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Hello anons!
The central banks of the world are all in different stages of either considering, researching, piloting, or beginning to use CBDC’s. They need to innovate and improve on ways that optimize their objectives of enacting monetary policy and achieving their economic goals. It is evident that the success of cryptocurrencies have opened the doors to these CBDC’s and have served as a signal for far more innovation requirements.
In this article I uncover the angles that central banks are taking for their CBDC’s and how this is going to affect you.
Quick Run-Down on Relevant CBDC Developments
The projects of CBDC’s have been “in progress” far longer than most people realize. The Bahamas launched the Sand Dollar this time last year being the first nation to effectively launch a CBDC. They announced the project in 2016, the same year China announced they’re starting their project on a CBDC. The Central Bank of the Bahama’s statement on the CBDC is parallel to the common messages I have seen across the other central banks. They all say something along the lines of “ We want to remain competitive and reach out to those who are ‘unbanked’ in the world.”
“The main goals of the Sand Dollar are to modernize and streamline the country's financial system, reduce service delivery costs, increase transactional efficiency and improve financial inclusion.”
The ECB:
Other statements of a similar tone came from the European Central Bank (ECB) at the same time last year. The ECB reported the need for cash to coexist with CBDC’s and for a need to expand the scope of the central banking apparatus.
“A digital euro would create synergies with private payment solutions and contribute to a more innovative, competitive and resilient European payment system. By serving as a unifying force in Europe’s digital economies, a digital euro would also be an emblem of the ongoing process of European integration…Issuing a digital euro would be relevant for nearly everything the Eurosystem does and it would have pervasive effects on society as a whole.”
The FED:
The development and issuance of CBDC’s is currently in an all out race now that things have started to pick up. The PBOC, Bank of Japan, Bank of England, are all leading the way on this. The US seems to be falling behind, and Jerome Powell of The Federal Reserve (USA) is playing his cards nonchalantly. More so than other central bank leaders. Recent statements in the media portray that Fed officials are currently “split” on the structure of a CBDC, but it is very evident there is no split necessarily on the idea or prioritization of the project.
“The Federal Reserve is also doing its part to examine the role of new technologies.
Experiments with central bank digital currencies (CBDCs) are being conducted at the Board of Governors, as well as complementary efforts by the Federal Reserve Bank of Boston in collaboration with researchers at MIT. In addition, a recent report from the Bank for International Settlements and a group of seven central banks, which includes the Fed, assessed the feasibility of CBDCs in helping central banks deliver their public policy objectives. Relevant to today’s topic, one of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system…Digitalization of financial services, combined with an improved consumer experience, can help increase financial inclusion, particularly in countries or areas with a large unbanked population.” (Jerome Powell, March 18, 2021)
J. Powell announced in May of this year that the Fed will release their paper on a CBDC later this year and targeting it for late Q4. Statements by him elude that it will explore the implications of issuing a CBDC and plans for it to “complement the research already underway”. Interesting.
The PBOC:
In April 2020, China became the world's first major economy to pilot a digital currency. People's Bank of China are aiming for widespread domestic use of the DC/EP by the 2022 Winter Olympics in Beijing.
Currently the central bank’s of the world exploring the issuance of CBDC’s account for ~90% of the world’s economy. 90%. Think about the implications and changes that brings moving forward.
A New System
A large deal of the concern with Central Bank Board’s and a CBDC is how they’re going to be implemented. This and the policy issues and interoperability between private and public use cases is what they’re focused on. This is going to involve: B2B, P2B, & P2P transactions. The secure and immutable technology that was introduced by cryptocurrencies gave light to the idea that it could enable better monetary policy and bring more banking services to the ~1.7 billion unbanked people in the world. They are currently considering and measuring how all of this is going tom work moving forward. How are they going to seamlessly integrate this into ongoing financial services and work it alongside their current rails?
They know the future is 24/7, they need to find a way to remain competitive. The growing demand for crypto called for the innovation of a CBDC. This growth called for newer and more efficient technology. The old system and it’s never ending line of inefficient operations is outdated. This new system in the pilot stages as seen in China has already created much easier financial access and frictionless payment methods for those holders of (beta version) Digital Yuan Wallets in China. It has so far been successful.
As of July 2021, there were 81 countries around the world (making up ~ 90% of that global economy) were pursuing CBDC projects in many different stages. For example, Sweden's Riksbank is planning an electronic version of its official currency krona, called e-krona, to facilitate the development of an alternate payment system after a decline in the use of cash in the country. Within the United States, a possible introduction of CBDCs in the monetary system is being considered to improve the domestic payments system.
Whatever the motivation, the general consensus is that a CBDC will act as a general representation of a country's fiat currency. Like fiat currencies, it will function as a unit of account, store of value, and medium of exchange for daily transactions. → Remember this as it is not in any way like Bitcoin or Ether as it will still be subjected to the same monetary policy issues and lack of privacy that we are all seeing today.
The Different “Types” of CBDC
Retail CBDC
Wholesale CBDCs improve upon a system of transfers between banks. Retail CBDCs involve the transfer of CBDC backed by the government, and is available directly to consumers. This is the biggest argument for it. This is where they take their inspiration from crypto and apply it. They are effectively removing the risk or the risk of any intermediary/middle man.
Wholesale CBDC
These can settle transactions between already existing financial transactions. They can use the current traditional banking and existing financial institutions to run these transactions. One wholesale CBDC transaction for the transfer/distribution of assets involving more than one bank would be conducted via the current process for such transfers, also known as interbank payments, unfortunately already involves considerable counterparty risk.
However, using a DLT (Distributed Ledger Technology) enables more favorable conditions into a contract (smart contracts). Therefore, a transfer will not occur if the agreed upon conditions are not met.
Wholesale CBDC can expedite the process and create reusable functions for cross-border transfers. The DLT available in wholesale CBDCs theoretically can extend the concept to cross-border transfers and expedite the process to transfer money across borders giving itself an arguable use case.
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The Benefits of CBDCs
Anyone who is involved in crypto already knows that anything involving intermediaries present third-party risk and inefficiency. CBDCs are undoubtedly going to remove the third-party risk in the traditional financial space. This risk will remain within the central bank and present the opportunity for individuals to transact directly within the current system. This is also going to come with some other *costs* to you, the user, and will be subjected to more oversight and control on your spending. Nonetheless, we know that some of these benefits, although undesirable in some cases, does present an improvement and solution to the current system and the unbanked out there.
CBDCs and central bank monetary policy come together and CBDCs will make it easier to distribute and funnel money through the economy. The current structure of the system is heavily reliant and supported by middle men. They’re needed to funnel money throughout the economy. Contrarily and efficiently designed for an automated process, the CBDC will process between banks through wholesale CBDCs and establish a direct connection between consumers and central banks through retail CBDCs.
CBDCs will present a newer and better system for those who are unbanked. Especially for those living in developing countries. CBDCs can establish a one to one connection between consumers and central banks, and will be eliminating the need for unnecessary infrastructure spending.
CBDCs present and provide more efficiency, and a more frictionless process in government functions. Just as they can promote financial inclusion by simplifying the process to disburse money, CBDCs can also minimize effort and processes for other government functions, such as distribution of benefits or calculation and collection of taxes.
The MAJOR Disadvantages of a CBDC
It is very obvious and clear that many those “advantages” are also major disadvantages. It is also very obvious and clear that CBDCs do not solve the problem of centralization. A central authority, in this case a reserve bank, creates a much worse scenario. The Central Bank is still responsible for and the authority to these transactions. Therefore, they’ll have total control on the data, the users, and ultimately the transactions between citizens, and institutions.
CBDCs can prevent certain activity because they’re digital and do not require anything like a serial number for tracking. Cryptography and a public ledger operated by a central bank creates a simple opportunity to track money throughout their jurisdiction. This creates a scenario where preventing certain transactions using CBDCs is simple. Red flagging anything from a transaction to and from an individual, or a business is very easy. We can already see through many instances of censorship today online that those centralized authorities make the decisions. Think back to the first post “The Root of All Fuckery”.
Central banks will have the opportunity here to misuse their power and prohibit transactions between citizens for any categorical reason. If there is an integrated system for your credit score tied to your digital wallet (much like the social credit system in China) this could prevent public access/or other forms of consumer control by preventing someone from buying certain items, or not being able to send money to someone for any number of reasons.
CBDCs will erode privacy. A centralized authority is responsible for collecting and sending your digital ID so your transactions can be officially executed. Remember, this is a digital currency issued by your central bank that still operates on the system it runs, this is still the current system. They will continue to collect all your information and will learn more about you, and will tie it to your digital wallet. This is going to open a box of privacy issues, similar to the ones that plague “big tech”. Just yesterday, Facebook was hacked, your identification information in the central banking system could be hacked being it is a centralized distributed system.
The never ending problems with CBDCs are like a bomb that is about to go off once they’re fully released. There are so many things to think about. It makes sense when people are fully considering their benefits in cross-border transfers. It is imperative to also consider the issues involving geographical oversight. I believe people should also be asking how they plan to regulate when crossing borders? How are people going to feel with all their data in the central banks of the world. The portability of CBDC systems means that a strong CBDC issued by a large nation will very likely end up substituting the local currency of a weaker country as we can already see today. Again, another example of the spread and scope of the large central banking apparatus.
Direct and secure transactions running 24/7 and outside of all intermediaries sounds fantastic for any kind of service. Enhancements of financial stability, robust technological advancements, and adopting new ways to serve the public. It seems logical until you dig into how this will erode privacy.
You can see how apparent and stronger China’s anti-crypto rhetoric and policies coincidentally intensified over the years as their ongoing advancements in the digital yuan made progress. The same is said for the anti-crypto rhetoric seen by the ECB’s Christine Lagarde. The root of CBDC is to maintain control of the money. You can see the unfavorable remarks made by the leaders against global freedom technology. That is evidence enough.
The US seems to be the most welcoming in terms of crypto favorability when compared to the Eurozone and China. We have large developments occurring in Miami, Florida and Texas is looking to become another hub for crypto developments. The US seems to currently be focusing on the regulatory calls for stablecoins.
Simultaneously, with the development of CBDC ‘s we have also seen countries like El Salvador adopt BTC as legal tender. Other Central and South American countries are working on a framework to adopt Bitcoin into a nationally recognized legal tender as well. Paraguay recently has proposed legislation for it, however, at this point it seems like it isn’t going to pass. Which is a good thing as the bill would’ve called for too much involvement and oversight from the government.
As of yesterday, it also looks like rumors are spreading about a possibility of Brazil moving a “Bitcoin Law” forward to recognize Bitcoin as legal tender in Brazil. Will have to stay updated on this as we move forward.
Conclusion
I want to thank you for reading this week’s issue of CBDC Watch. If you enjoyed this edition of the substack share with your friends and family!
Next edition will be released next week…Stay Tuned!
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