 1971-1973, the petrodollar became the most elegant version of this logic in modern history. America’s 1974 deal with Saudi Arabia is well known by now: price oil in dollars, recycle the surplus into US Treasury bonds, and you have created permanent structural demand for American currency from every nation on earth that needs energy — which is every nation on earth. Even without the Bretton Woods system, the dollar became the air the global economy breathed, invisible and omnipresent, controlled by one central bank. Dependence on it was universal and unchosen.

Pax Silica’s Monetary Answer

The Pax Silica Initiative, launched in December 2025, has been described as a supply chain alliance, a semiconductor coalition, a critical minerals compact. All of that is true but, to an extent, all of it obscures the point. In reality, what Washington is building, layer by layer, is the infrastructure for the next version of the same monetary hegemony that the petrodollar created. The AI economy needs compute the way the industrial economy needed oil. Whoever ensures that compute is priced, settled, and financed in dollars wins the same structural game that Henry Kissinger won in Riyadh fifty years ago.

As we argued in Barrels to Bytes, the most plausible vehicle for this new phase is the dollar-denominated stablecoin, ahead of a central bank digital currency, a new Bretton Woods architecture or a reformed IMF special drawing right. USDC, USDT and whatever comes next are the denarius of the AI age. The system has an underlying elegance: AI systems transact at machine speed, across borders, in volumes and frequencies that existing banking rails cannot handle. An autonomous agent paying for API access, a robot settling a logistics invoice, a data pipeline micropaying for training data: none of these fit inside a system built for human-speed, branch-based correspondent banking, whereas stablecoins do. They are programmable, instantaneous, borderless and denominated in dollars. The Genius Act, passed by the US Senate in 2025, did more than regulate stablecoins. It consecrated them as an instrument of American monetary foreign policy, making explicit what the market had already decided.

The strategy follows from this premise. Pax Silica secures the physical stack — the mines, the plants, the data centres, the energy infrastructure — while dollars and dollar stablecoins settle the transactions that flow through it. The coalition of trusted partners that Washington is assembling around compute and critical minerals will, by design, conduct their AI-economy commerce in dollars. The petrodollar recycled oil revenues into Treasury demand; the AI-era equivalent will recycle compute revenues into stablecoin dollar demand. The mechanism differs but the outcome is identical: structural, self-reinforcing dollar hegemony, this time built into the payment rails of artificial intelligence rather than the oil futures market.

Can the World Be Cut in Two?

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Neha Narula started her career building databases — fast, scalable, multi-core systems designed to handle the cloud infrastructure of companies like Google, Microsoft, and Meta. The work was intellectually interesting. It was also, as she eventually concluded, being used mostly to keep people scrolling and clicking on ads. That dissatisfaction sent her looking for harder problems.

She found one in Bitcoin. Not the ideology, and not the investment thesis, but the engineering puzzle: why is a payment system so difficult to scale? The question pulled her into the mechanics of how money actually works — central banks, fractional reserve banking, the basic plumbing of the global economy — and she emerged with a view that has shaped her work ever since. Money is not a natural fact. It is a system built on design choices, and those choices encode political decisions about who gets access, on what terms, and at whose expense.

That view now sits at the centre of some of the most consequential debates in finance. As Director of the Digital Currency Initiative at MIT’s Media Lab, Neha led Project Hamilton, the research collaboration with the Federal Reserve Bank of Boston that laid the technical groundwork for a potential digital dollar. She has written on the hidden risks in stablecoin infrastructure and on what it would actually take for Bitcoin to become quantum-resistant. She sits on the board of Block and advises the Federal Reserve Bank of New York.

In this conversation, Neha explains why CBDCs and stablecoins are less different than most people assume, what Project Hamilton set out to do and what it left unresolved, why zero-knowledge proofs are not a privacy solution on their own, and what a decentralized community like Bitcoin can realistically do to prepare for quantum computing. She also takes the geopolitical temperature: what Iran’s reported willingness to accept Bitcoin payments actually signals, and why, in her view, the dollar remains the game to lose.

Her website is at nehanarula.org. The Digital Currency Initiative is at dci.mit.edu. She is on X at @neha and on LinkedIn.

Marieke: Hi! I’m Marieke Flament.

Nicolas: And I’m Nicolas Colin.

Marieke: And this is the Currency of Power podcast, the companion to the Currency of Power newsletter, where we dig into currencies, power, and the people connecting the two.

Today’s guest is uniquely positioned to bridge deep technical engineering, public policy, and mainstream finance when it comes to crypto and digital assets. Neha Narula started as a senior software engineer at Google and helped relaunch Dig before completing her PhD at MIT, where she built Doppel, a fast, scalable, multi-core database. She currently serves as Director of the Digital Currency Initiative at the MIT Media Lab, a board member at Block — formerly Square — and a member of the Federal Reserve Bank of New York’s Innovation Advisory Council.

Today’s conversation runs in four parts. The first two are for all listeners; the last two for paying members. Thank you to all members for following us, and to those paying, thank you. Part one covers Neha’s career and how she entered the digital asset space. Part two covers stablecoins, Project Hamilton, and why the US does not want a CBDC — or does it — and what that means for other countries. Part three covers privacy and quantum. Part four covers the geopolitical outlook.

Neha, you and I recently met at an ING Orange event in Amsterdam. We shared a ride and couldn’t stop talking about stablecoins and digital assets. I’m delighted to have you here. Thank you for making the time.

Neha: Thank you. It’s wonderful to be with you both, and I’m excited to continue the conversation we started there.

“The success of platforms like Bitcoin has done a great deal to rethink how to build decentralized systems.”

Marieke: Let’s get started. We love understanding people’s journeys — what got them into what they’re doing. Walk us through yours, and in particular the moment when you realized that distributed systems could do something important for how money works.

Neha: I was doing my PhD at MIT in computer science, working on databases and distributed systems — nothing to do with cryptocurrency. I finished around 2015. Bitcoin was launched in 2009. I’d heard of it around 2010 or 2011 but hadn’t paid much attention. A couple of friends were very enthusiastic about it, but I wasn’t convinced. The proof-of-work mechanism seemed odd.

By 2015, I had finished my PhD and reached a moment of real doubt about what I was doing. I had been working on very fast, scalable databases — systems that run the cloud for large tech companies like Microsoft, Meta, Oracle, and Google. But at the time, that work was being used mostly for advertising and for products married to advertising. There was a lot of effort going into keeping people scrolling and clicking, showing them more ads. It was deeply unsatisfying. I wasn’t sure the work I found intellectually interesting was being used to solve real problems.

I took some time off and finally had the chance to read the news. I kept seeing articles about Bitcoin having trouble scaling. 2015 was the height of what we call the “Blocksize wars” — a large debate about how to get Bitcoin to scale, reduce fees, and increase users. I read those articles and thought: what is the problem here? Bitcoin is a payment system. Payment systems are easy to scale. What could possibly be hard? That is how I got — we like to say — nerd-sniped into the cryptocurrency world.

I fell down the rabbit hole. I learned how Bitcoin worked, but more importantly, I learned how money worked, and I had no idea. I learned about central banks, commercial banking, fractional reserve banking, interest rates, the basic infrastructure of the economy. And I thought: this is so different from anything I had imagined. There are a lot of people left behind — people who pay very high fees to access financial infrastructure, people who carry debt their entire lives while others have theirs forgiven. This happens not just at the individual level but at the level of nation states.

These parameters are built into our financial system, but they don’t have to be this way. Cryptocurrencies seemed like the best tool for change, because changing things from within the financial system seemed far too hard. Cryptocurrencies offered a whole new way of thinking about structure — very much parallel to the architecture of the internet, with packets of information and protocols layered on top of one another. And the underlying technology — distributed consensus, peer-to-peer networks — was directly related to the problems I had been working on. It felt genuinely exciting. That is how I got into it.

Nicolas: Would you say that software architecture has already been changed by the lessons learned in crypto?

Neha: Yes, I think that is fair to say. The idea of decentralisation existed before crypto, but the success of platforms like Bitcoin, Ethereum, and stablecoins has done a great deal to rethink how to build decentralized systems. Before Bitcoin and Ethereum, the most well-known decentralized system was BitTorrent — a way of sharing files over the internet without a trusted third party. In 2006, BitTorrent was the majority of traffic on the internet, used primarily for music and films, but also for distributing software and other files.

BitTorrent was a precursor to cryptocurrencies, but crypto has taken that technology well beyond it. And some ideas from cryptocurrency have been filtering back into traditional finance — the idea of digital wallets, more open access, real-time 24/7 payments and settlement.

Marieke: You gave a TED Talk almost exactly ten years ago that now has 2.6 million views. You outlined the programmability of money and what it was going to change. It feels like it took ten years for everyone to arrive at the point you described. What is your view for the next ten years? And when it comes to programmable money, what changes in power are you starting to see in the financial system?

Neha: I stand by that talk, which is remarkable considering it was ten years ago. Back then, everyone was confused about cryptocurrencies. People would start with SHA-256 and miners and electricity and proof of work, and just confuse their audience entirely. The framework wasn’t there. I was trying to separate what would be true in five to ten years from the implementation details that, while important, were not the critical thing to understand.

Going forward, we are still capitalising on programmable money. That is still in progress, but we are seeing a great deal happen. And you have to make AI a central part of any ten-year outlook. People are very excited about AI agents — autonomous software that needs to transact economically, make payments sometimes on behalf of users, but sometimes at a scale and speed at which the user will not be in the loop. Are stablecoins or cryptocurrencies the best tool for that? There are interesting arguments on both sides. One of the actors doing the most in this area is Visa, a very traditional company, which released a command-line interface for AI agent payments. So there is movement there.

But it is not just how AI agents will make payments. It is how AI as a tool will change the way we think about money and how money flows. One example: monetary policy today involves a great deal of data and modelling, but ultimately it is humans deciding. I think it is inevitable that this will become more and more algorithmic — more automated, with perhaps a human in the loop but not at the centre. Another example: most money today sits on the balance sheets of commercial banks. What is the next step? Will stablecoins or new types of fintechs create money? What will the creation of money look like?

Marieke: It sounds as though, if anyone at TED is listening, they should invite you to give the next ten-year talk.

Neha: I would love that.

“Looking back, I think I underestimated how political money really is”

Nicolas: Let’s move to Project Hamilton. I imagine you worked on it before Trump returned to power, because CBDCs are now out of favor with the current administration. And the name — is it Hamilton because Alexander Hamilton was the founding father of the US financial system, and the project was about reinventing or experimenting with that?

Neha: Yes, and it is actually a lovely story. The name did come in part from Alexander Hamilton, but there was another Hamilton the project was named for as well — Margaret Hamilton, a software engineer during the Apollo missions who was critical in writing much of the software for those missions. There is a famous photograph of her standing next to a stack of books representing all the code her team wrote. Jim Cunha, who was a leader at the Boston Fed at the time and pushed for the collaboration, chose the name for both reasons — technology and the person who helped architect the financial system. It is a wonderful coincidence that it is the same name.

At no point had a decision been made to actually build a digital dollar and launch it. This was about doing the research necessary to form a foundation and understand what a digital dollar could be, how it would work, before even deciding whether to explore it as a serious option. Technology sets the rules of any system — what it can do, what is even possible — so we wanted to build that understanding.

Our initial goal was around scalability. Something at the scale of a digital dollar, operating in an economy the size of the United States and potentially globally, would need to handle hundreds of millions or billions of users with very high throughput and very low latency. That was a good match for my expertise. The Boston Fed knew about our work in cryptocurrencies and cybersecurity, and so we collaborated. It was a wonderful partnership — we continued to work with some of those people even after the project ended.

But the work was just the tip of the iceberg. We started with scalability and security. We did some work on programmability. We did not get to touch privacy fully, though we did design the initial system so that it did not store personally identifying information, did not store balances in clear text, and did not store user addresses or pseudonyms in clear text. That was rooted in the idea that central banks do not want a honeypot of sensitive information. They want to focus on building a currency that fulfils their mandates — in the United States, employment and price stability. They did not want to know all the payments users were making.

We kept the work very technical — distributed systems, software architecture, published papers. We tried not to get into policy because that was not our domain. That was the job of the Federal Reserve Board of Governors, Congress, and the executive branch. But looking back, I think I underestimated how political money really is. Even clearly technical work that is, I believe, quite neutral is very hard to divorce from people’s feelings about money — their worries, their fears, their incentives, political and otherwise.

There are real fears around surveillance. People are worried about the government, their employer, friends, family, and coworkers potentially seeing their financial transactions, which reveal a great deal about who we are. But people are not just worried about data leaking. They are worried about control.

There is a conversation happening around the world about what I want to call restricted money — as distinct from programmable money. The idea that government-issued money could restrict how it is used. SNAP benefits in the United States are a good example: payments for food that can only be used on certain things. But we do not call SNAP money. We think of it as a coupon or a voucher. When you start to mix the idea of restricting money with the concept of money itself, that becomes very worrisome. There were fears that a CBDC would prevent you from buying certain things, donating to certain political parties, or that spending data would be used to deny visas. I never want to build a system that can be used in that manner. The system we built cannot, I believe, be used that way. But I understand the concerns.

The 2024 election was highly charged. The idea of a CBDC immediately fell along partisan lines. We now have an executive order from Trump rescinding Biden’s executive order on digital assets, and an anti-CBDC Surveillance Act that has passed the House. There is currently a moratorium on this type of research. For what it is worth, I do not know whether it is a good idea for the United States to launch a digital currency. I was clear about that throughout — I was not advocating for it. But I think it is a serious mistake to suppress research. That starts to encroach on questions of free speech and academic freedom. It is important to be able to study things.

Marieke: Is your reading of the Anti-CBDC Surveillance Act that it blocks both wholesale and retail CBDC? And what is the actual US position, given that other countries are still testing and embracing CBDCs?

Neha: I have not read the act recently, so I may be slightly wrong, but I believe it is primarily focused on retail. Wholesale CBDC concerns them far less. The Federal Reserve Bank of New York is still working with the BIS on some wholesale CBDC concepts. A wholesale CBDC would only be used by large financial institutions — and the question then becomes why it is better than FedNow or Fedwire. You could add programmability, atomic settlement, and so on. But then why can you not do that with APIs on top of FedNow or Fedwire? These are genuinely interesting questions.

To answer your direct question: it was primarily about retail, and some wholesale CBDC research is still ongoing. However, the act was written quite broadly. It essentially said the Federal Reserve could not issue a digital version of the dollar, and I think even existing central bank reserves could fall under that definition. It needs to be sorted out before anything is implemented.

Nicolas: Because money is largely digital already. The concern seems to be about preventing a permanent connection between the dollar you use in daily life and the central bank. How are you looking at the geopolitical landscape, with different countries going in different directions?

Neha: We work across all those categories — CBDC, stablecoins, tokenized deposits — and I think they are more connected than people realize. A lot of people see CBDC versus stablecoins as a binary. I do not think that is true at all. One way of viewing a stablecoin is as a wrapped CBDC. Stablecoins currently wrap Treasuries in the United States, and to some extent commercial bank accounts and money market funds, which ultimately wrap Treasuries.

A lot of stablecoin providers would love access to central bank balance sheets. In the UK, they are actually thinking about that — stablecoins backed by the central bank balance sheet. That is a wholesale CBDC. You are broadening access to the central bank balance sheet, and once you wrap that in a stablecoin, it becomes a retail instrument issued by the private sector instead of the central bank. That is essentially a two-tier CBDC, which is exactly the CBDC architecture where banks issue the tokens.

The whole point is that we are tokenising money — turning it into this packetized thing. Whether it is issued by a central bank or the private sector, what matters are the design choices: what is it backed by, what are the legal agreements behind that backing, what happens in bankruptcy, can users access something of value when institutions fail? From a technology standpoint, a CBDC and a stablecoin are the same idea with different choices for those parameters.

I do not want to minimise the differences between something issued by a central bank and something issued by a private actor — the legal frameworks are quite different. But at a high level, they are the same thing. People do not quite understand how connected they are, or how design choices can blend them together.

Nicolas: Can you give an accessible explanation of the difference between wrapping Treasuries, as stablecoins do under the GENIUS Act, and having access to the central bank balance sheet? Is it fundamentally about power — who governs the issuance and use of money?

Neha: Yes, exactly. If it is backed by Treasuries, it is issued by the Treasury, operating in concert with the Federal Reserve. Treasuries are managed through the New York Fed’s Market Desk. But the key question is: who decides how much is issued into the system? And most importantly, what happens when things fail? That is what gives money its value — the trust that you will have something of worth at the end of the day if institutions fail. That is the bankruptcy question. Can consumers and users get at something still valuable when that happens?

Nicolas: So we are prisoners of current categories. If you had to reinvent the wording, how would you describe the space?

Neha: CBDC has become a dirty word, so I would throw that one out. I was annoyed for a while by the conversation about tokenized versus account-based systems, but I am coming around on it — tokenized money versus non-tokenized money is a meaningful distinction. I think the more fundamental question is: how decentralized is the substrate? Does the system have the property of censorship resistance? Cash has that property. Tokenized money is supposed to have it, but if it is issued by Circle or Tether, it does not. Tether just froze 500 million dollars’ worth of USDT. So that is the real question. I am not sure I have the right vocabulary yet. It would take months, if not years, to really sort that out properly.

Marieke: This is very interesting, because Nicolas and I have been working with a concept of a tokenized money stack. I love the word you use — wrap — rather than stack. In a stack it feels layered. But it is actually that you wrap one thing within another. And ultimately, as you say, it comes back to bankruptcy: who is the lender of last resort?

You recently wrote a paper on the hidden plumbing of stablecoins. Walk us through what it found, and what could go wrong — especially in an international system where parties are operating under different rules.

Neha: The interoperability question is central. Within one blockchain ecosystem — say, the Ethereum ecosystem, using the EVM and ERC-20 tokens — you get interoperability almost for free. That is the whole point. You can use any ERC-20 token in Aave or Compound. It is the concept of money Legos.

It becomes much harder across different blockchain systems. Ethereum to Solana, for example, is traditionally done with bridges. Bridges have been a major source of hacks because they rely on multisig or trusted actors managing the movement of money. Anyone can start a bridge, and there have been many. But interoperability between chains is not solved.

In the traditional finance world, large institutions — the BIS, CLS, Swift — come together to manage interoperability through messaging standards and FX holdings. They have projects they are starting to productionize. It will be interesting to see how that develops.

As for the hidden plumbing paper: everyone was focused on reserve backing. The GENIUS Act is primarily focused on backing — are the reserves there, how are they accessed? But we thought there were many other risks that people were not thinking about, starting with the underlying blockchain infrastructure. Circle and Tether issue on dozens of different chains. The largest chains by volume are Tron and Binance Smart Chain, which most people have not heard of — not what you would call blue-chip chains like Ethereum. These are chains with fewer validators, less decentralisation, shorter track records, and weaker security. Blockchains are not a universal, well-understood substrate. They are all quite different.

Then there is the question of how stablecoin issuance actually works. Not everyone can redeem directly with a stablecoin issuer. Most people have to sell through a cryptocurrency exchange, which introduces additional risk for maintaining par value. When Silicon Valley Bank failed and Circle had three billion dollars there, Circle resolved all redemptions at one dollar — for the institutions allowed to redeem directly with Circle. But ordinary users had to sell USDC on a cryptocurrency exchange, and on exchanges it broke par. That is an important structural risk that is not widely understood.

The third element is the structure of the Treasury market itself. Even if you are redeeming with a stablecoin issuer, can they actually sell the underlying Treasuries quickly enough to give you commercial bank account money? There are weaknesses there. I am not sure these risks are understood by the people writing or voting on the laws.

Nicolas: What is the systemic reason why ordinary users cannot redeem directly with issuers?

Neha: From the issuer’s perspective, it is overhead. They have to KYC everyone, maintain business relationships, manage all those accounts. Circle typically only redeems with a set of institutional customers; Tether with an even smaller set. Interestingly, under MiCA in Europe, stablecoin issuers are required to offer redemption to all customers. I am not sure how that is playing out in practice, but it is a significant development.

Marieke: On the Clarity Act and the question of yield on stablecoins — within this stack there are many actors participating in the stablecoin ecosystem, and the yield can be distributed by different companies at different levels. Are banks right to be worried about stablecoins?

Neha: Banks are right to be worried broadly. Coinbase would love to have JP Morgan’s business — that is very clear. But should they specifically be worried about yield? I am not 100% sure the arguments they are presenting are entirely valid. I am not sure stablecoins take money out of the banking system in a material way. They may take customers from the banking system, which is different. This is really a question about distribution and who owns the relationship with the end customer. Smaller and mid-tier banks are most concerned about interchange fees. If a large share of payments move to stablecoins, they lose on interchange. Yield is the first thing people have identified, but there are other aspects of their business that will be eaten away. Yield is essentially a customer acquisition tool — the incentive that draws people in and determines where they go.

“Encryption can be used to increase freedom or to reduce it.”

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Sir Howard Davies has spent fifty years at the intersection of finance, regulation, and public policy — long enough to have helped build the architecture he later had to defend, and to have watched it buckle.

He started as a diplomat, posted to Paris in the early 1970s, where an encounter with the French administrative elite convinced him that the British habit of treating a university degree as a lifetime qualification was not going to serve him well. He left the Foreign Office for the Treasury, went to Stanford for an MBA, and returned to Whitehall just in time to work on both the nationalisation and the privatisation of the same industries — a coincidence that turned out, as he explains, to require exactly the same skills.

What followed was one of the more varied careers in British public life: McKinsey, the CBI, the Bank of England as deputy governor, and then the FSA, which he chaired from its creation in 1997 until 2003. He was there, in other words, when the regulatory framework that would be blamed for the 2008 crisis was being built — and has had to live with the accusations ever since. His view on the “light-touch regulation” charge is direct and, on the evidence, largely correct.

Since then he has led the LSE, chaired NatWest through the post-pandemic recovery, taught financial regulation at Sciences Po Paris, written several books on economics and central banking, and taken on a number of board roles — including, most recently, the chair of Qivalis, a consortium of European banks building a regulated euro stablecoin.

In this conversation, Howard walks through the origins and failures of the Basel capital framework, explains why the 2008 crisis was fundamentally about inadequate capital rather than regulatory culture, and makes the case — carefully — for what regulators got wrong and what they did not. He discusses Brexit as a strategic miscalculation, assesses what two decades of advising Chinese financial regulators has taught him about how Beijing thinks about global rules, and sets out why he believes Europe needs a bank-issued euro stablecoin before dollar-denominated alternatives make the question moot.

His new book, Global Financial Regulation: An Opinionated Guide, is out from Polity Press in the summer. You can find his Project Syndicate columns here, and he is active on X at @HowardJDavies.

Marieke: Hi, I’m Marieke Flament. This is the Currency of Power podcast, the companion to the Currency of Power newsletter, where we dig into currencies, power, and the people connecting the two. Today’s guest needs little introduction, but the breadth and depth of his career demands one anyway.

Sir Howard Davies has spent 50 years at the intersection of finance, regulation, and public policy — from the Foreign Office and HM Treasury to McKinsey, the Confederation of British Industry, the Bank of England, and the Financial Services Authority. He led the London School of Economics through a turbulent decade, chaired NatWest Group through the post-pandemic recovery, and today, among several other things, chairs Qivalis, one of Europe’s most serious efforts to build a regulated euro stablecoin infrastructure.

Sir Howard is also a professor of practice at Sciences Po Paris, where he teaches master’s courses on financial regulation and central banking, and is the author of several books on economics, finance, and regulation, with a new book coming shortly.

Howard and I go back some years. We worked together when he chaired NatWest and I was building Mettle, and we are working together again at Qivalis. Few people have seen more of the machinery of global finance from the inside. Today’s conversation runs approximately two hours. The first hour is open to all listeners; the second — going deeper on China, digital assets, and what comes next — is for paid subscribers. We will cover four areas: Howard’s career and what it teaches us about how institutions actually work; the current geopolitical moment and what it means for markets; his unusually direct perspective on China; and finally stablecoins, CBDCs, and the future of money. Howard, welcome.

Howard: Thank you. That introduction makes me rather exhausted just thinking about all those jobs.

“It was a deliberate, French-driven strategy”

Marieke: Me too! Before getting into the substance — 50 years across so many institutions and geographies, and a career that looks less like a straight line than a series of reinventions. What has been the through line? How did you navigate all of that?

Howard: It all started, interestingly, in France. I began as a classic British amateur. In the UK at the time, a university degree was regarded as a kind of vaccination against needing to learn anything further for the rest of your life. So most people did a degree at the best university they could get into — in my case Oxford — and then entered whatever career they chose as a complete amateur.

I chose the Foreign Office, which seemed an interesting option. Like most young people, I thought travel would be fun. When I was sent to my first overseas posting in Paris, I found myself dealing at length with people in the French system who were, at that time, undoubtedly better trained and better educated than we were. You did your undergraduate degree, or one of the Grandes Écoles, then ENA, and you came out knowing a great deal about public administration, economics, even philosophy. In the UK, that was regarded as of no interest whatsoever — you picked it up as you went along. I found myself somewhat intimidated. Not on language, because I had done a year as an assistant in a French lycée and could hold my own at the Quai d’Orsay. It was simply that they had so much more educational background.

That observation combined with what I could see happening in Britain at the time. We had a Labour government re-elected in 1974, and it seemed the government would integrate forward into more and more areas of economic life through a gradual process of nationalisation — sometimes ideologically driven, sometimes simply because companies were failing and needed rescuing, as with British Aerospace and Rolls-Royce.

I thought the French had the right idea. What would be interesting for a future career was to work at the interface between government and the private sector — someone who understood how government worked but also understood something about business. So I decided to leave the Foreign Office for the Treasury, which was surprisingly prepared to accept me despite my lack of economics training. I also told the Treasury I wanted to go to business school in the US, get a proper business qualification, and then work largely in the public sector. It seemed like a good niche.

The problem was that by the time I finished business school, Mrs Thatcher had been elected. Far from the state integrating forward, the opposite was happening — more and more areas were being privatised. What turned out, though, was that although my personal career strategy was built on a completely wrong assumption, it remained perfectly viable for the opposite reason. There were now more and more areas of the private sector that depended quite heavily on government policy. It is fine to privatise a formerly nationalised industry, but the idea that it then operates entirely without government involvement is wrong. So the strategy proved usable in different ways. I went back to the Treasury after business school, working first on nationalising companies and then on privatising them — and actually the same skills are required.

It was a deliberate, French-driven strategy, motivated by a feeling of embarrassment at being less well educated than the French officials I met. There is nothing that motivates an English person more than feeling the French have got one over on them. That was quite a useful emotional dynamic.

Nicolas: For the record, I went to ENA, and the students there enjoy looking down on the school and explaining to everyone that you learn nothing there. So we may have a different perception — but perhaps things were different then.

Howard: They certainly had a good way of talking about it.

Marieke: That does sound very French. Now, looking at everything you do today — Sciences Po, boards, books — you are incredibly active. What is your filter? How do you prioritize?

Howard: It looks complicated when you are running a portfolio — I chair three companies plus an arts organisation, an orchestra, do some teaching and a few advisory things. But reflecting on it, it is not actually that different from being chief executive of a large organisation. If you are running a university, or chairing a bank, or running a big regulator, you always have to be very selective about where you intervene. There were all kinds of parts of NatWest I could have involved myself in, but would I have added value? In most cases, probably not. The mortgage business was well managed; the people knew what they were doing. A new venture with a complicated regulatory dimension like Mettle — that was somewhere I could contribute.

Even in a single job, you are constantly making choices about where to intervene and where not to. A portfolio is not so different. I do think about it rather like a children’s train set — you have a series of trains and you want to push them all forward. I usually take stock on a Thursday: have I done anything on each of these this week? Is there a call I should make, something I should read, someone I should chase up? It is not so different from running one large organisation. I was chief executive of large organisations for about 25 years, and you make those choices constantly.

“There are no prizes for running a light-touch regime”

Marieke: That is interesting — you can apply OKR-type thinking to yourself, checking each week whether you have moved things forward. Should we go into the substance? The first area is the 2008 crisis. You were the FSA’s first executive chairman from 1997 to 2003, and then the crisis happened. The post-mortems were quite critical of regulators. Is that fair?

Howard: Broadly, it is not fair in most senses, though there are one or two respects where it is. The subsequent analysis in the UK tended to focus on the accusation that the regulator had operated a light-touch regime and that this was a mistake. I can get quite exercised about this, but I will try to stay calm.

I actually confirmed via ChatGPT yesterday that there is no speech, no document, nothing in which I referred to a light-touch regime while at the FSA.

What happened was that when the government changed in 2010, the Conservatives under George Osborne had a strong motive to blame the financial crisis on the previous Labour government. Osborne argued it was all caused by Gordon Brown, who had changed the regulatory system and introduced a single regulator operating a light-touch regime. The fact that the regulator had never mentioned a light-touch regime was not regarded as a relevant detail. It is true that one or two Labour ministers did use the phrase, which made us very nervous at the FSA — there are no prizes for running a light-touch regime, because the market will always disappoint you if you do.

So I reject the notion that it was our strategy, and there is no evidence that it was. But even setting the words aside, you have to disentangle what a light-touch regime could actually mean. Regulation falls into two broad boxes: prudential — the capital regime, how much capital banks were required to hold — and conduct of business.

On the first, the FSA rigorously applied the globally agreed capital regime. There is no evidence that UK banks held less capital than Basel rules required, or less than comparable institutions elsewhere. The problem was that because our economy is heavily dependent on financial services, when financial markets catch a cold, the UK gets influenza — it is simply a larger share of the economy. Some of our banks were badly affected, but the same was true of other large financial centres. In the Netherlands, practically the whole banking system went bust: ABN AMRO, Fortis — more or less everything. So on the substance of light touch in capital terms, no, absolutely not.

On conduct of business, I think with some reflection that we were probably not as aggressive on enforcement as we might have been. I would not say that caused the financial crisis — I do not think mis-selling of interest rate swaps to small businesses, or LIBOR manipulation, brought the system down. But some of those practices did not look pretty after the event.

Insofar as I would accept any guilty charge: not at all on light touch, not at all on capital. The global capital rules were too weak — we know that now — but that was not something the FSA could unilaterally change. Had we said in 2001 that an 8% minimum was wrong and we were going to impose 15%, the reaction would have been hostile. You could not have done it unilaterally because of the level playing field. The global regime was too weak, but it was applied in the UK just as it was everywhere else.

On policing conduct in the wholesale markets — yes, in retrospect, we probably should have been tougher. Some of the practices in securitisation markets were pretty dubious, and the regulators should have been harder on them.

Nicolas: What is your view on how regulation was handled in the US, and the extent to which the US was influencing the approach in other countries?

Howard: For most commercial banks in the US, the rules were being applied very similarly to the UK and the rest of Europe. The exception was the large broker-dealers. Goldman Sachs, Merrill Lynch, Morgan Stanley, Bear Stearns and the rest were regulated by the SEC, which did not have the same approach to capital or the same understanding of it. Those institutions were not regulated appropriately.

Very quickly during the crisis, the US authorities acted to make them banks. Several went bust in the process — Merrill Lynch was effectively rescued by Bank of America, Bear Stearns went bust, Lehman Brothers went bust; Morgan Stanley and Goldman survived. The SEC regulated five major broker-dealers and three went bankrupt. A 60% failure rate for a regulator is quite high. That part of US regulation was definitely flawed, and it was corrected rapidly in the autumn of 2008 when the survivors were forced to become banks regulated by the Fed, putting them broadly on a level playing field with everyone else.

Marieke: On Basel — my understanding is that it emerged post-war as something like a global framework for what bank capital should look like. But it has been loosely followed by the US and more stringently implemented elsewhere. Did that play a role? What is the history of Basel and how consistently is it actually followed?

Howard: The Basel Committee has only existed since the 1980s. It was essentially an Anglo-Dutch creation. At the time, the assumption was that an 8% capital ratio would guard against any but the worst financial downturn.

Basel I was written on a postcard, effectively — you must hold at least 8% capital. The problem was that it was not risk-sensitive. You applied the same 8% whether you were lending to the US government by buying Treasuries or lending to a speculative high-risk mortgage insurer. That was not good enough, so Basel II attempted to correct it.

Interestingly, Basel II was constructed on the assumption that 8% was the right number — it just needed to be redistributed, with lower capital against sovereign lending and higher capital against speculative mortgages. The absolute level was not questioned. In the run-up to the crisis, markets had actually become more volatile, so arguably you needed more than 8% as a baseline — but that was never discussed. Basel II was about redistribution, not about the level.

When the crisis hit, it was obvious the absolute level was too low. The downturn was enough to wipe out the capital of some very large banks — Citibank, RBS, Fortis, Commerzbank — all of which had to be rescued in various ways. Basel was a sound intellectual framework, but the numbers were too small. When Basel III came in, the three-pillar framework was retained because it is intellectually coherent, but the numbers were ratcheted up significantly. A bank like NatWest, on a comparable basis, now holds four times as much capital as it did under Basel I. That is the scale of the additional capital that was needed.

“The numbers were simply too small”

Nicolas: Can we turn to what you wrote in your book Who is to blame about the crisis — your assessment of what went wrong and who bore responsibility? Was it the system, the behaviour of certain players, or something else?

Howard: The number one point is the one I have just made: the inadequacy of the capital base. The amount of capital banks were required to hold was no longer sufficient given the volatility in markets.

Second, regulators had not been good at policing what I would call the regulatory frontier. There were many ways in which banks could effectively increase their financial leverage — through special purpose vehicles, off-balance-sheet structures of various kinds — where the losses, when they crystallised, bounced back onto the core bank’s balance sheet. That was true of much of the securitisation in the subprime market and elsewhere. So the absolute rules were too low, and there were also technically permissible ways of circumventing them which exaggerated the degree to which capital was inadequate when things went wrong.

My own view is that the conduct-of-business failings — the mis-selling, the LIBOR manipulation — were not core to the financial crisis. I do not think they would in themselves have brought the system down. It was the capital. The assumption was that banks would have sufficient capital to absorb market losses and that, if necessary, central banks could step in.

This links to a debate that has gone on for 20 years between what are called leaners and cleaners. Until the crisis, the dominant view — articulated most persuasively by Alan Greenspan — was that central banks should not interfere too closely in markets, because that would damage their dynamism and wealth-creating properties. Instead, they should stand ready to clean up when things went wrong, providing liquidity to stabilise markets during a panic.

There was another current of opinion, mainly from the BIS, arguing that central banks should lean into these cycles — that when bubbles are inflating in asset markets, you should be prepared to say so and take action: tightening loan-to-value requirements on mortgages, restricting margin lending, requiring higher capital buffers. This is now called counter-cyclical regulation.

The crisis settled that debate largely in favour of the leaners. It became clear that even the Fed announcing it would provide liquidity was not enough to stop a panic. The ECB provided liquidity and banks still went bust. So the notion that you should be prepared to intervene when a bubble is inflating is one that most central bankers would now accept, at least in theory. You can see it today in Andrew Bailey warning about a private credit bubble in his role as chairman of the Financial Stability Board. That kind of forward-leaning statement would not have happened under Greenspan.

Nicolas: Are there recent examples of leaners actually acting and reigning in a bubble, or is this still largely theoretical?

Howard: There are practical examples. In the UK, for instance, a few years ago the authorities imposed penal capital requirements on mortgages above 70–75% of property value, and they adjusted those requirements up and down as conditions changed. The Chinese have always done something similar, and quite sensibly.

Counter-cyclical capital buffers are another example — where regulators require banks to hold an additional buffer, say 2%, across the board when markets are running ahead, not based on analysis of individual loans but as a general precautionary measure. Several countries have used these, moving them up and down with conditions. In the UK we had them at 2%, then removed them during COVID to avoid constraining lending during the recovery. So there are plenty of practical examples of what we now call macro-prudential regulation — a term that was barely used in the run-up to the last crisis.

Marieke: Is China the ultimate leaner? It sounds as though they have always done this in a more proactive way.

Howard: You have to distinguish between the broad concept of leaning and the micro-regulation of many individual markets, which the Chinese have gone into extensively. Some of that is for financial stability reasons; some is simply because they want to control property prices in coastal cities that they think are getting out of hand. I do not think that is quite the same as an overall judgment that credit expansion is too rapid and asset prices are generally too high. Some of the Chinese intervention is very micro in focus.

Marieke: You have written about this period, and in your book The Chancellors on Alistair Darling you describe him as a man who dealt a genuinely terrible hand who played it extraordinarily well. What does that tell us about leadership in a crisis?

Howard: The book was the second in a series — whether I live long enough to produce volume three, I am not quite sure. When I was at the LSE, I edited a book called Chancellor’s Tales. I persuaded all the then-living chancellors, going back to Denis Healey, to come to the school and give a lecture not on the politics of each individual budget, but on what it was like to run the Treasury and the British economy during their time. To my surprise, they all agreed, and most produced quite interesting lectures. I edited those into a book with a long thematic introduction covering 1964 to 1979.

During COVID, I thought it a good use of time to repeat the exercise for the subsequent generation of chancellors. I interviewed them all — with one exception — and used those interviews as the basis for a narrative about managing the British economy through that period. I wanted them to tell their own stories about why they made the key decisions they made, and also how it felt to be in charge.

With Alistair Darling, the particular interest was that he had come in as Chancellor when Blair left Number 10 in the summer of 2007 and Brown took over — having previously been Secretary of State for Transport, so with no responsibility for any of what followed — and then the world fell apart. What struck me about his approach was his composure. At that moment, everybody was losing their heads. Brilliant financiers being paid millions of pounds a year were panicking and demanding to be bailed out in every conceivable way. To steer through that required personal solidity more than mountains of analysis. The analytical models were essentially useless — the then-CRO of Goldman Sachs famously remarked that their models told them the market movements of the previous week should occur once in a million years, and they had just happened again. In those circumstances, what you needed was someone calm, prepared to listen, and able to communicate that there was a grown-up in the room trying to maintain control. It was a case where personality mattered as much as policy. Those who worked directly for Darling at the time would validate that assessment.

Marieke: The skill of not making a crisis worse by panicking yourself.

Howard: Exactly. If you can at least do that, you have made a start.

“London was on its way to becoming the onshore financial market of Europe”

Nicolas: Shall we move to the current geopolitical context? A significant thing happened in Britain a few years ago — Brexit, the decision to leave the European Union. It was widely assumed this would give Britain more flexibility to reposition in a changing world. After several years, it is fair to say that has not clearly happened, and it is still not obvious what Britain’s strategic goals are. You have called Brexit a significant mistake. Can you elaborate? Why was it a mistake, and was there anything that could have been done to make more of it?

Howard: The effects of Brexit have been less bad in some respects and less good in others than was widely expected.

In the period running up to Brexit, London had been the great beneficiary of the growth and deepening of the single market, including the single financial market — however incomplete that remains. London was moving from being the offshore financial market for Europe to being effectively the onshore financial market as well. A striking feature was that you would find Italian investment bankers selling Italian corporate debt to Italian investment managers — in London. All these people had families in Milan and worked for Milan-based institutions, but the business was actually being done in London. There is what economists call an agglomeration effect in financial markets, which is somewhat circular: people are there because other people are there, and that reinforces itself. Brexit was a blow to that, and there has been some repatriation of business to domestic markets. EY has tracked job losses, which reached about 7,000 and seem to have stabilised there. That is not enormous — BNP Paribas, for instance, says it employs more people in London today than before Brexit. But there has been a cost.

And looking forward, the push towards a savings and investment union and deeper capital market integration in Europe is exactly the kind of development London would have been well placed to benefit from. As things stand, insofar as a functioning capital markets union exists in Europe, it is in London — and we are no longer positioned to capture that growth in the same way.

On the other side of the ledger, is there anything Britain has been able to do with its regulatory freedom that it could not have done inside the EU? At one level, any pan-European regulation is a compromise among 28 countries, so any individual country, given a free choice, would probably design some rules differently. There have been some examples — most visibly in insurance, where changes to the Solvency II regime in London have been beneficial for the wholesale markets, and which would have been harder to achieve within the EU.

But as a practical matter, when you ask the large American firms whether they want UK regulation to diverge from European regulation, most say not really. The benefits of a slightly more market-friendly regime may be offset by the complications of running two different regulatory regimes within the same institution. Most would prefer consistency.

There is also a deeper point. The EU capital regime starts in Basel — the rules are devised there and then converted into binding legislation in Europe, whereas the US treats them more as best-endeavours guidelines. Why does the EU legislate them rigidly? Because in a single financial market, the French regulator is very interested in what the Latvian regulator does. A Latvian bank can set up in the Faubourg Saint-Honoré and sell into the French market without further restriction if it holds a Latvian licence. So you cannot simply rely on mutual recognition — you need the same capital definition, the same capital levels, because otherwise you are being undercut and you cannot stop it. The rigidity is the price of the open market.

So the degrees of freedom Brexit provided have been fairly limited, and most of the apparent deregulation in the UK is not actually Brexit-related. A lot of it involves reducing requirements that were self-imposed and went beyond anything the EU required — like the Senior Managers and Certification Regime, which codifies individual accountability in detail that has no equivalent in any European directive. We introduced that after the crisis because when bankers were summoned to parliament and asked who was responsible for a bank going bust, they all pointed at someone else. So we codified responsibilities. That regime has since been lightened — but that was something we did to ourselves, and now we are partly undoing it. It has nothing to do with Brexit.

Marieke: I lived what you are describing when I worked at Circle, based in London leading the Europe operations. When Brexit happened, the FCA was actually quite advanced in its approach to crypto regulation — genuinely world-leading. Brexit put the brakes on that because the authority had to redirect its attention. And the loss of passporting rights was significant: previously we could passport a licence across the EU from London. After Brexit, we had to obtain licences on the continent and move teams accordingly. Exactly the consequences you describe, experienced at a small scale.

“All their wives were in Milan and the business was being done in London”

Nicolas: You described the agglomeration effect and London’s role as the hub that made the concept of a single European financial market a practical reality. Does losing London mean Europe has lost its ability to deliver on that promise to investors? It is very hard for Frankfurt or Paris or Milan to replicate what London offered.

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Dollar stablecoins are expanding global dollar dominance outside the traditional banking system. Existing monetary infrastructure wasn’t built to handle such an extension, and every jurisdiction is now being forced to respond to it.

This week offers an illustration of the tensions that stablecoins are producing across the global monetary order. America is pushing ahead its stablecoin agenda: the Clarity Act is moving through Congress, with a fight over yield at its centre, while USDC is being embedded into the infrastructure of the emerging agentic economy. Meanwhile Brazil has banned regulated fintechs and eFX providers from using stablecoins or any cryptocurrency to settle cross-border payments. And in Europe, Christine Lagarde argued on Friday that stablecoins are not the path to a stronger euro. In her view, the right response is to build public infrastructure and wait for it to be ready.

Three jurisdictions, one underlying problem, three entirely different responses. And as this edition will argue, only one of them is playing offense.

The Yield Question

The Clarity Act is doing exactly what it says. It is bringing regulatory clarity — to the US. The problem is that in a world of borderless digital money, a domestic clarification can have consequences that are anything but domestic.

The provision drawing the most attention is the yield question: within the stablecoin supply chain, who is permitted to offer yield to end users?

The debate has been framed, predictably, as a fight between the crypto industry and the banks. And the banks have a coherent argument. In the traditional system, yield is the mechanism central banks use to direct the flow of capital. Low rates push money into markets. High rates pull it back into deposits. That mechanism is how inflation gets managed, how growth gets throttled — and how banks keep their balance sheets funded. If regulated stablecoins begin offering competitive yield to retail customers, the concern is that bank deposits drain toward a new and less-regulated alternative.

Several analyses have complicated that argument. In particular, the evidence for mass deposit flight is thinner than the lobbying suggests. That said, the underlying anxiety is undeniable, suggesting it maps to something deeper than deposit economics. The real fight, in reality, is about who gets to own the customer relationship in an era when money has gone digital. Banks are worried about losing both deposits and relevance from a customer’s perspective.

To understand what is at stake, it helps to get back to the basics. The short version goes like this: yield is a customer acquisition cost dressed up as monetary policy.

More specifically, in any competitive system, yield is what you offer someone to say: stay with me. It is the reward for holding. And in the stablecoin ecosystem, the economics of that reward are simply different. Issuers like Circle and Tether hold Treasury T-bills at around 5%. They pass little (in the case of Circle) to nothing (in the case of Tether) back to the user, because they need to retain most or all of the yield for themselves: the margin is the business, and the Genius Act was drafted based on this premise.

That said, the debate now happening in Washington is whether that should change — whether yield should flow downstream, and if so, through whom. In DeFi, stablecoins can already generate returns of 3–12% APY depending on platform, protocol, and risk profile. Platforms like Kraken, Aave, and Coinbase all offer variations of this. The higher the yield, the higher the risk embedded in the structure underneath it. This is not new. What is new is that the same question is now being clarified at the level of statute — and the answer will not stay within US borders.

What Washington Decides, the World Inherits

Here is the scenario that the Clarity Act debate has largely failed to reckon with — at least outside of the US. Whatever gets legislated in Washington applies to US-regulated entities serving US customers. It does not automatically apply to a European holding USDC in a self-custodied wallet. If, as a result of the Clarity Act, a US citizen cannot earn yield on their stablecoin holdings, but a European citizen holding the same asset through a different interface can, the resulting incentive structure can prove problematic.

For a European holder, the decision calculus becomes: convert euros into USDC, earn a materially higher yield, absorb the FX risk. Sometimes that trade makes no sense. Sometimes it does. But in aggregate, even partial adoption of that logic creates structural pressure toward dollarisation operating inside European borders, driven not by policy or coercion but by individual wallet decisions. Capital does not wait for political permission to move to where it is treated best.

Currencies are now competing for retail holders at a scale and with an accessibility they never had before. You can download a wallet, receive USDT, and transact internationally without touching a bank or a regulated institution. The dollar’s deep liquidity and global trust make USD stablecoins the dominant form of that competition. And yield is the marketing tool that can convert a passive holder into an active advocate.

In other words, we are witnessing a global competition for wallet share — where yield is the incentive layer that converts a passive holder into an active advocate.

Brazil Draws the Line

The most instructive defensive response to this dynamic is in Brasília.

Last week, the Banco Central do Brasil published Resolution No. 561. The rule bans regulated fintechs and eFX providers from settling cross-border payments using stablecoins or any other cryptocurrency. From October 1, companies like Nomad and Braza Bank — which had built USDT and XRP-ledger settlement into their cross-border rails — must route everything through traditional FX transactions.

The numbers help explain the decision. Brazil’s traditional remittance market moves roughly $25B per year. But crypto had quietly assembled something considerably larger alongside the regulated system. Brazil’s crypto market now processes $6–8B per month, with stablecoins accounting for approximately 90% of that volume. Annualised, that is $70–90B in cross-border flows operating through channels the central bank cannot observe — a parallel financial infrastructure, built without permission, larger than the regulated market it nominally complemented, and almost entirely invisible to the BCB. At that scale, the regulatory blind spot had become untenable.

The BCB’s rule operates cleanly at the institutional layer. Licensed fintechs have authorisations to protect, thus compliance will happen. What the rule cannot reach, however, is the peer-to-peer layer. Any Brazilian with a self-custodied wallet can still settle in USDT on Tron or USDC on Solana, entirely outside the eFX framework. The plumbing the regulation controls is not the same as the plumbing that actually moves the money.

Europe’s Answer: Build the Plumbing, Skip the Token

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Everyone has been watching the ports and the railways. That was the wrong thing to watch.

China has quietly become the world’s largest official creditor. According to AidData’s dataset published in November last year — the most comprehensive analysis of Chinese overseas lending ever assembled — China’s lending portfolio has reached $2.1 trillion across 217 countries and territories. For every dollar it donates, it lends 35. To developed countries, the ratio is 761 to one. The share of its overseas portfolio that qualifies as development aid has fallen from 22% in 2000 to 1% in 2023. China’s overseas lending is the most aggressive return-seeking international lending operation in history — run by a nominally communist state using the capitalist playbook of investment, and then some.

That reframing is refreshing for everyone interested in China’s global soft power. Until recently, the debate about China’s overseas ambitions has been almost entirely focused on the Belt and Road Initiative (BRI) — the infrastructure programme launched under Xi Jinping in 2013, which built ports, roads, and railways across the developing world.

For years, critics have been calling the BRI debt-trap diplomacy: fragile states lured into loans they could not service, then forced to hand over strategic assets. The Hambantota port in Sri Lanka, leased to China for 99 years after Colombo could not service its debt, became the emblem of this critique. But the debt-trap framing, always contested, has been superseded by events. Infrastructure lending has fallen from 75% of China’s overseas portfolio in 2010 to less than 25% today. The BRI, in its original form, was phase one. Something more sophisticated seems to have replaced it by now.

To understand what China is actually building, it helps to start not with the BRI but with the dollar order it is trying to displace.

The Dollar Order as Alliance Coordination

The post-war dollar system is usually described in monetary terms: reserve currency, recycled surpluses, exorbitant privilege. But Izabella Kaminska, who joined us recently on Currency of Power, offers a different reading — one that clarifies what China is doing by contrast.

In Izabella’s view, the dollar system was designed to solve a structural problem in Western defense. Democracies are poor at sustained military coordination. They answer to electoral cycles and electorates that resist permanent sacrifice. The Soviet Union, as a command economy, faced none of those constraints. The dollar system solved this problem indirectly: by anchoring allied economies to American financial infrastructure, it allowed Washington to fund a global military posture without imposing the full cost on domestic taxpayers. Japan and Germany were rebuilt as export-led manufacturing powers. Their savings, recycled into US Treasuries, funded American security. The monetary arrangements served a strategic objective.

The dollar order was, in other words, an alliance coordination mechanism. The currency was the operating system. The goal was to implement “allied scale” — to pool and concentrate Western industrial and military capacity under a single umbrella, so that the democratic bloc could match the sustained resource commitment of a command economy.

Sinéad O’Sullivan, who spoke to us in an earlier edition, argues that China is itself a coordination system. Its central bank pursues social, employment, and political stability, deploying liquidity as a strategic instrument. The state planning apparatus decides which sectors grow and which absorb the costs of slowdown. That consistency — the ability to direct resources toward strategic objectives across decades — is something democratic market economies cannot match.

The US ran its system through a currency: countries that wanted access to American markets, American security, and American capital had to operate in dollars, which drew them into American-led institutions almost automatically. China has no currency with that kind of global reach, so it is building its network differently — through loans, infrastructure contracts, and increasingly energy systems that create direct dependencies on Chinese suppliers, Chinese financing, and Chinese technical standards. The monetary layer is coming, but it is being built on top of a physical and financial presence that is already extensive.

The New Playbook

AidData’s research makes clear that the BRI was never the whole story. For every four dollars China lends for infrastructure, it lends another six for activities that have nothing to do with infrastructure: corporate acquisitions, liquidity facilities, technology assets, critical minerals. By 2023, 76% of China’s overseas lending supported upper-middle and high-income countries. The single largest recipient of Chinese state credit is… America — which has received over $200 billion.

China’s playbook has several distinct components.

The first is the shift from aid to return-seeking capital. China has abandoned the role of a traditional donor. It lends on commercial or near-commercial terms, uses variable interest rates, requires collateral, and increasingly routes transactions through shell companies and offshore vehicles to limit scrutiny. Its cross-border acquisition lending — directed at technology assets, critical minerals, and strategic infrastructure — has an 81% success rate. Since the adoption of its Made in China 2025 industrial policy in 2015, the share of that acquisition lending targeting sectors that host countries have designated as sensitive on national security grounds has risen from 46% to 88%.

The second is the construction of a critical minerals supply chain. China has invested heavily across Africa, Southeast Asia, and Latin America to secure upstream extraction and midstream processing of the materials that clean energy and advanced technology require: copper, cobalt, nickel, lithium, rare earths. North American and European mining operations face a structural disadvantage: capital is available, but engineers and skilled workers are scarce. China built its position over decades. The West is now trying to replicate that in years.

The third — and the most consequential for the long run — is what we call the electrostate.

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Regular readers will know that China’s monetary strategy has become something of an obsession at Currency of Power. Over the past few months, we’ve traced how the petrodollar recycling loop is breaking, mapped the great bifurcation between dollar and yuan financial infrastructure, argued that the dollar has more lives than its critics admit, and tried to understand what it actually means when a country is wide open to the world and locked into a single system at the same time. We’ve also had the pleasure of going deep on the People’s Bank of China with the brilliant Sinéad O’Sullivan, whose four-part series on Chinese central banking is essential reading for anyone trying to understand how China’s monetary system actually works.

This piece grew out of something more immediate. Marieke just returned from a trip across China and Japan — and came home with a head full of observations. One in particular stuck: in Hong Kong, mainland Chinese shoppers were flooding the malls. Not because of some new retail trend, but because the maths suddenly made sense. A weak dollar means a weak HKD — which is pegged to it — which means everything priced in Hong Kong dollars is cheap for anyone earning or saving in yuan. A Chinese city, running on American monetary policy, accidentally on sale to its own citizens.

That small observation is the thread we pulled. And it leads somewhere interesting.

A City In Between

Hong Kong has always been a city in between. Between East and West, between colony and sovereign territory, between market freedom and party control. Its monetary system is, in many ways, the purest expression of that in-betweenness: a Chinese city whose entire financial existence is anchored to the United States dollar.

That arrangement has made Hong Kong extraordinarily prosperous. It has also made it a strategic puzzle for Beijing. As China embarks on one of the most deliberate dedollarization campaigns in modern financial history — expanding yuan swap lines, promoting its Cross-Border Interbank Payment System (CIPS), rolling out the digital yuan, accepting yuan payments for oil — Hong Kong sits at the centre of a paradox. It is China’s most important gateway to global capital markets, and it runs on the currency of China’s primary geopolitical rival: US dollars.

How can China use its most valuable financial bridge, Hong Kong, to escape the very currency that keeps that bridge standing? Answering that question sits at the intersection of monetary history, geopolitical competition, and the coming war over who controls the digital infrastructure of global finance.

Is Hong Kong China’s ultimate joker’s card when it comes to full sovereignty and de-dollarization or its weakest link?

From Crown Colony to Currency Board

To understand Hong Kong‘s monetary situation today requires understanding how it came to be tied to British sterling, then to the US dollar, and the political tremors that drove each transition.

Hong Kong was ceded to Britain in 1842 following the First Opium War, and for most of its colonial history its currency drifted between various anchors. After moving off sterling when the pound began its long post-war decline, the territory briefly floated its dollar in 1974. The experiment went badly. Inflation surged, speculative pressure mounted, and the economy lurched.

The decisive moment came in 1983. The Sino-British negotiations over Hong Kong’s post-1997 fate — the year Britain’s lease on the New Territories was due to expire and sovereignty over the whole territory would revert to China — had begun in earnest, and confidence collapsed spectacularly. On September 24 of that year, later dubbed “Black Saturday,” the Hong Kong dollar was devalued by 15% over two days to a historical low of HK$9.60 to the US dollar. Shops began quoting prices in US dollars and refused to accept local banknotes. There were runs on food staples. It was a currency crisis born entirely of political fear: investors had no idea what Hong Kong would look like under Chinese rule, and they voted with their capital.

The response was the Linked Exchange Rate System (LERS), announced on October 17, 1983, fixing the Hong Kong dollar at HK$7.80 to the US dollar through a currency board mechanism. The architect was economist John Greenwood, who proposed a simple, rule-based system in which every Hong Kong dollar in circulation would be fully backed by US dollar reserves held at the Exchange Fund. There would be no discretion, no central bank rate-setting, no monetary policy independent of the Federal Reserve. Credibility through constraint.

The peg survived the handover to China in 1997, the Asian financial crisis the same year, the SARS outbreak of 2003, the global financial crisis of 2008, the social unrest of 2019, and the COVID-19 pandemic. Since 2005, the HKMA has maintained the rate within a band of HK$7.75–7.85 per US dollar. The system has been a remarkable feat of institutional endurance — and one of the most transparent monetary frameworks in the world. Today, Hong Kong’s entire monetary base remains fully backed by US dollar assets held in the Exchange Fund.

The Post-1997 Paradox

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The Trump administration has made a simple story the centrepiece of its economic worldview: America has been cheated. Foreign countries sell into American markets, accumulate dollars, and use those dollars to lend back to Washington at interest. Trade deficits, in this telling, are a measure of exploitation. The rest of the world gets factories, jobs, and growth. America gets debt.

It is a story with genuine emotional and political force. It is also, in important ways, backwards.

For decades, the US has occupied a position in the global economy that no other country has ever held for so long: issuer of the world’s reserve currency. That status, critics argue, allows Washington to consume more than it produces, borrow without limit, and export its deficits to everyone else. Far from being the victim of a rigged system, the US built the system, and has been its primary beneficiary. This is what Valéry Giscard d’Estaing, then France’s finance minister, meant in the 1960s when he coined the phrase “exorbitant privilege”.

The situation, however, is more complicated. The economists who have studied this most carefully — Paul Krugman, Hélène Rey, and others — reach a more qualified conclusion: the privilege exists, but its economic value is probably smaller than either its champions or its critics claim. In a recent post on X, Izabella Kaminska of The Blind Spot goes even further: the dollar system was never primarily designed to let America live beyond its means. It was designed to keep the West’s military and industrial capacity coordinated under American leadership.

So why is America now stating that it’s being taken advantage of? And why is the rest of the world under the impression that the US is abusing its exorbitant privilege? This, as can be expected, is a long story—and a sign that something has gone seriously wrong.

The Architecture of Dollar Dominance

To understand any of this, it helps to be clear about what reserve currency status actually means — and why it is so durable.

The dollar is not dominant because of a law or a treaty. There is no world government requiring Brazilian importers to pay for Malay goods in US currency. The dollar dominates for the same reason English dominates international commerce: because everyone else uses it. Paul Krugman, drawing on a 1967 paper by Charles Kindleberger, has argued that this analogy is more than illustrative. It captures the deep structural logic of currency dominance. Just as it invoices in dollars, a Brazilian firm negotiating with a Malaysian counterpart conducts the conversation in English, not because either party chose America, but because those are the languages — linguistic and monetary — that minimise friction when strangers trade.

Data shows that this self-reinforcing network effect is remarkably stable. As pointed out by Paul Krugman, the dollar is involved in 88 per cent of all foreign exchange transactions, dominates global trade invoicing outside Europe, accounts for nearly 60 per cent of central bank reserves, and underpins some $20 trillion in foreign-held dollar assets. The euro is a distant second. The yuan barely registers.

The roots of this dominance lie in events that happened at the end of World War II. The Bretton Woods conference of 1944 placed the dollar at the centre of a new international monetary order, backed by American gold reserves and the overwhelming productive capacity of an economy that had emerged from the war intact while Europe lay in ruins. When that gold-backed system collapsed in 1971, the dollar’s dominance survived through a different mechanism: the petrodollar agreement of 1974, under which Saudi Arabia and OPEC agreed to price oil exclusively in dollars in exchange for American security guarantees. Any nation that needed energy — which meant every nation — needed dollars. Those dollars were recycled into US Treasury bonds, creating a permanent captive demand for American debt.

That petrodollar recycling loop, however, is now fading. Izabella argued, presciently, as early as 2015 — when it was unfashionable to say so — that the petrodollar effectively died the moment America became energy-independent through shale. As for Brad Setser, he recently showed that petrodollars now play a marginal role in funding America’s national debt. In other words, the structural demand for dollars anchored to oil has been in decline for a decade. What has replaced it, at least in part, is what Izabella calls the “sweat dollar”: the dollars that flow outward to pay for imports from countries whose comparative advantage is cheap labor, most notably China. And beyond that, our theory at Currency of Power is that a new digital recycling loop is being engineered, anchored not in oil but in artificial intelligence infrastructure (GPU dollars) and dollar-backed stablecoins (cryptodollars).

The architecture changes. The dominance persists.

Exorbitant Privilege: Real, but Qualified

So does this dominance let America live at the world’s expense?

The intuitive case for “yes” runs as follows. To supply the world with dollar liquidity, the US must run persistent trade deficits — it must import more than it exports, pushing dollars outward while absorbing foreign goods. The world, in turn, recycles those dollars into US Treasuries, lending Washington the money to fund its deficits at low rates. America consumes; the world produces; and the bill is deferred indefinitely onto a growing stack of sovereign debt now approaching 122 per cent of GDP—even more when you account for private debt as well.

This is a phenomenon known as the Triffin dilemma: the very mechanism that makes the dollar indispensable to the world hollows out American manufacturing, as a persistently strong currency makes US exports uncompetitive. The US gets cheap imports, cheap borrowing, and a bloated financial sector. It loses factories, and the communities that depended on them.

Hélène Rey and Pierre-Olivier Gourinchas have documented what they call the “hedge fund nation” dimension of this privilege: the US issues low-yielding safe assets (Treasuries) and invests the proceeds in higher-yielding foreign equities and direct investments, earning a structural excess return of roughly 1.5 per cent per year in real terms. America, in other words, borrows cheap and invests dear — a carry trade run at national scale.

But Paul Krugman urges caution about overstating all this. He points out that the notion of a “unique” American ability to run sustained trade deficits is simply false: Australia ran massive current account deficits for three decades without holding reserve currency status; the UK has done the same since 2000. The ability to borrow from global markets is not exclusive to the dollar’s issuer. Paul also notes that Ben Bernanke, examining whether dollar status lowers US borrowing costs, found no clear evidence of the effect. The economic value of the privilege, Paul concludes, is probably not large relative to the size of the American economy.

Where the privilege is unambiguous, he argues, is in power rather than economics. Because so much of world trade and finance runs through the US banking system, Washington can observe and block transactions across borders. This is the weapon behind sanctions such as those imposed upon Russia and Iran — and it is a genuinely formidable one. When the US froze Russia out of dollar clearing after the invasion of Ukraine, it demonstrated that exclusion from the dollar system is close to exclusion from the global economy. Iran’s alleged demand that tolls through the Strait of Hormuz be paid in yuan or cryptocurrency is, in this light, less a sign of dollar weakness than a sign of how badly a sanctioned state wants out.

So the picture that emerges is this: the exorbitant privilege is real, but its economic dimension is modest and comes with a structural cost (deindustrialization). Its power dimension — the ability to weaponize dollar clearing — is large, and is not obviously a form of living beyond one’s means. It is more like owning the world’s only bridge and being able to decide who crosses.

Paul Krugman

The Dollar’s Special Status: Sources and Threats

A recent news analysis by Al-Jazeera stated…

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3 months ago · 1296 likes · 214 comments · Paul Krugman

The System Was Not Built for This

This is where we need to discuss Izabella’s argument that the dollar is not about allowing America to live beyond its means.

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Izabella Kaminska has spent most of her career following a dollar that nobody in authority wanted to talk about.

She started as a general finance journalist — Reuters, CNBC, small English-language papers in the Caspian — before reaching Alphaville, the Financial Times’s blog, where she further developed a long-time interest in the eurodollar: the parallel dollar that circulates offshore, beyond the reach of the Fed, governed by nothing except the confidence of the people holding it.

That interest turned out to be good preparation for 2017, when she became one of the first journalists to argue that Tether was not merely a crypto curiosity but a recognisable monetary form — the latest iteration of something the world had seen before. The eurodollar had been issued by offshore banks in the 1960s on the same basic logic: promise to settle in dollars, manage your liabilities however you like, and hope nobody asks too many questions at once. The crypto crowd did not know what she was talking about. Others, like economist Perry Mehrling, did.

She left the FT to found The Blind Spot, and later The Peg, on the premise that the space between TradFi snobbism and crypto boosterism is where the important questions live — and that covering it honestly requires independence from both sides.

In this conversation, Izabella walks through the origins and logic of the eurodollar, why the LIBOR scandal was widely misunderstood, how the introduction of the euro may have quietly contributed to the subprime crisis, and why she thinks stablecoins are best understood not as a financial innovation but as a stabilisation operation — a controlled way of unwinding an asymmetry that has been building for thirty years. She also makes the case for Tether as a grey-zone instrument of US statecraft, discusses the parallel between the City of London’s offshore role in the 1960s and Tether’s position today, and explains what Poland’s gold purchases tell you about where monetary sovereignty is heading.

She’s active on X at @izakaminska, and you can find her work at both The Peg and The Blind Spot on Substack.

“My ambition is to tell the story of how the monetary system is changing.”

Nicolas: Hello, I’m Nicolas Colin, co-host of the Currency of Power podcast with my colleague Marieke Flament. Today we have a very special guest, Izabella Kaminska, founder and editor of The Peg and The Blind Spot, and formerly editor of the Financial Times blog Alphaville.

Izabella, maybe we’ll start with a quick conversation about your journey from the Financial Times to your current work, and then dig deeper into The Peg and its coverage of stablecoins, crypto, and the new monetary order. It’s a very similar topic to the one we cover at Currency of Power, and we launched at about the same time. It appears we had the same idea simultaneously — that it’s an important topic and deserves more coverage. So thank you very much for being here. Tell us a bit about your journey from mainstream financial journalism to where you are today.

Izabella: Thank you very much for having me. It’s a real pleasure. It was a real delight discovering fellow stablecoin enthusiasts coming at it from the monetary order perspective. I think it’s like Marconi and Bell — we had the same idea at the same time, because it really is a good one: that this needs discussion, not just from a purely technical and industry perspective, but from the bigger global picture of what’s going on. Or as I like to put it, breaking the stablecoin down to its fundamentals in terms of the new monetary order that is emerging.

How I got here: I’ve been a journalist all my life, and I think that’s the point of differentiation between us — I come at it from a journalistic point of view. I’ve always been a finance or business journalist, with a long career spanning Reuters, CNBC, small English-language newspapers in the Caspian, and in Poland as well, because I’m Polish. My parents are Polish. I was born in the UK, but I’m very much brought up in the cultural Polish way.

I got to the point where I was at Alphaville at the FT, and to be frank, Alphaville was one of the best jobs I’ve ever had. I was surrounded by incredibly smart people having very interesting discussions all the time. But the reason I left the FT — and I’ve been upfront about this — is that everything was getting politicized. I don’t think it’s the FT‘s fault. It just became more and more difficult to write about the intersection we’re talking about now. I feel like you have to be independent to do this objectively, because you’re always upsetting somebody otherwise. Finance journalism used to be compartmentalized in a sort of safe space. It didn’t really crash into politics that often. Obviously there was the Great Financial Crisis (GFC), and that was highly political, but even so it was a different type of politicization. Having covered Poland, and as the West became more polarized, it became more difficult to write about these things, at least at the FT in some respects.

I always say this and I do mean it: it’s still a great resource and there are people there who do great work. But journalists in mainstream frameworks are sometimes a little constrained in what they can say. So I was really looking forward to saying my own thing, which is why I left and founded The Blind Spot — the idea being a sort of off-balance-sheet Alphaville, where we could once again go wherever we wanted. It veers more into the politics side, because one of the things about being in an institution is that if you start writing about any political figure — Boris Johnson, Brexit, whoever — you collide with the political teams. There’s a clash over who has more authority to say things, and if you say something different to the others, it becomes cumbersome and politically sensitive.

I thought finance needed a dispassionate assessment from other perspectives — not necessarily endorsing those perspectives, but putting them out there. Investors cannot afford to be politicized. You have to look beyond the noise and the emotionally charged coverage. That was the idea behind The Blind Spot.

Being an entrepreneur is really, really difficult, and I made a lot of rookie mistakes. I also had no funding. As a journalist, I’m incredibly bad at asking people for money — it’s not something I’m used to. Getting funding is very difficult when you’re trying to be objective and neutral and have no paymasters. I tried to do too much too quickly, ran out of money, and had to take another job at Politico. I kept The Blind Spot going alongside that, but it proved conflicting in the end.

I’m now on my second run, having learned the lessons of that period. I’ve realized that for monetisation purposes — and there’s a reason Alphaville was always outside the paywall — monetising that sort of broad, off-the-cuff, speak-truth-to-power journalism is really difficult. You need at least a two-sided market, I think is the technical term.

So the idea with The Peg — I’m still doing The Blind Spot, but my ambition, if the monetary gods shine on me, is that The Peg will become a proper institutional industry offering, at a rate that pays for itself and for really solid, neutral journalism. That’s the key point. I personally believe this space is a little crowded with people either from the crypto side of the spectrum — which doesn’t necessarily provide neutral coverage, and I’m not dismissing them because a lot of those outlets do a great job tracking what’s going on, but they sometimes lack expertise on the TradFi side — and on the TradFi side, there’s still a degree of snobbism about the other side. Central banks are moving slowly towards understanding the nitty-gritty, but there is still a somewhat dismissive attitude towards new ideas within that community. That included me, many years ago. I’ve come more to the middle.

My ambition with The Peg is to frame everything in the very big picture — the macro story of how the monetary system is changing. If that succeeds and I can get proper journalists to support me and it pays for itself, then the creative Alphaville-style content can be put out for free as reach, with The Blind Spot remaining as a free offering. That’s the vision. Whether the gods allow me to follow through is another matter.

Marieke: I think it’s really interesting what you say, because independence in that sector is very difficult. With crypto outlets, if you have sponsorship, you feel an obligation to certain protocols. It’s hard to strike the right balance. But the gap you’re describing — bridging this dialogue in a different way — is clearly what’s missing.

Izabella: I can but try. And I do think the space needs a strong-minded, independent voice with journalistic pedigree.

“A eurodollar is a parallel dollar – a liability issued by an offshore bank that promised to settle in dollars if and when redeemed in the US.”

Nicolas: We wanted to start the conversation with eurodollars, because that’s a very old and largely overlooked segment of global finance that in many respects is a precursor to today’s stablecoins. A lot of people interested in stablecoins come from the crypto space and, like everyone in tech, don’t know much about history and aren’t particularly interested in it. What we try to do every time we write about these topics is rewind and remind people that these things aren’t completely new. Eurodollars are, again, a precursor to stablecoins. Can you tell us the history of eurodollars and why you got interested in them?

Izabella: It is a mystery even to myself. I just found the whole thing so fascinating. I got into it when I was at Alphaville, but I think if I was to really think about it, the reason I’m so drawn to eurodollars is because I’m Polish, and I saw the sharp end of the eurodollar market in the former communist system — where those dollars were circulating, not just in terms of the high-value corporate financing that the City of London was doing, but on the grubbier side: the kantors, the underground exchange. Not quite illicit, but informal.

I have a personal connection because my father was a money transmitter in those days. He was based in London and had one of the three main money transmitters doing hard currency transfers to Poland — and was somehow involved in two of them. It’s all very murky. I still can’t get a straight story from him about how it worked. I used to work weekends at his office, which doubled up as a travel agency and a parcel company, because that’s what you did — sending parcels and money transfers. I would spend my Saturdays after Polish school helping him file accounts, just organizing the cabinets without really knowing what I was doing. But now I realize what was happening: we would take the payment slips and stand outside the Allied Irish Banks and pay them all in. It was always the Allied Irish Banks, and now I realize that’s because the Irish had a different jurisdictional approach to transfers in that era — they were kind of neutral politically, which is why it enabled that. All these things started coming together.

Then separately, I was fascinated by this idea of a parallel dollar circulating through Europe. I think the second part of my fascination came when I was at Reuters as a graduate trainee, doing some time on the eurobond desk. I couldn’t understand the difference between a conventional bond and a eurobond, and I don’t think a lot of the reporters covering that market understood it either. Nobody ever properly explained it to me. That was the moment I thought, I’ve got to understand why this is a different thing. So I went off on a quest to the British Library, got hold of historic editions of Euromoney, and went through them trying to work it out.

By the time I was at the FT, eurodollars had become so second nature that nobody really questioned the difference. Even during the GFC, I think, nobody really put two and two together that the LIBOR crisis was fundamentally a eurodollar crisis. And ever since then, I’ve just been trying to get more and more insight. By 2017, when I spotted stablecoins, I was one of the first people to make that connection. I put out a story saying Tether is the new eurodollars, and at the time I don’t think anyone in the crypto space knew what I was talking about. I was at a gathering with Perry Mehrling, who I absolutely adore, and we were discussing it on the sidelines. He agreed they were eurodollars. The rest, as they say, is history.

Nicolas: What’s the short definition of a eurodollar? It’s a dollar that never goes back to the US?

Izabella: Yes — it’s a parallel dollar. These days it’s heavily regulated, so slightly different. But back in the old days, it was effectively a liability issued by an offshore bank that promised to settle in dollars if and when redeemed in the US. You could get physical cash dollars — Soviet-style kantor — or you could get a correspondent in America to pay out to another American bank. But how those banks managed their liabilities was up to them and completely unregulated. The US couldn’t really control it, and that’s where a lot of the risk came from, because these eurodollar banks were effectively issuing cheques their books sometimes couldn’t cash.

The Americans weren’t very happy about it, but they were also, unwittingly, the creators of the eurodollar market — because it was their own regulatory climate, which capped domestic interest rates, that made it so lucrative and viable to lend into the offshore market overnight. That provided the liquidity and funding that allowed the whole thing to expand.

It most famously started in the 1960s. A lot of these dollars ended up outside the system to pay for things — the famous origin myth involves Vietnam and the dollars funding various activities in the Soviet Union, and then of course the petrodollar, which ended up banked in European banks in Switzerland. That created a nice source of perpetual dollar flows that could be re-lent almost on their own parallel ledger.

Nicolas: A characteristic of the 1960s was the fixed exchange rate system. Why were counterparties outside the US using dollars instead of francs or Deutsche Marks?

Izabella: One of the main reasons was liquidity. Having to change money between the Deutsche Mark and the drachma — there simply wasn’t enough liquidity. The dollar became a bridging currency in many cases. That bridging role created a float, and that float paid a good interest rate in Europe if you funded it overnight. That’s really how it originates. It was to do with the fragmentation between all these different currencies.

By the time of the GFC, London had become the hub of eurodollar trading. It owned that market. By that point we were on floating rates, and it was in some ways the market price for dollars as opposed to the administered price through the Fed. When we saw LIBOR breaking, one of the issues was that it was a market-based price, which is very hard for central banks to influence. Post-GFC, a lot of the regulatory action has been focused on bringing that market rate under control of the Fed — done by dropping LIBOR and pushing everything onto a collateralized rate, which poses its own problems, but that’s a different conversation.

Nicolas: Can you explain what LIBOR is and what happened with it?

Izabella: LIBOR is the London Interbank Offered Rate. What’s really interesting is that crypto markets have started to evolve their own equivalent. The way I like to describe it is that it’s the rate you’re prepared to pay for dollars in order to avoid going to the central bank. Because it’s a hypothetical, it was notoriously difficult to index. It was almost theoretical — like an insurance rate. If I were to have to borrow from counterparts to avoid going to the central bank, what would that rate be? That posed its own issues, which obviously led to the LIBOR scandals, although post-GFC I think the story we heard about LIBOR was subject to some hysteria and a real quest to find a scapegoat.

Having met Tom Hayes, one of the bankers arrested for manipulating LIBOR — I interviewed him a couple of years ago, and he’s since been acquitted — I think a lot of the judicial cases failed to understand how this market really worked. Everyday people just wanted to see a banker go to jail. There was a very big difference between the manipulation of LIBOR for commercial interest and what was later argued — that the Bank of England itself was guiding LIBOR down and telling banks to give inorganic rates. So who was really manipulating whom is the question. I don’t think it was as clear-cut as it was portrayed at the time, and a lot of traders who probably didn’t deserve to go to prison did go to prison.

But LIBOR was, in a way, the market organically creating a price of money outside the domain of the central bank’s administered rate. Which is why when the Bank of England wanted to guide it lower, it was forced to literally phone up the CEOs and say it would really appreciate it if they did — because they had no direct control beyond whatever diplomatic channels they could deploy.

Nicolas: So it’s another way in which eurodollars are precursors to stablecoins — there’s that same defiance towards central banks.

Izabella: When there’s a liquidity issue, the idea is that there is a price of money amongst counterparties. Say hypothetically a stablecoin is short of the liquidity to pay out for redemptions — it’s the equivalent of going to fellow stablecoin providers who might have excess and asking them to lend overnight. The counterparties then determine whether it’s a good loan. In the GFC, what happened is that everyone knew there was a de facto shortfall in the whole ecosystem. Like a game of musical chairs, one chair was missing and the banks all knew it. So nobody was prepared to lend to anyone because you might be caught without the chair. That’s why you had to have central bank intervention.

Nicolas: Did the introduction of the euro have an impact on eurodollars?

Izabella: It’s an interesting question. I’m confident I read a BIS paper on this many years ago by Patrick McGuire, building on work by Robert McCauley. The general premise, as I recall, was that the introduction of the euro was one of the catalysts for subprime, because it created a need for that float to go somewhere else. Suddenly you had all this liquidity looking for higher rates, which had been used to collecting a nice return from funding FX flows in Europe, and suddenly it needed to go somewhere else. That cheap pool of liquidity helped fund looser borrowing standards elsewhere. I don’t want to misquote it or inaccurately attribute it — I read this ten years ago — but that was the premise.

Nicolas: That’s interesting. It implies that if dollar-denominated stablecoins grow in volume, and then someone manages to launch a euro stablecoin that grows as well, there’ll be a float looking for new destinations, and that could potentially trigger the next financial crisis.

Izabella: Well, I think the difference is that at the moment stablecoins are mostly dollar-denominated, servicing either emerging markets with a lot of FX volatility, or DeFi and crypto markets generally, which are cross-border and everywhere. That makes it slightly different, because there isn’t a natural organic process by which all these nation states are going to come together and create a comparable rail system across all those different jurisdictions. It would involve a massive cross-border currency project — something like a single currency project between all these emerging markets — which I just don’t think is going to happen. It would be interesting if the euro displaced the dollar through market dynamics alone, but it would be a market-led phenomenon rather than a political one like the creation of the euro itself.

“Dollarization is a type of geopolitical statecraft. You get hooked on us, and we come and rescue you.”

Marieke: Hearing about eurodollars through the lens of what you saw in Poland makes me think of the fear of dollarization today — how the dollar perpetuates itself and becomes embedded in economies. Is there a threat of dollarization from stablecoins that is bigger than it was with the eurodollar?

Izabella: I think there is a threat of dollarization. I actually think it’s part of the Doge-style doctrine mentality, and I think it’s a type of geopolitical statecraft. It’s not unique to the US — it’s very similar to how the EU operates with the euro system, where the euro is a sort of carrot for membership and expansion. Come join, assent to our values and standards, and one day you get to be part of the euro, your government gets to benefit from common mutual borrowing costs. Bulgaria has most recently joined the euro, and that’s very much the draw — you come from a currency board regime and get to borrow at the euro system rate rather than your national rate. That’s the carrot for expanding geopolitical influence.

I think the US is doing something very similar, but not through a formal accession process. It’s just saying: if you’re in our sphere of influence, have an unreliable currency, and we’re going to unofficially encourage dollarization — then you get hooked on us and we come and rescue you. A great example is Argentina. You saw last year when the US came in to stabilize the currency using the Exchange Stabilization Fund. Scott Bessent actually made money on that trade in the end. It shows how much political influence that provides. Further down the line, it creates a political onboarding pathway for countries like Argentina to be part of greater America effectively.

There are great advantages to being in the dollar system. For countries facing the choice between that and the BRICS orbit, the US pushes a tough AML/KYC regime through the FATF with one hand, while with the other it’s quite happy to spread the dollar around. That was the case in the Soviet Union. Officially there were capital controls and no real correspondent banking. But behind the scenes, it suited American interests for black markets to be priced in dollars, because that created price discovery and exposed the degree to which the planned economies were being mismanaged. It was a great advertisement for the stability of the dollar in relative terms.

“Saudi Arabia was the central bank of oil. China replaced it with what I call the sweat dollar.”

Marieke: Maybe we can link this to Bretton Woods, the petrodollar, and what happened post-Nixon in 1971. How do you tell that story?

Izabella: Russell Napier, and I think it might actually have been Paul Volcker who coined this, describes what we moved to as a non-system. Nixon famously took the dollar off gold, largely because of the French, and everyone thought it would be the end. But the story of post-1970s dollar markets is that they went from strength to strength, partly because it really fuelled the eurodollar markets. Once the dollar was unlinked from gold, there was really no holding back, and endogenous money creation became a massive phenomenon, mostly in the offshore world.

Geopolitically, right up until the 90s, you had the Cold War and this incredible competition between two systems. Through its unshackling from gold, the dollar became effectively a borderless currency with mobility beyond any other. I think the dollar became what it was partly because in beauty-contest terms it was being circulated so heavily in the command economies, which were mismanaging their own systems. That was really the making of the dollar.

In Europe, from a corporate financing perspective, European corporates were the most intensive issuers of dollar-backed bonds. It was also the era of bearer bonds. It was a unique time where US statecraft — selling Americanism abroad, liberalisation everywhere — created a slight tension between external and domestic policy. On one hand, control the system; on the other, be quite pleased to see the dollar circulating everywhere.

That culminates around the 90s, where you get a series of successive little crises — savings and loans, and others — and then increasingly systemic-style events. The key point for the dollar is when China starts to engage, but first it’s Japan, because of Japan’s industrial policy. And then of course the petrostates. The petrodollar, the Soviet Union, Japan’s industrial policy, and then eventually the Chinese export model — those are the pillars.

Nicolas: A lot of people are rediscovering petrodollars because suddenly the whole system seems to be changing fast — partly because of conflict in the region, but also because the US is now energy independent.

Izabella: That petrodollar regime starts coming to a head in 2014, when you see the rise of shale. It’s not a coincidence that as the US becomes more independent, you see political change in Saudi Arabia — it’s necessarily having to woo and sell more to Asia and China, which changes the game quite fundamentally. This culminates in the displacement of the old regime with MBS, who comes to power realizing that the days of bottomless petrodollar funds are at least changing, if not diminishing. He’s the one who realizes Saudi Arabia has to look beyond petrodollars, and starts the Vision 2030 agenda. We’re still living in the fallout of that regime change.

Nicolas: Why does it change things? We don’t expect Saudi Arabia to stop exporting oil. What you mean is that the buyers over time tend to be less prone to paying in dollars, and therefore Saudi Arabia cannot invest in the US economy and has to reconsider its model?

Izabella: The importance of Saudi Arabia is that it used to set the price of the marginal barrel of oil. That is where its power lay — it was the central bank of oil. For as long as the marginal barrel was effectively priced in dollars, underpinned by a US-Saudi relationship with a codependency, that anchored the dollar in a very specific way and ensured a pipeline of petrodollars and liquidity coming out through that avenue, lubricating all the eurodollars in Europe.

What has happened from the 90s and noughties onwards is that the main importer of external dollars becomes China. And it does that not through exporting a raw commodity like oil, but through what I call the sweat dollar — effectively, sweatshops and very cheap labor undercutting manufacturers in the West. That’s a completely different model, and ironically it still needs to be funded by oil from Saudi Arabia.

So you end up with a different regime. As the US’s dependency on Saudi Arabia goes down, its dependency on China goes up — which is where you get to the crunch point with Trump and tariffs. The US realizes it may have shed its dependency on a controlled ally and replaced it with a dependency on imports of manufactured goods that are actually essential to maintaining national security, armed forces, and technological advantage. That was never the case with Saudi Arabia. The deal there was: we buy your oil, you pay for it in dollars, you use those dollars to buy our defense systems, and we stay on top.

The China deal is very different. China is accepting dollars but not reinvesting them by buying US arms. It’s investing them in US debt, making it incredibly expensive for America to maintain its advantage. Then reinvesting the proceeds into its own domestic military force — outside the US security umbrella — which poses risks the old Saudi relationship never did. The exorbitant privilege becomes an exorbitant burden: the US was paying a coupon to China, which got reinvested into a military force not aligned with it.

“The exorbitant privilege becomes an exorbitant burden: you end up paying a coupon to China, which gets reinvested into a military force not aligned with you.”

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Barely a week passes without a new headline about de-dollarization. A BRICS summit communiqué. A bilateral trade deal settled in yuan. A central bank quietly adding gold to its reserves. A Gulf state accepting non-dollar payments for oil. The list goes on.

But almost all the commentary misses the same thing. It treats the dollar as one object that either holds or breaks, when the dollar is in fact two very different things — with different sources of power, different costs, and very different prospects.

To see why that distinction matters, it helps to start not with currencies, but with the engine that produced dollar dominance in the first place.

The Flywheel

Ray Dalio spent years studying the rise and fall of empires — the Dutch, the British, the American — and identified a flywheel that runs through all of them. Military strength protects trade routes. Control of trade routes makes a nation’s currency the one everyone else wants to use. Reserve currency status gives that nation the privilege of borrowing cheaply from the rest of the world. Cheap borrowing funds the military. The loop closes.

Dalio also maps how the loop breaks. As the dominant power borrows more, it grows complacent. Debt rises. The cost of maintaining military protection of trade routes becomes a net drain rather than an investment. Foreign creditors begin to question the currency. Reserve status erodes. The military weakens. The empire declines.

The US sits at a particular point in that cycle. Its interest payments on government debt now exceed its defense spending — a pattern both Dalio and Niall Ferguson have argued historically coincides with hegemonic decline. The dollar has already lost around 8% of its value in the first semester of 2025, the largest half-year decline since 1973. Markets reacted to the “Liberation Day” tariff announcements of April 2025 with an unusual pattern: investors did not flee to dollar assets as they would in a normal risk-off episode. They hedged their dollar exposure instead.

None of this means the dollar is collapsing – at least, not today. But economists Hélène Rey and Ludovic Subran, writing for France’s Conseil d’analyse économique in March 2026, identify the current moment as a “Kindleberger gap”: a period in which the dominant power is no longer fully able — or no longer fully willing — to provide the global public goods that underpin monetary leadership. Open trade, safe reserve assets, external security, lender-of-last-resort functions: these are the foundations on which reserve currencies have historically rested, and they require a hegemon prepared to bear the cost of supplying them. That willingness is now openly in question.

The flywheel is still turning. The question is which parts of it are under strain — and to answer that, the distinction the de-dollarization debate keeps failing to make must be made clearly.

Two Roles, One Currency

The dollar performs two distinct functions in the global economy.

The first is the reserve currency role: the dollar as a store of value, accumulated in central bank vaults, the denomination of choice for sovereign wealth funds and international investors seeking safety. Today the dollar accounts for approximately 58% of global foreign exchange reserves, far ahead of the euro at around 20% and the renminbi at less than 2%.

The second is the trade currency role: the dollar as the medium of exchange for global commerce, used to price commodities, settle contracts, and clear cross-border payments. Approximately 60% of global trade is invoiced in dollars — dramatically out of proportion with America’s 14% share of world trade. More importantly, virtually every dollar-denominated transaction anywhere in the world, between any two parties, in any country, clears through the US financial system.

The two roles reinforce each other through a simple mechanism. If you sell commodities in dollars, you accumulate dollar surpluses. You then need somewhere safe to park them — and US Treasuries are the obvious answer. If you expect to buy oil or manufactures priced in dollars, you hold dollar reserves as a buffer against the day you need them. Trade currency status thus generates reserve currency demand almost automatically. And reserve currency demand, in turn, deepens the dollar’s dominance of trade: the more widely dollars are held, the more natural it is to invoice in them. This self-reinforcing loop is the core of the flywheel — and it is why the two roles, though distinct, have historically moved together.

Even if they’re related, the two roles are not the same, and the power they confer is different in character. Reserve currency status is about what countries hold. Trade currency status is about what every transaction passes through — and who controls the gate.

That gate is also the source of something often underappreciated: America’s sanctions power is not a foreign policy tool bolted onto the dollar system. It is intrinsic to the architecture of dollar clearing. To be excluded from dollar settlement is to be excluded from the global economy. Iran cannot sell oil internationally through normal channels. Russia’s largest banks cannot access global capital markets. Venezuela cannot conduct ordinary international commerce. These are not merely financial inconveniences. They are existential pressures, applied through a payments infrastructure that most of its users never think about.

Understanding how the US came to hold both roles, and which is now under threat, is essential to understanding what comes next.

How The Flywheel Was Built

Dollar dominance was constructed, layer by layer, across three decades of deliberate architecture — and the two roles were accumulated separately.

The reserve currency foundation was laid at Bretton Woods in 1944. With Europe devastated and the US holding the majority of the world’s gold reserves, forty-four nations agreed to anchor the global monetary system to the dollar, pegged to gold at $35 per ounce. But the system carried a structural flaw from the outset — what economist Robert Triffin identified in 1960. To supply the world with the dollar liquidity it needed to grow, the US had to run persistent balance of payments deficits. Those deficits gradually undermined confidence in the gold peg.

It was within this Bretton Woods system — and partly because of its constraints — that the eurodollar market took root. US capital controls and domestic interest rate ceilings pushed dollar-denominated business offshore, primarily to London, from the late 1950s onward. The result was a growing pool of dollars circulating entirely outside the US banking system, beyond the reach of American regulation. With the growth of eurodollars, the dollar was becoming stateless: a global currency that happened to be issued by one nation. Crucially, this offshore ecosystem flourished precisely when America’s capital account was not open — a reminder that dollar internationalization and financial liberalization are not the same thing, and did not arrive together.

In August 1971, facing a run on US gold reserves, President Nixon closed the gold window. The dollar became a pure fiat currency, backed by institutional trust rather than metal — and America’s capital account began its long opening. The eurodollar market, which had grown up in the constraints of the old system, now expanded further still as those constraints fell away.

What followed secured the trade currency role: the petrodollar deal. In 1974, the Nixon administration struck an agreement with Saudi Arabia. In exchange for American military protection, Saudi Arabia would price its oil exports in dollars and recycle surplus revenues into US Treasury bonds. The other OPEC nations followed. Because the world needed oil, it needed dollars to buy oil. The self-reinforcing loop described above — trade generating reserve demand, reserve demand reinforcing trade — now had an energy engine driving it. Every barrel of oil traded anywhere in the world created demand for dollars and recycled through the US financial system.

By the time financial deregulation accelerated through the 1980s and 1990s, the architecture was complete. The petrodollar recycling loop — oil priced in dollars, surpluses invested in US Treasuries, dollar demand self-perpetuating — was the engine of American financial hegemony for fifty years. The flywheel, in Dalio’s terms, was turning at full speed.

The Privilege and the Burden

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Sean Neville has spent thirty years asking the same question in different forms: what happens when you put a system that was built by gatekeepers onto rails that have none?

Sean started as a coder and composer, building software in the early days of the web at a time when most people were still paying monthly fees to send each other emails within a single walled garden. He watched the internet dissolve those walls for content and data, then spent the next decade questioning why money had been left behind. It is the quest to answer that question that led him and Jeremy Allaire to found Circle in September 2013, with a simple and radical premise: that the dollar, like the documents and the emails before it, should move on open rails.

The path from that premise to a working product was not straight. Circle tried consumer payments, OTC trading, crypto investing, and several versions of what would eventually become USDC before finding the form that worked. The first USDC white paper was mostly wrong. The second was mostly right. Coinbase came in as the first partner and co-founders of the CENTRE Consortium, the governance body that launched USDC in 2018 (and later closed in 2023). Regulatory clarity took seven years. The market cap did not move meaningfully until 2020. Sean describes all of this without apology — not as a series of failures but as the only honest way to climb a mountain when you cannot yet see the path.

USDC is now one of two stablecoins with genuine liquidity at scale. That fact contains, for Sean, both the vindication of the original thesis and its next unsolved problem. A world with two liquid stablecoins works. A world with ten thousand — each slightly different in value, each claiming to be a dollar — breaks the most basic property that makes money useful: that a dollar is always worth a dollar. This is the well-known singleness of money problem, and Sean thinks it is the largest single obstacle standing between where stablecoins are today and where they need to go.

His new company, Catena Labs, is built on a related inversion. Every financial institution in existence has spent years and enormous resources keeping bots out of its system. Catena is designed from first principles for a world in which bots — AI agents — are the intended customers. The compliance infrastructure, the identity layer, the policy engine: all of it is built not to exclude automated actors but to let the right ones in, safely, with cryptographic enforcement rather than human oversight at every step. Sean believes that within a foreseeable horizon, every financial transaction will be executed by AI. The question is not whether to build for that world but how to build for it without repeating the gatekeeper mistakes of the early internet.

In our conversation, Sean walks through the composing and coding parallels that have shaped how he builds, the slow series of ‘aha’ moments that led from Bitcoin to USDC, why the singleness of money matters more than most people in the stablecoin space acknowledge, and what it actually takes to build a financial institution whose customers are agents. He also explains why the hardest problems in both crypto and AI are not technical — they are about getting people who do not normally talk to each other to agree on the same approach before the window closes.

You can find Sean and the team at @psneville and @catena_labs. Follow the agent identity work on Catena Labs’s website.

“Composing music for ensembles and building software to run on machines share a great many parallels.”

Marieke: Welcome to Currency of Power, Sean. It’s a real pleasure to have you here.

Sean: It’s a pleasure. Great to see you, Marieke and Nicolas.

Marieke: Let me start with a bit of context. Nicolas and I started Currency of Power almost a year ago. What we try to do is examine the intersection of money, power, and technology. Very few people sit at the centre of all three, and Sean, you do. We are going to explore stablecoins, agentic payments, and how you think about the future of money. You have built many companies in this field and have always been good at reading the forces coming together, so it is really exciting to have you with us.

Sean: Thank you.

Marieke: For our audience: Sean is the co-founder of Circle, inventor of USDC, and today the founder of Catena Labs, where you are building what you call an AI-native financial institution. I had the pleasure of working with Sean and Jeremy at Circle about ten years ago. Sean, you are a very deep thinker and you connect dots that many people miss, so hopefully you can bring clarity to some very complex topics today.

Our conversation has three main parts. First, your career and mental models — from music and coding to building platforms and now AI-agent commerce. Second, the stablecoin revolution — what USDC revealed about money and programmable finance. Third, AI agents and agentic payments.

Let’s start with your journey. You are a musician and an excellent coder. Tell us about that.

Sean: On the music side, I would say I am much more a composer than a performer. I have always felt that composing music for ensembles and building software to run on machines share a great many parallels.

From the outside, people imagine you have an idea, you put together a plan, and then you go build it. But in music and in software it is more holistic than that. You have an idea — or an obsession you cannot set aside — but you do not always know exactly how it will be realised. So you cannot write a perfect plan and simply execute it. It is a little like building a house not from a blueprint, but by laying a bit of the foundation, then trying a bit of the roof, seeing what happens, learning things, and finding how the pieces connect. You work iteratively, and ultimately things come together to realise the core vision — though likely not in the form you first imagined.

In music, especially improvisational composition, you have to listen to everyone else playing. It is not a solo enterprise. And in all the best things I have built in software, it has been exactly the same: multiple players, internal and external.

From a career perspective, the conventional wisdom is to pick a lane, learn a domain, and stay dedicated to it. If you look into other lanes, you risk being criticised for drifting. I have always thought that is nonsense. It is far more productive to develop a sense for how builders in different domains work, and then try to connect those things. That is the only way I know how to do it, and to whatever extent I have been successful, it is the only way I could have done it.

Nicolas: Does that mean you have been active in both music and technology simultaneously, or did you make a switch at some point?

Sean: I have always done both at the same time, but I always knew I would be a software engineer — that building software products was what I would do. And the best way to build certain products is to build companies, and the best way to build generational platforms is to build several companies. So it cascades.

I never had it in my head that I would go full-time as a professional composer or performer. I scored some films, games, and commercials on the side and kept that up. But Jeremy and I founded Circle in September 2013, and as we ramped up, the music — and the other things I was doing — had to diminish because there are only so many hours in a day. I was teaching one class at Berklee College of Music at the time, and that was when things started to pull in different directions.

Nicolas: Did you train in jazz?

Sean: My mother was a professional classical musician — a flutist. My sisters and I grew up around formal music training. My biological father also played jazz and other things, so we studied everything. I was always drawn to ensemble music, which is where jazz sits. Berklee is known as a jazz school, though it covers every genre.

The trick with improvisation is to lean on a solid understanding of theory without letting it cloud your ear. You have to play in the moment, find the right pocket, listen to the other players, and let what you hear inform your playing — without it becoming an academic exercise, which is what it sounds like when it does not work.

Nicolas: You also need a high level of technical mastery to translate what is in your head into actual notes.

Sean: That is right. Growing up with a parent who was a professional performer, I saw from a very early age the hours required to reach that level. That is one of the reasons I knew I was not going to spend my hours on performance. My mother taught at collegiate level during the school year, practised her own repertoire, and did orchestral tours in the summers — fourteen to sixteen hours a day. The truism she lived by was something like: if I miss one day of practice, no one in the audience will hear it, but I will. If I miss two days, everyone in the band will hear it. If I miss three days, the audience will start to hear it. It is the consistency that matters to stay at that level.

There are so many musicians, but also people who study philosophy — Jeremy, my co-founder at Circle, studied political science. A lot of liberal arts people were building the early web. I think there is a resurgence of interest in those studies now in the age of AI. Those who orchestrate agentic workflows most effectively often have some skill, if not formal training, in literature, philosophy, or languages.

Marieke: Walk us through your journey into coding. You founded Code Studio in 1998 and then moved through Macromedia and Adobe to Circle. What was that path?

Sean: For me, there was always something I wanted to build, and so I would learn enough to build it, and hopefully find people along the way who could help teach me how. I coded since I was a kid — back then you could write out a program, send the raw source code, and have it published so that other people could copy it into their computers. I did that as a child.

I became more obsessive about it in my early teens. I was obsessive about music too, but I always had a sense I was going to build software because those were the things I was most interested in. And when computers began to be networked — not just software on my machine that I could give you the source code to, but all of our machines connected through shared protocols — I was solidly on that trajectory. None of us foresaw everything that would be possible on a worldwide web, but we had a sense of the enormous unlock that would come from networking machines on open standards that no single company owned.

It was not a matter of deciding to become a professional software engineer and majoring in computer science. It was more that I had things I wanted to build, I would go build them, and that would lead to the next thing. I was fortunate to meet very like-minded people along the way. Some of it was pushing the boulder uphill, but a lot of it was also a snowball rolling downhill, gathering momentum as we built.

Nicolas: You mentioned open protocols — foundations that are not owned by anyone, things that anyone can build upon. Is that a common thread from those early days to crypto?

Sean: It is. Before I started my first company, a lot of people used online services like America Online, CompuServe, or Prodigy. For most people it seemed like there was more content inside those walled gardens than on the open internet. The web was just emerging, and mostly it was a way to retrieve documents if you were in academia. A typical user paid a monthly fee for the privilege of sending email to someone else on the same service — you could not send it externally. Content was caged inside those platforms.

The premise of the internet was breaking through all of those walls. No longer controlled by gatekeepers, whether for content, for expressing your opinion, or for commerce. Open rails as a fundamental public good for the world.

And then when it came to crypto, the idea was: we played a small part in developing public goods for the exchange of content and data. Can we do the same thing for money? Because money was still very much locked behind gates. Gatekeeper business models are typically: I will give you access to the system, but I will take a little of your data — or your money — for the privilege of connecting. We looked at cryptography as a way to break that down in a very similar way.

“Bitcoin was a new thing on the whole, but its pieces existed before.”

Marieke: What was your moment of conviction for crypto? In 2013, it was portrayed in the press as something for fraudsters and drug dealers. What did the ‘aha’ moment look like for you?

Sean: There is still criticism of crypto, and the speculative side still ends badly for people. But there is also a lot of good that has been unlocked along the way.

For me there was not one single ‘aha’ moment — there was a series of them. Early on, it was conviction not necessarily around Bitcoin itself, but around that early combination of technologies. Bitcoin was a new thing on the whole, but its pieces existed before. It was a very clever connection of existing technologies to give people control of money flows. Seeing that it was possible to trust financial transactions without trusting your counterparty — trusting the software rather than the human beings or businesses built on top of it — that was an early one.

We founded Circle in 2013, but I did not write the USDC white paper until 2017, so it was four years. You could ask why we did not simply put dollars and euros and pesos on the internet from the start. The truth is it was a series of aha moments and experiments. Our overall vision has not changed — I think of it as a mountain in the distance that we are going to climb. We are not going to choose a different mountain. But the path to get there will almost certainly change as we learn things. You may need to backtrack and find another way, but the mountain is the same: to democratise access to global finance and create new ways for everyone around the world to engage with the economy on equal footing.

Marieke: From where I sat at Circle, it felt like there was always this idea that money would be completely transformed — but that finding the path required constant adjustment. What were some of the testing moments?

Sean: There were many. Even with USDC, the first version was not right. We had envisioned something almost like a programmatic central bank, with a unit called a cent, overseen by what we called the Centre consortium. It was a different mechanism for bringing fiat currencies on-chain, but it was not the right approach at the time. We revised it substantially, and it was really the second version that we took to market with Coinbase as the first major partner.

And I certainly did not do it unilaterally — there was a whole team of people involved.

More broadly, when you have a large vision for what you hope will be a generational platform, there will inevitably be multiple products that try to get you there. We did not follow the conventional startup wisdom of doing one thing, focusing on one ideal customer profile, finding their pain point, building a painkiller. We started with several possibilities: a consumer product called Circle Pay, a product called Circle Invest, an internal OTC trading desk, a treasury and trading function. Some experiments flat-out did not work — the first version of USDC was simply the wrong approach. Others worked for a period and then stalled, which is actually the hardest situation, because you are always asking whether to give it more time, invest more, or redirect resources. And then there were things we had firm conviction in that were not immediately successful.

USDC was one of those. When we launched, interest rates were low — the business model depended on interest rates — and we also knew that encoding a dollar token on internet rails would require legislation. I thought that might take ten years. It took seven: we got the GENIUS Act passed. Because of all of this, the market cap for USDC did not really begin to grow until mid-to-late 2020.

The hardest part of all of it, though — the most testing moments — is people. The most valuable technical problems to solve are always, at their core, people problems. Partners, customers, and the people inside the company who joined at the early stages and committed a portion of their professional lives to the vision. Managing course corrections with those people is a real challenge.

“A stablecoin is, at its core, just a dollar made to work on internet rails.”

Marieke: Maybe we can move to stablecoins specifically. Stablecoin 101: what is a stablecoin, why is it called that, and what led Circle to create USDC?

Sean: I will preface this by saying I have never loved the word stablecoin — I will explain why in a moment.

The concept is fairly simple. The idea is to take something like a US dollar — it can be other currencies, but when people refer to stablecoins they are mostly talking about dollars — and put it on internet rails so that it can be transferred not through credit card systems, wires, or other traditional rails that flow through banks, but directly across the internet. The advantage is that you can send money across borders almost instantly for almost no cost. The internet does not distinguish between a trillion dollars and one dollar in terms of data size — it is just a very slight difference in the data. It is not based on the value of the number.

The idea is simply to take money, make it accessible on open public-standard rails, and let businesses and individuals transfer value over those rails without intermediaries taking a cut along the way. If I send you a thousand dollars, you receive a thousand dollars. That sounds obvious, but in reality, depending on where you send it, a thousand dollars might arrive as eight hundred. Or nine hundred and ninety-seven. The internet largely wants data to be free, with other business models supporting that freedom. A stablecoin is, at its core, just a dollar made to work on internet rails.

More technically: the mechanism is that a dollar recognised by the government is deposited somewhere — in a bank account or equivalent. If you want to convert it into a dollar that works on the internet, that dollar goes into what are called reserves — a safe backing — and in return you receive a token, almost like a coat-check card. You can pass that token to someone else, but it is backed by the real thing. And the backing matters enormously. If the custodians are untrustworthy or the reserves are invested in risky assets, then you may think you hold a dollar but it is no longer backed by anything that can confirm that.

So fundamentally, a stablecoin is a fiat currency held in a trusted, risk-managed reserve, represented as a token that can circulate and later be redeemed for the underlying currency.

The word stablecoin has nothing to do with any of that. It is really a reference to crypto. The problem with crypto — the benefit if you are an investor, but the problem if you are making payments — is volatility. Bitcoin, Ethereum, Solana: all go up and down. If you want to buy a coffee, it is difficult to use something whose value could fluctuate by orders of magnitude in hours or days. Stablecoin simply means: compared to crypto, the value does not fluctuate. A dollar is a dollar is a dollar.

Outside the bounds of crypto, when you are just thinking about money, it is a slightly odd term.

Nicolas: Going back to open protocols: there are protocols like SMTP for email and HTTP for the web. No such thing existed for money. In Europe, the SEPA system lets people send money from one country to another seamlessly and for free. It is very difficult for stablecoin advocates in Europe to make the case that we need them. Can you explain that difference?

Sean: Good point on standards. HTTP for the web, SMS — no one owns those protocols. Google does not own HTTP. Microsoft does not own SMS. These are open protocols maintained by standards organisations in a way that has been beneficial to everyone, so that you can put your business online and anyone can interact with it without needing a special way in. That is a lot of the idea behind blockchains for moving money.

Now, for stablecoins specifically: the clearest way to help people understand the value is usually through two use cases.

The first is sending money across borders. The internet has no borders. If I send you an email, it does not stop at a border and wait a few days. But that is essentially how money works across borders. Treasury managers often do not know where their money is at a given point in time because it is in transit between accounts held overseas by custodians in different banks. The power of sending money over blockchains is full transparency at all times — an open, auditable ledger. And fees, while they vary by chain, are very small relative to the traditional system.

The benefit varies depending on which borders you are talking about. Sending sterling from London to a family in the Philippines — the problem is obvious. Sending money from Scotland to England — much less of a problem. But the idea is you should not have to think about borders at all.

The second use case is on the recipient side. Many people simply want to hold value they can trust and use in their own economies, and they cannot. It could be a lack of liquidity, inflation, or local currency problems. One of the reasons stablecoins largely mean dollar stablecoins rather than other currencies is that many people abroad want to hold dollars. They are not asking for stablecoins — they are asking for dollars, but they cannot open an account at a US bank. The best way for them to access dollars, whether as individuals or businesses, is through stablecoins.

Marieke: How do you think things will evolve? There is fragmentation: central bank digital currencies, tokenized deposits, stablecoins. And today, ninety-nine per cent of stablecoins are in dollars. What is the place for other currencies and other forms of tokenized money?

Sean: There is a third use case worth mentioning that is more interesting to people with an economist’s bent, and it was really foundational to Circle: the concept of a narrow bank, and what is sometimes called the Chicago Plan.

Narrow banking is a boringly simple concept. If I put money into a bank and come back ninety days later, my money is still there. That is not really how banking works today. Banks lend out a multiple of what you have deposited — fractional reserve lending — which is how most money is generated. Narrow banking asks: what if we had a bank that could not do that, or simply did not? It separates the money-creation function from the payment function.

Further experiments have explored: if deposits can only be invested in the most conservative, liquid instruments — short-term US treasuries, for instance — and there is some return on that, could depositors actually access some of it? The bank takes a margin because it needs to make money, but could depositors see some of the yield?

Such a narrow bank, accepting deposits directly and connecting to the Fed and to treasuries, is not legal in the United States. But stablecoins are effectively that in spirit. The reserves, now encoded in legislation like the GENIUS Act, must be very conservative — US T-bills, cash, highly liquid instruments with built-in consumer protections. No fractional reserve lending. You put your money in; it is still there; and to the extent it is invested, it goes into the most liquid and conservative instruments available.

When it comes to other currencies: the desire is not really for USDC or other dollar stablecoins. It is for dollars. And the real hurdle for any stablecoin — dollar or otherwise — is achieving meaningful liquidity. That depends on how desirable and trustworthy the underlying reserves are, and what incentives you can use to encourage people to hold and use the coin.

Prior to last year, I would say the biggest hurdle for stablecoin adoption outside crypto capital markets was simply regulatory uncertainty. It was not clear whether a stablecoin was an investment, a money market fund, or a payment instrument. Now it is much clearer. The next hurdle for anyone creating a stablecoin is liquidity. Technically, creating a stablecoin is easy. But why would anyone accept mine if there is no meaningful liquidity behind it?

The fundamental business model is still tied to interest income on the reserves. If interest rates are unhealthy, other alternatives begin to emerge — tokenized deposits and so on. That is a key consideration for the entire space.

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There is a plan. No ministry has published it, no party congress has voted on it, and you will not find it written down anywhere. But if you watch where the cables go, where the factories are, and where the money flows, the shape of it becomes clear. China is building the infrastructure of a new world order, and the war in Iran just gave it a ten-year head start.

To understand why, you need to follow the money. Not the oil—the money.

The loop that ran the world

For fifty years, a single financial mechanism underwrote American power. It was elegant, self-reinforcing, and almost invisible to most of the people it affected.

Here’s how it worked. Gulf states sold their oil exclusively in dollars. The world needed that oil, so the world needed dollars. The dollars accumulated in sovereign wealth funds in Riyadh, Abu Dhabi, and Doha, and in turn those funds recycled the surplus into US Treasuries and American financial markets. With the system running at full capacity, Washington could borrow cheaply, run large deficits, and project military force across the globe—all of it quietly underwritten by the daily fact of oil changing hands in a single currency.

This was known as the petrodollar recycling system, and its origins could be found in an obscure deal, struck in 1974 between the Nixon administration and Saudi Arabia at a moment when America needed a new anchor for the dollar after deliberately abandoning the gold standard in 1971. Over time, petrodollar recycling ended up working better than almost anyone expected. By the time the shale revolution made America largely energy-independent, it had been running so long that most people had stopped seeing it as a system at all. It felt like gravity, an immutable law of the economic universe.

The question nobody asked was what happens when the planet underneath it shifts.

The system Washington is building to replace petrodollar recycling

The petrodollar was always going to fade, for various reasons that all became obvious over the past decade or so: US shale has reduced America’s own dependence on Gulf oil; the energy transition is slowly eroding the long-run value of hydrocarbon reserves; finally, world increasingly organised around data, AI, and compute infrastructure is going to need a different kind of scarce, dollar-denominated commodity to anchor global demand for American currency.

Washington’s answer to the predicted exhaustion of petrodollar recycling is compute: scarce, capital-intensive, dollar-denominated infrastructure whose settlement rails would do what oil revenues once did—an argument we developed in Barrels to Bytes last November, which was later re-quoted and further discussed by many—including John Naughton from The Observer in “Why Stablecoins “crypto for adults” have suddenly become a big deals.”

This is the through-line of American economic power that is easy to miss when you are focused on oil. The US did not just win the postwar era with military strength; it also won it by being the leader in the age of semiconductors, computing and networks and asserting control over the operating systems, the platforms, the protocols that became the invisible infrastructure of the global economy. From the 1990s onward, every serious economy ran on American software, and American software, by design, ultimately settled in dollars.

America’s bet for replacing petrodollar recycling follows the same logic, extended one layer further. AI is software. Crypto is software. Stablecoins are, at their core, the softwarisation of the dollar itself—programmable money that can move anywhere, settle instantly, and be embedded into any digital transaction on earth. A stablecoin issuer takes deposits, issues digital tokens pegged to the dollar, and reinvests the deposits in US Treasuries. The issuer earns the yield, the Treasury gets a buyer, the dollar gets a new payment rail, and every stablecoin in circulation becomes a small permanent bid for American government debt, thus cementing US hegemony for decades to come as we wrote in June last year. Stablecoins—or, as we call them, “cryptodollars”—are the new petrodollar.

The deeper question is what runs on top of those rails:

• As AI agents proliferate—autonomous software systems that negotiate, transact, and settle on behalf of their users—the volume of machine-to-machine transactions will dwarf anything humans conduct today. Those agents need a settlement layer, and dollar-backed stablecoins are the natural candidate: programmable, instant, globally accessible, denominated in the currency that already anchors international trade.

• Alongside the agent economy, the tokenisation of real-world assets is creating a second wave of structural demand—real estate, bonds, commodities, private credit, trillions of dollars of assets moving on-chain, each transaction requiring a settlement currency. If both run on dollar stablecoins collateralised by US Treasuries, the network effects compound in ways the petrodollar system could never have achieved. Oil was bought and sold by humans, in bulk, a finite number of times a day. Software agents transact continuously, at machine speed, at planetary scale.

The transition to this new world requires capital—vast amounts of it. The data centre buildout needed to anchor this new system runs into trillions of dollars globally, which is why, for the past three years, every American hyperscaler has been travelling to Riyadh, Abu Dhabi, and Doha with term sheets. Gulf sovereign wealth funds were to be the bridge: petrodollars recycled not into Treasury bonds directly, but into the compute infrastructure that would generate the next generation of dollar demand. Trump himself was pressing Gulf leaders for commitments running into hundreds of billions—American-technology-powered data centres built across the Gulf itself, turning old petrodollars into new cryptodollars. The system would renew itself. Stargate is a good example of the level of ambition that was laid ahead.

Following a grandiose visit, the first concrete proof of concept arrived in May 2025. MGX, an Abu Dhabi state-backed investment firm, used USD1—the dollar-pegged stablecoin launched by Trump’s own World Liberty Financial—to settle a $2 billion investment in Binance, the world’s largest crypto exchange. USD1 is backed one-to-one by US Treasuries. This particular transaction was, in miniature, exactly the loop the cryptodollar thesis describes: Gulf sovereign capital flowing through a dollar-denominated instrument collateralised by American government debt—the old petrodollar recycling mechanism, updated for the digital age. That the stablecoin happened to be the president’s own family venture added a layer of political controversy, but the monetary logic underneath it was precisely what Washington has been trying to build in the recent period.

Then the bombs fell.

Three things the war destroyed in a single night

The strike on Iran did not merely disrupt oil markets. It severed three structural elements of this plan at the same moment.

• First, the Strait of Hormuz closed. Gulf producers could not safely ship their oil or collect their dollar receipts, and the automatic recycling of petrodollar liquidity into US financial markets—the mechanism that has quietly funded American deficits for five decades—stopped. The bridge capital for the cryptodollar transition, dependent on that same surplus, evaporated precisely when it was most needed.

• Then, on the first Sunday of the war, Iranian drones struck three AWS facilities in the UAE and Bahrain, causing structural damage and extended outages. The message to every investment committee in the world was immediate and legible: a data centre in a war zone is a liability. The Gulf buildout—the physical foundation of the cryptodollar plan—became uninvestable overnight. Projects in Saudi Arabia, Qatar, and the UAE that had taken years to structure are now stranded, and the insurance market alone will ensure the capital does not come back quickly.

• The third blow was slower but may prove the most durable. The war frightened the world about hydrocarbons as a foundation for anything. When supertanker cover gets pulled and a chokepoint carrying a fifth of the world’s traded oil comes under active threat, the case for domestic energy independence stops being a climate argument and becomes a simple matter of economic survival. The race to electrification lurched forward a decade in the space of a week. As Azeem Azhar and Hannah Petrovic write in their recent essay “The case for radical solar optimism”, the solar supercycle that makes this possible has been turning for fifty years and shows no sign of slowing.

We have seen this before. The 1973 oil shock hit Japan with particular violence—an island nation with no hydrocarbons, entirely dependent on Gulf imports. Tokyo’s response was to build its way out of the dependency with the Energy Efficiency Act. Japanese manufacturers spent the next decade engineering the world’s most fuel-efficient cars, the government poured investment into alternatives, and adversity became an industrial strategy. Japan’s auto industry became one of the most formidable export machines of the twentieth century. Every government watching the current crisis is running the same calculation now. The question is who builds the infrastructure that replaces fossil fuels.

China had not been waiting for a crisis or an opportunity. It has been building a parallel infrastructure for decades.

The Electrostate

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Kurt Hemecker has spent his career trying to answer one question: How do you scale trust in a digital age?

He started out writing encryption firmware for US avionics, then built international payment circuits on Wall Street for British Telecom, then helped expand mobile payments to forty countries at a startup that was absorbed into PayPal. Each step taught him the same lesson: moving money is not a technology problem. It is a problem of trust distribution and political consent.

That lesson became vivid at Libra—the Facebook-backed project that attempted to redesign money at internet scale, later rebranded as Diem. Kurt was there. He watched the association—Shopify, Spotify, Uber, A16Z, social impact organisations—spend years educating regulators, negotiating with governments, and building what he describes as the most intellectually ambitious monetary project he had ever seen. He also watched it fail, not for technical reasons, but because money is sovereign, and sovereigns pushed back. While Libra/Diem was busy asking permission, other players such as Tether and Circle were simply doing it.

After Diem wound down, Kurt turned to the verification problem. If finance is going to be programmable, how do you make identity and compliance programmable too—without turning every transaction into a data breach waiting to happen? That question took him to the MENA Foundation, where he worked on zero-knowledge proofs: the branch of cryptography that lets you prove something is true without revealing the underlying information.

He is now CEO of Gold Token SA, an MKS PAMP company, where he is relaunching DGLD—a token backed one-for-one by physical gold stored in a Swiss vault in Ticino. MKS PAMP refines four nines of purity, distributes to central banks and Costco alike, and runs trading desks in Geneva, New York, and Hong Kong. Kurt’s argument is straightforward: this is not a blockchain company trying to get credibility in gold; it is a gold company putting its asset on modern rails.

In this conversation, Kurt walks through what actually killed Libra, why zero-knowledge proofs have not yet reached the mainstream and what it will take, and why tokenised gold is not the same thing as a gold ETF. He also makes the case for gold itself—not as a speculative bet, but as one of the four pillars that families with multi-generational wealth have quietly relied on for centuries. None of it is investment advice. All of it is worth hearing.

You can follow Kurt on X at @khem and explore DGLD at dgld.com.

Marieke: Kurt, it’s great to have you with us. You and I have known each other for some time—I had the opportunity to sit on your board at Mina Foundation, and now we have the pleasure of working together at MKS PAMP on the Digital Gold Token, where you’re CEO and I’m one of your advisors. Nicolas and I co-author Currency of Power, a newsletter we recently launched that looks at geopolitics and new forms of money—of which tokenizing gold is one. We couldn’t think of a better guest to discuss gold, tokenized assets, privacy, and everything happening in this new financial world.

We’ll cover three areas today. First, your career: from PayPal to Libra/Diem, then Mina Foundation, and now MKS PAMP. Second, privacy and anonymity—critical concepts as finance becomes more digital, and an area where you have real expertise. Third, tokenizing gold, which is highly topical right now. Welcome, Kurt.

Kurt: Thank you, Marieke, and Nicolas as well. I’m delighted to be here, and genuinely fortunate to have Marieke among my advisors on the gold project.

“Financial infrastructure is not just code. It’s governance, legitimacy, and political consent.”

Marieke: Let’s start with your path into crypto. You’ve been in the space long enough to have seen Libra, Diem, Mina—a zero-knowledge proof protocol we’ll explain—and now tokeniszd gold. What brought you in, and how has the journey unfolded?

Kurt: I’ll go into a bit more detail than I usually do on a panel, since we have the time. Going way back, I studied computer science and started out developing encryption firmware for US avionics, then spent time on Wall Street working for British Telecom on international circuits between financial institutions. So I’m a bit of a dinosaur—I’ve been through what Chris Dixon calls Web1, Web2, and Web3.

My move into crypto wasn’t ideological at first. It was really about scale. I’d spent a large part of my career working on digital payments. At PayPal, I was working for a mobile startup called Zong, where we had expanded mobile payments into more than forty countries, and that eventually became part of the PayPal portfolio. That experience taught me something quickly: moving money is not primarily a technology problem. It’s a problem of trust distribution and regulatory coordination.

Then at Libra, which became Diem, I saw for the first time an attempt to redesign money at internet scale. It wasn’t just another wallet or payment app—it was about creating a programmable monetary layer embedded into global platforms. The opportunity to work on that was intellectually irresistible. Love them or hate them, the Facebook team brought remarkable thought leadership, and the broader association included Shopify, Spotify, Uber, Lyft, investment firms like a16z and USV, and social impact organisations. These were people who know how to build services that people actually want to use.

But in the end—and everyone knows the story now—it became a masterclass in how sensitive money is as a social technology. That clarified something for me: financial infrastructure is not just code. It’s governance, legitimacy, and political consent.

That realisation led me toward a deeper question: if finance is going to be programmable, how do we make verification programmable too? That’s the famous Web3 ethos—don’t trust, verify. And that’s what took me to Mina and zero-knowledge proofs: the idea that you could prove compliance or identity without overexposing personal data.

Now at Gold Token SA, which is an MKS PAMP company, I see the continuation of that arc—taking one of the most historically trusted assets and putting it onto modern rails in a way that respects both regulation and innovation. The throughline is simple: I’ve been working on how to scale trust in a digital age.

Nicolas: I remember writing about Libra when it launched. My recollection is that one of the main arguments in its favour was that it would counterbalance the Chinese payment system. Everyone was impressed by how rapidly and at what scale China had shifted its entire payment culture to mobile, and there was concern they would extend that dominance to Africa, Asia, and beyond. Was that a fair reading, or did I over-interpret the geopolitical angle?

Kurt: Not at all—that was certainly one dimension. There is a genuine technology war underway, and who controls global payment infrastructure matters enormously. There’s rarely a winner-takes-all outcome, but there are usually a few winners, and you want to be among them.

That said, there were other dimensions too. Social impact was a significant one—improving the distribution of wealth and giving more people access to exchange. That’s why there were so many social impact organisations in the Libra association. And then there was the question of sovereign debt distribution, which became increasingly sensitive.

Marieke: On the social impact point—that was also a driver for Bitcoin, wasn’t it? The idea of a more equitable financial system. How do you see the current adoption curve of crypto and stablecoins, given everything you’ve witnessed? Is it moving as fast as you expected?

Kurt: A bit slower, honestly. But I think that’s just the nature of these revolutions—they don’t happen in one sweep. Even the shift to plastic and credit cards forty or fifty years ago was incremental. It was one step among many. Money does move on crypto rails today with far less friction than on traditional rails, which are genuinely quite outdated.

Nicolas: Who would you say replaced Libra, or Diem, as the main player? Is Tether the iteration of that vision, perhaps with better timing?

Kurt: They achieved one part of the mission, not the whole. And frankly, that was a source of real frustration at Libra and Diem. We were spending enormous resources educating regulators and talking to governments, while over here Tether and Circle’s Centre Consortium were simply doing what we wanted to do—and nobody was stopping them.

The difference was ambition and approach. Libra and Diem took the right path of engaging regulators directly. Tether found a killer use case: where do I park my money between speculative trades? That was it, and it was enormously successful. They’re very smart people who’ve since parlayed that into other products and services. The challenge now is how they pivot from that original use case into everyday payments—and you can see that effort in USAT, their regulatory-compliant stablecoin.

Companies like PayPal have a significant advantage in that transition because they already have the merchant network and the distribution.

Marieke: That’s a fascinating framing. I was at Circle at the time, working on the launch of Centre. Our approach also involved talking to regulators, but it was simpler — dollar only. Going back to what you said earlier about the politics of money: my understanding was that Libra was conceived as a supranational currency, a basket of five currencies. Do you think that ambition was one of the main obstacles?

Kurt: It was certainly one of many. The thinking behind the basket was sound—it addressed exactly the challenges we see today around interest rates and what happens when they go negative, and how you maintain a treasury in that environment. But it became politically very sensitive around sovereign debt and who controls it. In hindsight, starting simpler, with a smaller initial ambition, might have been the wiser path.

Nicolas: Is there a lesson here for major disruptions generally? That you need a first player to educate regulators, absorb all the obstacles nobody anticipated, and prepare the ground for the next wave?

Kurt: I couldn’t agree more. And starting simple is part of it. We saw this in the ETF space—a great evolution in financial instruments, but some of the early products were structurally too complex to survive. The ones that worked were the ones that were straightforward.

The deeper lesson from Diem is that regulatory fit is not something you add later. It’s a product constraint from day one. Even with all the technical robustness in the world, if your product doesn’t align with how regulators conceptualise risk and monetary sovereignty, it won’t work. And if policymakers can’t explain your product in one clear sentence to their constituents, you don’t really have regulatory alignment.

Nicolas: Their constituents essentially want to know two things: does it create jobs, and does it improve purchasing power.

Kurt: Exactly. The Swiss regulator FINMA went remarkably deep on Diem. I remember discussions about the consensus algorithm—it was based on something called HotStuff, developed by a research team that eventually joined Facebook, built on Byzantine fault tolerance. FINMA wanted to understand: at what point is a transaction considered final, and what happens before that? They were concerned about the chain of claims. If this became systemic—and that was the immediate concern, given the existing user base—how do you manage that chain if something breaks? They got deep into the probability algorithms around transaction finality. It was serious, rigorous work.

Nicolas: That’s the challenge with payments systems generally—they must be universal and large-scale, but also essentially faultless. You need absolute certainty that the money goes where it’s supposed to go.

“Keeping a secret means not telling it. And that’s the essence of zero-knowledge proofs.”

Marieke: After Diem, you moved to Mina Foundation to work on zero-knowledge proofs. Can you explain what that is, and why it matters—assuming no prior knowledge?

Kurt: The core realisation is this: compliance data is everywhere. Countless counterparties ask for the same documents, and every intermediary stores identity or other personal information. That creates privacy risks and inefficiency.

There’s a joke I like: “I can keep a secret—can you?” The point is that keeping a secret means not telling it. And that’s the essence of zero-knowledge proofs. You don’t share your data, but you can still prove that something based on it is true.

I’m not a mathematician, but the explanation that made most sense to me uses a physical metaphor. Imagine a mountain with two entrances. Inside, there’s a complex network of paths—most lead to dead ends, but one connects both entrances. I want to prove to you, Nicolas, that I know the path without telling you what it is. So I walk through once and emerge. You might think I got lucky. But if I do it a hundred times, you become essentially certain I know the path—even though I’ve never shown it to you.

That’s zero-knowledge proof. You can prove you know something without revealing the knowledge itself. The applications are significant: proving you’re above a certain age, or that you don’t come from a restricted jurisdiction, without disclosing your passport. Proving in a vote that you’re a valid constituent without revealing your identity. The reason it hasn’t been more widely adopted, I suspect, is that we haven’t yet had a crisis large enough to force it. Every time I speak at a conference and ask people to raise their hand if their data has been exposed in a breach, every hand goes up. But it hasn’t yet become acute enough to drive mass adoption. That may change—particularly as AI moves from chatbots into devices all around us, capturing vast amounts of data.

Nicolas: Tell us more about Mina itself.

Kurt: It follows the classic foundation-plus-labs structure that became common in crypto. The protocol—Mina—was incubated by a company called o1Labs in San Francisco. The co-founders, Izzy Meckler and Evan Shapiro, along with one of their first engineers, Brandon Case, built something quite remarkable. They realized they could represent the entire state of a blockchain in a single recursive proof of less than 22 kilobytes. Their marketing team came up with “the world’s lightest blockchain,” which was brilliant. It took the world by storm.

The deeper innovation was making that proof programmable—enabling applications to generate proofs from private off-chain data, so that data is never exposed on-chain but gets encapsulated in this infinitely recursive proof structure. That was a genuine breakthrough.

The structure—a foundation overseeing the ecosystem and treasury, with a separate labs entity doing the technical development—was pioneered by the Ethereum Foundation and became the standard model. Polkadot had Web3 Foundation and Parity; Zcash had the Electric Coin Company. The idea was to ensure genuine decentralization and allow ecosystems to grow without centralizing around a single entity.

Marieke: Having operated both types of structure myself, I found the foundation model genuinely difficult. It’s almost like running a publicly listed company but without any of the governance or guardrails. Roles become extremely unclear, and real decentralisation is very hard to achieve in practice.

Kurt: Structurally, it’s not the right way to set things up. You need people in the same room, driven by the same goals, rather than a decentralized group with different agendas. To get a product to market, to iterate, to communicate quickly—it’s very hard when a critical engineer is on the West Coast, another person is in Asia, and the product manager is in Europe. I haven’t seen a single project you could hold up as a textbook success with that structure.

Nicolas: So what you’re both saying is that the foundation model made sense when the concept of crypto protocols was new and you needed to attract participants and grow an ecosystem. But now there’s enough common understanding and sufficient interest across the world that the model may no longer be necessary?

Kurt: At a high level, the foundation is the governance structure and the lab is the product development engine. The question is how resources—typically raised through a token genesis event—get deployed. There’s now a strong move toward winding down foundations and transitioning to decentralized treasury structures. It’s part of the broader collective experiment we’re living through: trust in centralized institutions, whether governments, central banks, or media, is at a historic low and falling. What replaces it? Do decentralized systems actually work? How does decentralized governance function? These are live experiments.

Marieke: There’s an inherent tension there. You need centralization to get things done—to ship an MVP, to build a product. But decentralizing means giving up power, and in some crypto ecosystems it’s fair to say that’s very hard for core teams to actually do.

Kurt: Exactly. What’s the incentive? Even if there’s a genuine greater good at stake, unless your basic needs are met, you still need some incentive to keep working. That’s what these governance structures are trying to sort out. And there’s a broad spectrum—from pure memecoin casinos to projects like Mina with real utility underneath. The experiment continues.

Nicolas: Coming back to privacy: can you explain the difference between privacy and anonymity, and why it matters—particularly given how often people conflate the two, or assume that if something is private it must be dodgy?

Kurt: Anonymity means nobody knows who you are. There can be perfectly legitimate reasons for that. But privacy is different. Privacy means the right parties know what they need to know—and nothing more. That’s the concept of selective disclosure.

The way privacy typically works today is you hand over all your data to another party and trust them to keep it secure. Sadly, through usually no malicious intent on their part, it often isn’t. Bad actors want access to it and find ways in.

In a truly anonymous state, it’s hard to build trust without some form of verification. So the goal is to keep the perimeter of exposed data as small as possible—selective disclosure rather than full exposure.

Nicolas: I serve on the board of the digital arm of La Poste, the French postal service. La Poste is the organisation that knows where you live, because delivering mail is their core mission. I’ve been pushing an idea: during KYC [know your customer], why do you need to disclose your address at all? Couldn’t La Poste simply attest that they know where this person lives, without revealing the address itself? Is that the same concept?

Kurt: Exactly the same. Though it touches something that gets sensitive: at some point, there has to be a trusted source of the underlying data. Garbage in, garbage out —you have to trust someone somewhere. In your example, you’re trusting La Poste as the authoritative source. And you could go further: you could prove that the attestation came from a valid trusted source without even revealing that the source is La Poste.

Marieke: That example feels particularly resonant right now. The number of places where we’ve each deposited our physical address, our passport copy, our phone number—trusting that each institution will protect it—is enormous. And given the scale of cyber attacks and the current social climate, that trust is increasingly misplaced. Is the technology actually ready to address this?

Kurt: Not quite yet. There are interoperability issues between platforms, performance constraints, and other hurdles. But there’s also a broader economic problem: we’ve become accustomed to getting services for free in exchange for our data. People are uncomfortable with giving away their data, but they’re happy to get things for free. Nothing has yet emerged at scale where people are willing to pay for a privacy-preserving alternative. That economic shift has to happen first.

My apartment door is a good illustration. I was happy with the lock I had. Then someone tried to break in, and I got better locks. In retrospect, I should have done it sooner. I think it’s the same with digital privacy—people won’t act until something happens to them personally.

Nicolas: Who decided that a utility bill constitutes proof of address? Is there a law? A banking regulation?

Kurt: I’m not an expert, but from my experience it’s driven by the compliance industry and how they’ve developed frameworks to combat fraud and triangulate identity. It’s not always a utility bill—it can be voter registration or other documents. But it’s an industry convention more than a hard legal requirement.

Marieke: This connects to the unbanked. The way regulation has been defined, to open a bank account you need to prove both identity and a physical address. If you have neither, you’re excluded. Part of the crypto and blockchain movement has been to challenge that—could biometrics, for example, substitute for an address as proof of existence? Projects like WorldCoin are going down that path. But the flip side is that a biometric is a unique and permanent identifier. If that gets compromised, you lose your identity permanently, with no way to reset it.

Kurt: That’s exactly right. And it gets back to the question of which data really needs to be shared, and what the risks are if it’s exposed.

Marieke: You mentioned something called the “Internet of True Things”. Can you explain that concept?

Kurt: Intelligence is moving into all the smart devices around us. Your refrigerator will eventually know you’re out of milk and place an order. There’s an enormous amount of data being captured in the process. The Internet of True Things is the idea that we can rely on this data—verify things as true—without having all the underlying personal data exposed.

Something like Mina has real potential here, because it’s compact enough to run on small devices. Evan Shapiro, one of Mina’s founders, has since launched a project called UserNode, with his blockchain running on mobile devices. The vision is verified truth in the devices around us, with our data protected. Your device performs a transaction, proves it’s authorised, and executes your policy settings—without streaming your entire behavioural data set. Nobody needs to know how much milk you drink.

Nicolas: So about ten years ago we had the Internet of Things—all devices communicating freely, all data circulating and training systems to give us personalised experiences. And now we’re stepping back and saying: actually, free circulation of data is dangerous. We’d rather build a layer that enables authentication and communication without disclosing what’s in the device. And that’s now technically feasible?

Kurt: Technically, yes—but the middleware and application layers still need to be built to make it widely usable. Two years ago, some camera manufacturers like Leica were already integrating zero-knowledge proofs into images, so you could prove a photo hadn’t been digitally altered since capture. I’m not sure where that stands now in terms of wide adoption, but it’s extremely important as deep fakes become more prevalent.

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For decades, America and China have been locked in a structural embrace that neither could easily escape. China manufactured; America consumed. China saved; America borrowed. The dollars that Americans spent on Chinese goods flowed back across the Pacific as purchases of US Treasury bonds, financing the very deficits that kept American consumers buying. Economist Michael Pettis calls this “vendor financing”. Others call it a trap.

The trap worked because the two economies were mirror images. China suppressed domestic consumption—through low wages, restricted social safety nets, and financial repression—to make its manufacturing hyper-competitive. Meanwhile, America ran persistent trade deficits because foreign capital needed somewhere safe to go, and the dollar was the only candidate. Each country’s model required the other’s. Neither could change course without threatening the foundations of its own system.

Fast forward to today’s new technologies and paradigm shift: AI. When looking at the current AI race, most often observers tend to frame it as a clean break: a new technological order that reshapes global power. But the deeper pattern is replicating itself— with one crucial difference: this time, each side is choosing its exposure. China is open-sourcing its intelligence, America is open-sourcing its currency, and the two are converging in the emerging economy of AI agents—each opening its strength, each exposing its flank.

What OpenRouter Tells Us

Let’s look at OpenRouter’s traffic data. Three of the six most-used large language models in the world, by actual production volume, now come from Chinese laboratories. MiniMax M2.5 sits at the top. DeepSeek and Zhipu’s GLM follow closely behind. The largest single consumer of AI inference on the open market is OpenClaw, an autonomous coding agent that routes the bulk of its traffic through Chinese models.

Open Router Data, March 8th, 2026

The mechanism is straightforward price arbitrage. MiniMax M2.5 matches Claude Opus 4.6 on software engineering benchmarks—80.2% versus 80.8%—and costs roughly one-seventeenth the price per token. A workload that costs $100 a day on Claude costs under $5 on MiniMax. Agents, which are indifferent to national origin and acutely sensitive to cost, make the obvious choice.

The economics are not purely a software achievement. China’s total installed power generation capacity reached 3,349 GW by end of 2024. Wind and solar alone hit 1,406 GW, surpassing China’s own 2030 target six years early. Clean energy now accounts for 52% of installed capacity. China spent $625 billion on clean energy in 2024—31% of the entire global total. Compute requires electricity. Cheap, abundant electricity makes cheap inference possible. The price gap between Chinese and American AI is partly an energy infrastructure story, built over decades of directed investment. The US, by contrast, faces genuine data centre power constraints. New capacity is queued behind grid limitations that will take years to resolve.

Then there is the architecture. DeepSeek’s Mixture-of-Experts design activates only a fraction of its parameters during inference. MiniMax M2.5 runs 229 billion total parameters but activates only 10 billion per query. These are structural cost advantages that compound at scale.

Finally, layered on top is straightforward competitive pressure: a dozen Chinese AI companies—Alibaba, ByteDance, Baidu, Tencent, Moonshot, Zhipu, MiniMax and others—compete so aggressively on price that margins have long since turned negative. They are buying market share, and it is working. The consequence extends beyond price. Every query routed to a Chinese model is also a transfer of data onto infrastructure subject to Chinese law. The cost advantage and the data advantage are the same advantage—and the data vulnerability for everyone else is the same vulnerability.

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