Burning questions about CBDC’s
Unless you are living under a rock, you have probably now heard about CBDC´s and digital currencies, but you are probably still a bit confused about what they are. No shame in that.
Unless you are living under a rock, you have probably now heard about CBDC´s and digital currencies, but you are probably still a bit confused about what they are.
No shame in that. There has been a lot of energy spent to make them sound like the obvious solution to so many problems, while at the same time avoiding explanation about what they are, or how they will work, and how life will change with them.
First we need to understand something important. Our money has been digital for a long time already. Only a very small percentage of the overall currency is in physical form, i.e. coins and notes. A bulk of it resides on ledgers in the data centres of banks and central banks around the world. It's a messy system that has evolved over the years. Transactions take a long time because of wasted steps with redundant intermediaries, many of whose business models are to skim from the massive money flows that invisibly circulate around the globe like a mass of tiny leeches feeding on the blood circulating around our bodies.
It is only until the awareness of how seamless and rapid currency can be with the advent of Bitcoin, that the traditional global financial system felt they had to clean up their act and start at least trying to settle transactions on the same day.
At the time of writing this piece (May, 2023) the global financial system is showing signs of serious strain only a short 15 years after the GFC. Many a serious unbeholden economist has lamented the extraordinarily stimulative environment we have had since then. There is no wonder that the meme “money printer go brrrr” was so easily understood by the masses. This period of plenty for those that already had plenty was bound to come to an end in a bad way, and looks like this is what is now unfolding.
So this brings me to the first question about CBDC’s. These questions are to the governors of central banks and treasury secretaries of countries all over the world, but in particular to Agustín Carstens, the General manager of the Bank of International Settlements (BIS), or colloquially known as the Central bank of central banks:
How exactly does the introduction of CBDC’s, and the abolition of cash, from a technical perspective actually alleviate the problem of the enormous debt overhang that so many countries, corporations and individuals around the world now carry, in particular in the collective west?
It may sound arcane but it's important to know that in our capitalist system one man's debt is another man's asset. This is why debt forgiveness is such a tricky and difficult proposition. Debt is traded today like stocks in companies. In fact buying sovereign debt is (as we have been led to believe) one of the safest investments anyone could make. The US treasury bills (i.e. US sovereign bonds, i.e. tradable units of debt) were considered to be at the very bedrock of safety in terms of investment or collateral for yet more debt.
[Right about now it is important to think of bonds in the correct way. When you buy a bond, you buy someone else’s debt. I.e. you become the lender. I.e. The money is now owed to you with interest. That is why it is an asset. Even better, it's an asset that pays a dividend, the interest part of the repayments.]
Governments, nor central banks cannot arbitrarily forgive debts, because, on the whole, they are not the beneficial owners. The owners are quasi private parties like pensions and mutual funds, investment funds, and ETF’s which themselves have chopped it all up into even smaller chunks, and then trade them like shares on the stock exchanges of the world, etc… .All of these diverse owners would have something to say about this forgiveness idea, I am sure. (n.b. The student loan forgiveness debacle in the US)
So to rephrase that question again, to all the armchair economists at treasury departments and central banks around the world and their mouthpieces: How will CBDC’s fix the current problems stemming from too much debt? (Lets ignore the irony that it is they who have caused much of it by the artificial manipulation of interest rates)
The diverse and arcane menagerie of economic actors that make up our complex financial system play a poorly understood role in our free market capitalist economic system. They may behave like leeches when it comes to money flows, ever straining their creativity toward finding new and novel ways to redirect the massive and continuous flows of money via their own computer servers in order to extract the 21st century version of a toll fee. Getting fat doing not much more than being another obstruction in our rickety financial system, but their jealous natures offer us all a little unexpected advantage. Privacy, sort of.
Yes, most of them have figured out the value of all that juicy financial information that goes along with those gargantuan flows of money they feed from. They jealously guard that data because it yields them both commercial advantage and profit. As despicable as this may sound to us when we think about it at a societal scale, on an individual level it ensures a healthy fragmentation of data about our personal transactions making it impractical for any one entity to uncover the complete chain of discrete flows of money, unless there is a very powerful motivation expending much effort to do so, e.g. crime
It is not surprising that if one wishes to deliberately create obscurity in their money flows, all one needs do is to overly complicate these flows with ever more shadow companies and entities that hold accounts simply as nodes in complex and expensive networks. These are primarily designed to create highly obscure, and difficult to follow trails of data scattered across maximal numbers of different entities. Hollywood has done a good job of dramatising this in numerous crime movies.
Inversely, with the near monopoly that Visa and Mastercard have over the credit card landscape, tracking down a careless criminal using such a card is made easy for law enforcement. They need only subpoena one or 2 companies to reveal all. Again thoroughly used in movie plots, usually the dumb criminal scenario.
We all assume that our decisions to receive, give and spend our money whichever way we want is part of our freedoms, but these freedoms have already been eroded to a dangerous degree. The US war on terror has created many barriers between completely legal and legitimate money flows between countries and organisations. It would be incorrect to assume that law enforcement and government edicts are overly difficult to enforce in our current fragmented and protective financial world. Although the sheer diversity of actors inadvertently offer us, as individuals, a certain degree of anonymity and privacy in our financial affairs, those that wish to impose laws and restrictions on financial freedoms are already well armed to this end.
This leads me nicely to my next question: How will a publicly acceptable level of privacy and freedom be designed into CBDC’s so that they are a foundational part of the system, and not just some flimsy token legislative fig leaf?
We must consider the obscure and fragile fluid balance between; our current individual personal financial freedoms; the arcane and commercially protective architecture of our traditional global financial system; and the natural tendency from those in power to diminish and dismantle personal financial freedom in the pursuit of control. This balance is ever changing. CBDC’s will very likely demolish this balance to the permanent public detriment.
The rapid rush to CBDC’s has a somewhat confusing urgency to it which does not gel with facts on the ground. Assuming, (and I believe I am safe in the assumption that no real compelling answer exists to the first of my questions, making it a combatively rhetorical one) it does not alleviate one of the (if not, the) core problems besetting our financial system, namely that of too much debt, then what is all the rush? Is it not more prudent to concentrate energy on solving problems that are identifiable and real. The rapid and coordinated rush feels contrived and dare I say it, nefarious.
If I were to elaborate on my question, or possibly rephrase it: if we have central bankers (who through interesting quirks of legalese are not necessarily under the jurisdiction of democratic governments); elected governments; and the general public as the 3 stakeholders in the CBDC project, then who is representing the valid, and as yet inaudible concerns of the general public before it's too late?
I grew up in a so-called liberal democratic country. There were multiple political parties (more than 2) and they vigorously debated the topics of the day, topics that concerned most people, which in the run up to elections gave the public a reasonable idea of what to expect from their chosen candidates. The media did a seemingly respectable job of holding the slippery statements of these politicians to public account. The variety and diversity of media outlets also seemed to reinforce the idea that, to the greatest degree possible, we had a system that gave voice to as many diverse points of view as practically possible. Protests occurred when the public’s ire crossed an invisible threshold of tolerance with the government of the day, and it was to the general detriment of the political careers of any elected officials that ignored such expressions.
All these sentiments may be the recollection of youthful naivety. The years when a young lads attention are more easily captured by girls and other hedonistic pursuits. Politics and economics were far from the centre of our attention. But for adults of the time who struggled with mortgage interest rates in the high teens, I am sure the situation was acutely different.
The world of today is very different. We can debate all day about the whys and wherefores, which would be an interesting subject to cover all on its own, but we do feel the grand result of an unravelling society. Hyper-polarisation of views which results in a frightening shrinkage of the window of topics that can be discussed safely with friends and strangers.
I cannot help but think that this result suits the powers that be quite nicely. We bicker about pronouns, racism, Ukraine, welfare, taxation, inflation, and the latest comings and goings of the new wave of influencers, while their machinations go unnoticed. Yes Klaus, I am referring to your little club!
Covid applied another colossal layer of polarisation over everyone. The pro vs anti maskers, pro vs anti vaxxers, pro vs anti lock downers. This cut right down to everyone's personal lives with these opinions cleaving through personal and familial bonds, not to mention punitive restrictions and penalties that nobody could ignore or escape. The feeling that we can never roll this one back is palpable. I don't want to go into what recent revelations say about who was right or wrong on these topics or else this piece will go on forever, and I doubt you’ll stick around for that!
What I want to tease out of this episode is how resistance to authority was dealt with. Canadian truckers and anyone sympathetic to them felt the raw end of the power of the state who had flicked open the can of spinach better known as emergency powers. They aimed straight for the jugular by freezing peoples money via the cooperative banking sector.
In other so-called liberal democratic countries, similar draconian measures were being tried out, all in the name of public safety. Now they have tasted blood, there is no going back for the power hungry bureaucrat.
What was shocking was to witness final confirmation that the media had completely abdicated its role of mediator and truth seeker for society. Yes, that media which we thought were fighting in our corner. They seem to have done a shifty switcheroony on us and now fight in the opposite corner against us. It's no wonder that media, or MSM if you like, is in sharp decline, while a veritable explosion of alternative media has flooded the internet to fill the waking public hunger for authentic voices trying to tell the truth.
The balance of power between the governors and the governed has always been a fragile balancing act. The public tolerates a limited amount of restrictions on their personal freedoms and privacy in exchange for security, stability, together with societal and economic structure. Those in power bestowed with the temporary right to steward and improve these qualities for society, want nothing more passionately than to remain in power, and what seems to be a societal axiom, they will intrude on the public's freedoms and privacy as much as they can get away with, to remain in power.
A dangerous flaw of liberal democratic nations has hidden in the shadows till recently. The fixed and permanent bureaucracies that exist to run the machinery of government no matter what political leaders are chosen from the ritualised election cycle. The omnipotent power of these bureaucratic structures to override the publicly chosen political leaders is only now becoming more visible. The veritable iceberg whose dangers lurk just out of sight.
The question I am belabouring to arrive at is framed by this. If central banks get their way and herd entire nations into CBDC’s as the sole way for the general public to transact economically and store their economic energies for later use in the form of savings, then suddenly the ability for the government to discreetly punish and coerce people to act in a certain way to their liking. An invisible cattle prod with infinite precision, potency and discretion, striking with immediacy right at the heart of anyone's life in the most acutely painful and personal way. The ultimate weapon with the carefree potential to kill without drawing a drop of blood or drawing any repercussions to the perpetrators. Gives the military term surgical strike a whole new and menacing civilian meaning.
Would they use the awesome and terrible power this new innovation offers? To poison the very well of life on which our modern society rests: money itself. Perhaps this is the wrong question. It is too rhetoric. The right question may be: why are they really building it? Could they suddenly have turned benevolent? Perhaps the real test of this thesis would be to make it purely voluntary. Allow the collective wisdom of the masses to choose for ourselves. For till now there has been a complete dearth of any discussion on vital safeguards to prevent current or future leaders from unleashing the devastating potential of this new breed of money.
The liberal democracy I have now mentioned a handful of times, is a relatively new phenomenon in human history. A messy experiment that claims to be the pinnacle of personal freedom and privacy. It is the best we have experienced as a species (as far as we can recall). Getting those in power, those that lust for it, on a short enough leash to let the personal freedom and privacy of the general public to flourish like a flower in the desert, cost millions of lives over the generations to achieve. That flower yielded a gilded age of innovation and creativity the likes of which has never been seen before in memory. I feel like I have been gifted a rare prize of fate to have grown up when I did, to feel the dangerous heady possibility such conditions offer. To travel the world, to start a business, to invent something new, to write about anything that comes to mind and offer it without fear to the world. These are rare gifts bestowed upon us by that flower in the desert.
Now as an adult, I am confronted with an unfortunate obligation. I must make the best effort I can to preserve this freedom for subsequent generations, so they may expand it and let humanity flower to its full potential. I will do this in any way I can, and this blog is one of them.
The US, as the self proclaimed protector of democracy, a hubristic proclamation if ever we hear one shows its hypocrisy for all to see in its pontification in its protection of Ukrainian democracy. The MSM cannot even hide the fact that the regime in power at the moment in Ukraine, respects the democratic free will of its citizens to such an extent that they have violently banned and criminalised all political parties or expressions that do not comply with the ruling regime. Is this the new kind of democracy we can all look forward to?
I hate to end a post on such a dark note. CBDC’s are still theoretical ideas, but with each passing month, it seems more and more certain that they will be rolled out everywhere very soon. We have seen the first trials and they are not being met with much enthusiasm. (Nigeria, China, Bahamas,... by the time you read this there could be more). I am heartened to read that these dystopian ideas are not resonating with people who are probably not completely aware of how bad they will be.
Furthermore, it's not too late to take measures that will inoculate you and your families life against measures that are likely going to be thrown at us to grease the rails to adoption. I refer to a banking crisis where your insured deposits will be converted into CBDC’s. Ask yourself how much you trust your bank? And then look at how much of your lifeblood (money, savings) you are entrusting to them. I suggest you act to rectify this.