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Central Bank Digital Currencies A Brave New World
Central Bank Digital Currencies (CBDC's) are coming.
They have been discussing them for years, and efforts have doubled since COVID-19.
Now, if you search for information on CBDC's, you will be swamped by the usual mix of kooks, conspiracy theorists, and awful predictions about the coming dystopia.
I will shortly be launching my premium service, including high value phone calls (just $1,000/hr) to prepare you for WHAT'S COMING.
I'll take payment in digital dollars please
There are some major implications further down the road, but still A LOT more questions than answers.
Where do the conspiracy theorists get their ideas?
Just look at this selection of headlines from the WEF & IMF.
This 2016 WEF video also featured the iconic line...
You'll own nothing, and you'll be happy.
It's just the usual agenda.
Less racism, inequality and climate change.
More equality (of outcomes), social inclusion and help for the poor.
"a greener, smarter, fairer world"
No practical thought, just a wishlist of ideals.
I'm really not on board.
Simpler solutions are available, but they insist on overcomplicating things.
Problem solved.
Anyway, the message is clear;
NOW IS THE TIME TO BUILD OUR UTOPIA
‘capitalism and socialism will need to merge’
Anyone actually paying attention will have noticed that there are elements of capitalism and socialism in every developed society , but I digress...
This is the 'plan'.
Or it might just be a graphic of idealistic buzzwords...
Why am I (cynically) pointing all of this out?
Because it's complete bulls**t.
These are high level progressive activist groups promoting their utopian visions to rebuild and reshape our societies.
Are we supposed to believe that these huge institutions of intellectual masturbation have figured everything out?
And they've convinced permanently failing central banks (and governments) to suddenly unite on this single point, even though they can barely agree on policies within their own boards or political parties?
They're going to act quickly and efficiently to implement all of this?
OK. I'm done. Rant over.
Let's wipe the slate clean on all of the BS and look at CBDC's with a clear perspective.
What are central bank digital currencies?
Well, they don't properly exist YET.
Studies are well underway. All of the major central banks are getting involved.
It's definitely a matter of when, rather than if, and there is a lot of work to be done.
Retail CBDC – Central bank-issued digital currency that is operated and settled in a peer-to-peer and decentralized manner (no intermediary), widely available for consumer use. This will serve as a complement or substitute for physical cash and alternative to traditional bank deposits.
Wholesale CBDC – Central bank-issued digital currency that is operated and settled in a peer-to-peer and decentralized manner (no intermediary), available only for commercial banks and clearing houses for use in the wholesale interbank market.
As this ECB paper (and the below graphics) show, the levels of centralisation are far from certain.
Does everyone get an account at the central bank?
Or do they maintain the current system with banks as intermediaries?
There are some pretty huge implications here.
If everyone can have an account at the central bank (fig.1) then banks would be redefined as credit brokers instead of credit issuers.
We'll come back to that later.
Why might a central bank switch from fiat money to digital money?
It's all down to human innovation.
Our collective genius is always causing problems for policymakers.
Digital currencies already exist in the private sector.
Central banks have been caught napping (and not for the first time).
Now they face a simple choice.
Embrace the new technology or get left behind (and eventually lose control of the monetary system).
We know which one they're going to choose.
At a recent BIS media briefing, two panellists admitted that they're well off the pace and shared their insights.
Benoit Couere (Former ECB member):
The private sector is moving quickly, and ahead of us in many aspects in terms of developing new means of payments, digitalising payments, and the Covid-19 crisis has accelerated this change.
We see a new payment ecosystem shaping up with new forms of payments and maybe new forms of currency, with different status.
BOE's Jon Cunliffe:
Consider what this means for our job of ensuring that trusted, effective, convenient money continues to be available to everyone.
Facebook's Libra and China's Alipay are the proof of concept.
The private sector is waaaay ahead of the central banks.
Starting today, people across India will be able to send money through WhatsApp 💸 This secure payments experience makes transferring money just as easy as sending a message. pic.twitter.com/bM1hMEB7sb— WhatsApp Inc. (@WhatsApp) November 6, 2020
Alibaba and Tencent are miles ahead of any other financial service provider in the digital payments space. Through their respective payment services, Alipay and WeChat Pay, the tech firms account for nearly 90 percent of all mobile payment transactions made in the country.
Under the trial programme, the central bank distributed “red envelopes” - a reference to China’s traditional way of gifting cash - in the form of online wallets containing 200 digital yuan ($29.75) each to 50,000 randomly selected consumers.
Sceptical reactions among some Shenzhen recipients of the giveaway - long used to scanning phones to pay for goods with other systems - showed the central bank and government have work to do in convincing consumers of the benefits of a central bank-backed digital yuan.
“Alipay and WeChat Pay have been out for a long time,” said a shopper who gave only her surname, Zhong. “The new digital currency is similar to those so it’s quite late to just start the trial,” said Zhong, who said she was an accountant.
Another downtown Shenzhen user of the online wallet, who gave her surname as Yuan, echoed that notion, saying spending her digital currency gift was less convenient than existing options.
“I’m not planning on using it again,” said Yuan, who said she works in finance. “Unless there is another red envelope, of course.”
In other words, give it to us for free and we'll use it.
It's an important point.
With private providers already so far ahead, where's the incentive to switch?
We'll come back to this.
What are the standards that a Central Bank Digital Currency must meet?
i.e. What are CBDC's actually going to be used for?
To track and monitor your behaviour in the new Orwellian Dystopia, duh.
Ok, the BIS kindly released this summary paper laying everything out.
Simple enough.
Any CBDC must be compatible with current policies and systems, whilst having zero negative impact on stability.
So, what are the key characteristics and features of CBDC's?
The BIS has us covered again;
For now, they're focused on a domestic means of payment.
CBDC's are supposed to complement cash (and maybe one day replace it altogether).
Obviously if they work domestically, then things will evolve internationally.
Summing up, central banks are well behind the curve, risk losing control of the money supply and are being forced into action.
For all the criticism of central banks being irresponsible with such power, imagine if we all started using Libra every day instead...
It wouldn't take long before someone figured out how to game the system and turned it into DeFi on steroids.
Let's move on to the fun part.
Irresponsible speculation about the future!
No tinfoil hats required.
We're focusing on actual publications from the IMF & the ECB.
This study has always fascinated me.
The problem?
Negative interest rates do not directly impact cash.
Therefore, instead of paying negative interest, one can simply hold cash at zero interest.
Cash is a free option on zero interest, and acts as an interest rate floor.
To avoid a negative deposit rate, people can just 'hide' in cash.
As long as there is no inflation, that cash retains it's value, which renders the policy ineffective (as there is no incentive to spend).
Not to worry though, the IMF have a solution:
Run a dual currency system, and put negative rates on EVERYTHING, including cash.
One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries.
To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.
In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.
To illustrate, suppose your bank announced a negative 3 percent interest rate on your bank deposit of 100 dollars today.
Suppose also that the central bank announced that cash-dollars would now become a separate currency that would depreciate against e-dollars by 3 percent per year.
The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year.
After a year, there would be 97 e-dollars left in your bank account.
If you instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.
The ECB are fully aware of this (and many other potential uses for CBDC's).
They published a working paper in January 2020 titled;
Item C.1. 👀
How about 'Section D: Sovereign money related'
Finally, the sovereign money arguments (D) are also overall controversial, and again the majority of monetary economists are likely to reject them. Moreover, as will be discussed in sections 3 and 4, the disintermediation of the banking system has been considered as one of the major drawbacks and risks of CBDC.
"Good! Screw the banks!"
(The crowd roars in appreciation)
But what if the alternative is even worse?
The ECB has us covered there too.
Huber (1999, 5-6), one of the key German supporters of “sovereign money”, summarizes the sovereign money proposal as follows:
Give the central bank unimpaired full control of the total money supply on the legal basis of a general prerogative of money creation.
In other words, have the entire money base - cash as well as non-cash money - exclusively issued by the central bank.
Huber continued;
This implies the abolition of the banking sector’s capability to create non-cash money in the form of sight deposits.
(i.e. the end of fractional reserve banking).
Sovereign money does not necessitate particular changes of institutional and market structures.
Simply, banks would be credit brokers and no longer be credit creators.
They would lose today‘s seignorage, the extra profit from the creation of non-cash money.
Apart from that, the normal profitability of the banking business will remain untouched. Banks would be able without any restrictions to continue to carry out every kind of business they do now, ....”
Yeah, apart from that minor detail everything would just carry on the same.
...it seems essential to be able to steer the issuance of CBDC in such a way that it serves the efficiency of retail payments, without necessarily putting into question the monetary order by making CBDC a major form of store of value.
What does this mean for Bitcoin?
“crypto-assets, such as bitcoin... They have no connection at all to money. They may have extrinsic value – you may like to collect them for instance, and as such they are a highly risky investment opportunity.
Their value can fluctuate quite wildly, unsurprisingly.
They strike me as unsuited to the world of payments, where certainty of value matters.”
Sounds like bitcoin is safe from the regulators.
Maybe it will become the digital gold after all.
Seemingly, if it's not suited to payments (not e-cash), then it's not competition.
That looks to be the consensus for the cryptocurrency arena.
In any case, they need the entire space to keep innovating and show them the best path forward.
Any regulation will come much later, as and when it is required.
Let's speculate a little more...
The biggest challenge?
Getting people to actually use CBDC's
Mrs Yuan gave us the solution earlier.
“I’m not planning on using it again,”
“Unless there is another red envelope, of course.”
But how can they just give away money for free whilst maintaining the perception of value?
I have a theory.
You may have noticed a slight politicisation of our beloved central banks lately.
In case you haven't, a couple of examples.
“I want to explore every avenue available in order to combat climate change,” “This is something that I hold very strongly.”
Gone are the days of the Phillips curve.
We've moved on to combating climate change and inequality now.
So how could this play out?
Would you like a subsidy/grant/loan to install your electric car charging point at home?
Available in Digital Euros™
How about an electric vehicle subsidy if you buy from a European Manufacturer?
Digital Euro™ cashback with every purchase
Will you employ this worker who ticks these arbitrary discrimination boxes?
We'll send a grant straight to your Digital Euro™ wallet if you do.
How about UBI?
Payable in Digital Euros™...
I'm picking on the ECB because they've gone to the trouble of trademarking the digital euro™.
The same applies for the other central banks too.
It seems the best way to get their digital currency adopted.
CBDC's have the potential to be a very powerful monetary and social tool.
They can potentially bypass the snail's pace machinations of government legislators, get money directly into consumers pockets, and into the areas of the economy that need it most.
But who makes those decisions?
Which system will we choose?
One where independent central banks are chasing societal goals?
Or governments and central banks reshaping societies together, abandoning the illusion of independence?
Whatever happens, change is coming relatively soon.
At yesterday's Central Banking Forum, Christine Lagarde expected a digital euro to be ready in "2, 3, or 4 years".
Let's enjoy irresponsibly speculating while we can.
At some point within the next decade, a brave new world surely awaits us.