The Intersection of Crypto & CBDCs
We are Sitting at a Crossroads of an Ongoing Financial Revolution
“ A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.” - Satoshi Nakamoto
I want to make sure everyone here understands the current inflationary situation and what that means for the path forward.
There’s a 100% chance you have heard of bitcoin (BTC), ether (ETH), or other cryptocurrencies. You’re probably wondering what it all is, why it is here, are curious about it, and want to learn more.
Maybe you’ve had some of these experiences before:
You bought some crypto in the past, sold it, and lost dollars on the trade.
Perhaps you have disregarded it for some time and feel like it is now too late to get involved and learn. You look at the USD prices and feel FOMO.
Maybe you think it is worthless, it uses too much energy, it is used exclusively by criminals, that it is a “bubble”, that it is “inefficient” and “too volatile”.
Maybe you only trade stocks, or only buy real estate and can’t get over the psychological barrier.
You might hear about Elon Musk and his tweets and comments around Dogecoin and think it’s a big joke, or that Elon controls the price of bitcoin.
I am here to educate you on exactly what crypto is, address your questions and get you up to speed. You will learn what it’s all about, and specifically the role CBDCs will have in the world. While it is all moving forward so quickly, it seems like there’s an “intersection” of crypto and CBDCs. Lets start with the ongoing issues with the USD.
The Problem with Fiat Currency
Fiat currency is a currency that isn’t backed by anything other than “the full faith and power of the government”. It is a government issued currency.
The US Dollar (a fiat currency) is used every day around the world to purchase goods and services. You probably have some saved in a designated account for your expenses. You might have some invested in a retirement account, and maybe some inside a brokerage account for some personal investing of your own.
We use money to pay for subscription services, utilities, and all other general expenses and costs. The problem about this money is that it is constantly being inflated away.
We all know that inflation is bad. This problem has been brewing and consistently becoming worse for decades. Ever since the GFC that started in 2008 and “ended” in 2010 it has also become worse and worse. Fast forward to today and we’ve gone fully parabolic on money supply.
The overall growth of the money supply has increased dramatically since the world went on lockdown during 2020. @BowTiedBull says the real inflation number is closer to ~30%. Think of the average difference of buying a house now than in the end of 2019, it’s about 30% more. Ironically the money supply has also risen nearly the same.
So, how do you measure inflation?
Ex Fed Chair Ben Bernanke (2006 – 2014) stated in the past during his term that commodity prices were overstated in inflationary reports. There is no doubt the recent statements regarding inflation have been the exact same lies from our current leaders/representatives. I beg you to ask the question, how are they *measuring* inflation? I dug up this article from 2006 (right before the GFC) to see the way people like Bernanke think,
“the day after the release of the May CPI, Bernanke blamed not just higher energy prices but higher commodity prices generally ‘for some of the recent pickup in core inflation.’ Earlier this month, he had noted that possible future increases in these prices remain a risk to the inflation outlook."
The Consumer Price Index (CPI):
Represents the cost of a basket of goods and services across the country on a monthly basis. The CPI is the weighted-average price of a broad cross-section of goods and services. This collection of items, often referred to as the CPI’s “basket” of goods, is intended to mimic the typical products and services purchased by American consumers. Over the years, as the prices of those products rise due to inflation, this gradual increase is reflected in a rising CPI. In the media, the CPI is commonly referred to in terms of its percentage year-over-year change. (Investopedia)
Those goods and services are broken down into eight major groups:
“After collecting and analyzing data, the BLS reports price changes using the consumer price index (CPI). The (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market *basket* of consumer goods and services. The CPI measures changes on a monthly basis.” - The St. Louis FED
Maybe you’re aware of the problem in using the CPI as your gauge on inflation, hopefully you are.
Below is a report of the data shared on the Consumer Price Index from the Bureau of Labor Statistics from this past July. This shows changes (positive or negative) in each of the following categories.
It won’t maintain this rate of course, however, everything has changed. Here is a recent release of the CPI from October.
The CPI is not a reliable indicator, and I think most people are starting to realize that. It’s a poor indicator for inflation for a lot of reasons as it is merely an inaccurate attempt at measuring the composite average of price changes that consumers pay.
Simply put, inflation is situational and different for everyone. Inflation is not going to effect me the same way it is going to effect you. This broad approach is why it’s ineffective.
Here is an excerpt from Michael Saylor (CEO of Microstrategy) on The Investors Podcast released on Dec 22, 2020 discussing inflation and the problem with using a market basket.
“So if I want to live on my own as a single person, I want to rent an apartment. And my ‘market basket’ is food and energy and a nice apartment and a car. If I want to have a family and own my own home, my market basket evolves to be a lot… Family healthcare, higher education for my kids, more land for everybody to play behind the house, a house, real estate, property taxes, more utilities, appliances, and maybe family vacations, right? So that’s a different market basket for the middle-class family.
Now, what if I want to be wealthy? Then my ‘market basket’ that I aspire to is a very nice, an elegant estate in the country, or beachfront property in a hip cool town like Miami Beach or South Hampton or Malibu. That becomes a different market basket. And of course, a home in LA and Hollywood Hills, that’s a different inflation rate. If I want to be really rich, what do the wealthy aspire to? Well, they’re aspiring to own Apple stock. They want to own stock, bonds, commercial real estate, you want to own things that produce income. So what’s the cost to buy a basket of shares in Apple that produce a million dollars a year in dividends. Well, that cost doubled in 12 weeks! In 12 weeks, 100% inflation in 12 weeks this year. The dividend didn’t double. The price of the share doubled. Therefore, hyperinflation in a market basket of stocks. In fact, if we look at the S&P index, one of the most interesting metrics is the number of hours that you have to work in order to buy a share in the S&P. And we see that chart, and that’s doubled. That’s shooting up…
I mean, the presumption of course, is that politicians have assumed that no one wants to be wealthy. Huh? Let me say that again. Politicians have assumed no one wants to be wealthy. I guess if you assume no one wants to be wealthy, and if you track the things that the wealthy people don’t aspire to, then you won’t find inflation and then you won’t have a problem, as long as we agree that no one can be wealthy, right? You’re never going to get there.”
You’re never going to see rising prices of assets like stocks, bonds, commercial real-estate, and other asset classes. As well as things that directly impact your life like taxes, higher education (for you, or your kids), out-of-network medical expenses, lifestyle upgrades, name brand medication, surgeries, and other factors that directly impact your life.
Regarding assets, it’s imperative to consider what Michael Saylor says about the rising cost for acquiring one share of the S&P 500, and how many hours it takes. As well as thinking about what assets wealthy people purchase, like AAPL, AMZN, GOOG, and NFLX stock. Elite Real Estate in major cities like Tokyo, Japan for example, and other cities like London. Now, look at what the wealthy are looking at next, crypto.
To give you a perfect picture as to what is happening to the dollar, look at this chart drawing a comparison to the price of the S&P 500 and the FED’s balance sheet.
The important thing to remember is how quickly stock prices have risen since 2008 due to the non-stop and relentless amount of Quantitative Easing that has occurred.
As of this writing in the last 2 years you have seen ~ 131% growth in price of Apple (AAPL) stock, Amazon (AMZN) ~ 102%, Facebook (FB) ~ 77%. The cost in USD to acquire 1 BTC is up ~ 625%, and 1 ETH is up ~ 2,425%.
Anyone who believes Cash is King needs to reassess their thinking.
Side Note: My statements here on investing should not be mistaken for “making money”. You want to focus on how you can make more USD to buy and own more assets. Buying BTC or AAPL shares to earn more USD is thinking small. I am specifically a long term investor. I do not look for quick flips. I focus on the long term and the big picture and adjust course whenever necessary.
Just remember → Cash = Trash
Becoming a coupon clipper and cutting your credit cards will make you “rich” or save you. You won’t get rich off a “diversified slow growth mutual fund”. Simply put, you do not want to be cutting yourself short.
Take the time now to save as much as you can in the mean time, however, the focus should be on expanding and growing your income streams while investing in equities (stocks) and crypto. Investing and growing your money should be at the very top of your list. Anyone who is “under-invested” should be rethinking their financial strategy immediately.
What Does This Have to Do with Crypto?
Rewind back to January 3, 2009 when the very first Bitcoin block was mined, the Genesis Block. This block contained the message “Chancellor on the brink of second bailout for the banks.” This headline was chosen as a message and is indicative for *why* Bitcoin (BTC) was created.
Crypto is entering into the next phase of “adoption”. Just look at what is going on in El Salvador, Miami, NYC, and Texas. People, CITIES, and COUNTRIES, are starting to jump on board, while others remain hesitant and wary of it.
You can address and approach this new technology, learn it, and get ahead in life. OR. You can continue to go about things the same way, and eventually, one day, realize you missed a once in a lifetime opportunity. People who were smart enough to put in the time and effort to understand the value, potential, and solutions the of internet prospered from when it was still nascent in it’s early days. The same thing applies here, this time on a larger scale.
We all know the advent of cryptocurrencies lead to this central banking adoption of CBDCs and looking for ways to utilize “distributed ledger technology”. We know there’s no shortage of desire coming from big government for oversight, control, and more of our data. The lack of privacy and level of control is what makes a CBDC undesirable for me, and no matter how we feel about it, CBDCs are coming this decade. It is going to be a fundamental change and will have massive implications on you.
Crypto and You
You are taking part and getting involved in revolutionary changes in finance and technology. This is much bigger than trading in your fiat diluted dollars for digital assets.
We now have the option to transact in a currency that cannot be diluted and debased as it is fully backed by code. I can take it anywhere I want, use it, transact with it 24/7. All knowing that it is programmed to be scarce…why wouldn’t I?
The legacy financial system’s products are not open source and transparent like they are with crypto. We know this because crypto is ran on blockchain technology and leaves it open for anyone to use.
Code programmers who are writing smart contracts provide the production of these Dapps. We know that Ethereum is the “world’s programmable blockchain” that enables the production of these Dapps. So, it is no surprise that currently *most* DeFi applications and projects are ran on Ethereum. Ethereum Dapps turns all of this into “programmable money”.
These Dapps are products and services that do the same things you would in the traditional financial system.
They let you: save, borrow, earn, trade, and more.
Except it is open and free to use since it is ran on *open source technology*. It is built for the internet, which is all you need to participate in DeFi (Decentralized Finance).
The foundation of Decentralized Finance is built off of three pieces of technology: cryptography, blockchain and smart contracts.
Cryptography is the use of written code to secure communication between two people in the presence of third parties. It secures information (data transfers) in the presence of adversaries. Concerning your crypto assets this protects your wallet, assets, and transactions. This enables the transfer of those assets and/or information without intermediaries, like banks.
Blockchain is technology that collects information in sets or *blocks* that are then connected cryptographically. The result is that nothing be changed or corrupted. The information cannot be changed or modified making it → immutable.
Think of it as a public record of data stored in chronological order. The blockchain is shared between all users. As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block.
Smart Contract: a self-executing contract with the *terms* of the contract being written directly into code. All of the information in the contract resides at a specified address for specified purposes (bets, purchases, etc.). It's a collection of code (its functions) and data that resides at a specific address on the Ethereum blockchain.
Think of smart contracts as a type of account. This means they have a balance and they can send transactions over the network. However they're not controlled by a user, instead they are deployed to the network and run as programmed.
The Digital Dollar
There a lot of CBDC projects currently developing at the moment.
It comes down to the 5 piloted programs under development at the Digital Dollar Project.
The Digital Dollar Project is a partnership between Accenture (NYSE: ACN) and the Digital Dollar Foundation to advance exploration of a United States Central Bank Digital Currency (CBDC). The purpose of the Project is to encourage research and public discussion on the potential advantages of a digital dollar, convene private sector thought leaders and actors, and propose possible models to support the public sector. The Project will moderate programs with interested stakeholders to measure the value of and and establish practical steps that can be taken to establish a digital dollar. (DigitalDollarProject.org)
Regarding the long awaited paper from Jerome Powell at the Federal Reserve, Christopher Giancarlo, a former regulator and co-founder of nonprofit the Digital Dollar Foundation states, "I hope the report confirms the great American tradition of the public sector working with the private sector as policymakers continue to explore developing a digital dollar."
Next follows a list of excerpts out of the Digital Dollar White Paper:
The Foundation has engaged Accenture as lead architect and technology innovation partner. Globally, Accenture’s CBDC work includes engagements with the Bank of Canada, the Monetary Authority of Singapore, the European Central Bank, and, most recently, Sweden’s Riksbank.
Tokenization can provide a new level of portability, efficiency, programmability, and accessibility, ensuring the tokenized digital dollar’s ability to complement existing formats of money while simultaneously modernizing our payment and financial infrastructure.
Programmability is another feature that could unlock additional avenues for innovation and precision in value transfers. A tokenized digital dollar could enhance confidence, efficiency, and functionality in dollar payments across retail, wholesale, and international payment use cases: Retail, Wholesale, and International.
Assuming the technological efficiency and potentially reduced regulatory costs associated with offering a digital wallet, one can imagine smart phones and devices preloaded with such a solution, or a minimum, the application programming interfaces (APIs) to allow for mobile applications to function. The wallet could be readily registered through a regulated hosting intermediary performing requisite Know Your Customer/Anti-Money Laundering (KYC/AML) checks. Had this been the case during the COVID-19 crisis, many of the currently underbanked may have had an alternative means of receiving funding other than by physical check. ( Example Below: Digital Yuan Wallets in China [NOT INCLUDED IN WHITEPAPER] )
We believe that tokenization provides unparalleled opportunities for innovation in the areas of payment and financial infrastructure.
HYPOTHETICAL TRANSACTION LIMITATIONS (pg. 20) Thoughtful macro, micro, and behavioral economic analyses should be undertaken to find the equilibrium threshold that maximizes consumer activity and minimizes illicit activities. For physical cash, policymakers have determined that the threshold is at $10,000. As development of a digital dollar progresses, policymakers will need to determine parameters, such as timeframe, participants, and/or amount, that maintain individual liberty and minimize illicit behavior given the newfound ease of use of a digital dollar.
CYBERSECURITY Cybersecurity will be a central requirement of a digital dollar. There are many solutions addressing cybersecurity such that risk can be mitigated. Our current financial infrastructure exists on legacy systems and has significant modernization needs; as a result, it is vulnerable to exploitation. By launching a tokenized US CBDC, a new infrastructure could be built leveraging the latest cybersecurity technology. The highest standards to which cybersecurity can be advanced will be necessary in the creation of a digital dollar.
If the US dollar is to remain the world’s primary reserve currency in the unfolding century, it cannot remain an analog instrument and unit of account for things increasingly denominated as digital tokens. It must itself become a digital tokenized currency that measures, supports, and transacts with the world’s digital tokenized things of value.
Conclusion
Thank you so much for reading. I look forward to releasing the next installment of CBDC Watch for you. If you enjoyed this, please share!
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Disclosure: Not legal or financial advice. All opinions are my own.