I wanted to talk a littl emore about
central bank digital currencies today what with the economist front cover last week
The Economist, favouring as it does state planning over free markets, has, broadly speaking,
been dismissive of bitcoin since the word go, describing it, for example, as “useless”.
In doing so, it has cost its readers, assuming they listened,
perhaps the greatest investment opportunity any of us will ever see in our lifetimes.
So it was with a certain amount of amusement that I looked at this week’s cover. It showed
a golden bitcoin, only the B was a G,
and the story was “Govcoins - the digital currencies that will transform finance.”
It shows you just how far bitcoin has come that the Economist is now pastiching bitcoin’s imagery
and terminology to shill copycat, but inferior central bank digital currencies (CBDCs).
British Chancellor Rishi Sunak has been operating with similar double standards. On
the one hand the FCA bans crypto derivatives. On the other he brands the British CBDC “Britcoin”.
But the purpose of this column is not to expose double standards. It’s to talk crypto,
and the current hot topic is CBDCs. So what are they? And what will their impact be?
CBDCs, rather less catchy than govcoins, are “exactly what it says on the tin”
to use the old saying. They are digital currencies directly issued by central banks.
You might say, “isn’t all currency issued by central banks?” And the answer to that would be
yes and no. Central banks, together with their mints and printers, are responsible
for the issuance of physical currency. Yet 97% of the money in existence is now digital,
and most of it - aside from that which was created by Quantitative Easing - was created
by banks - HSBC, Barclays et al - when they lend. Hence debt-based fiat money.
Technically, when you deposit money in the bank,
you are actually lending it to the bank. Fiat money is, basically, debt.
CBDCs are slightly different, and they will see central banks creating money
more directly in the real economy.
Individuals will have a wallet with the central bank into which, for example,
your UBI or furlough money can be deposited, and from which your taxes can be extracted. Many will
start to use the money in their central bank wallet just as they use the money in their bank
account - and thus the central bank will be able to track your and everybody else’s transactions.
There are all sorts of moral implications to this which we will come to in a moment.
The biggest loser from CBDCs, apart from the individual and his privacy, will surely be banks.
Many will gravitate from their bank account to the central bank account.
That’s assuming the tech works, of course, which is a big assumption given governments’ track
record with tech in the past. If you need a recent example of awful government tech,
look no further than the UK government’s Track and Trace.
But, as for the traditional banks, it’s not hard to see greater use being made
of fintech and challenger banks, as well as CBDCs, all of which will erode their user base,
particularly among the young. Already in China for example Alipay has a billion active users
and its turnover is 25 times that of Paypal. Together with Tencent,
which handles the payments for WeChat, the two process 90% of China’s mobile transactions.
Fintech and central banks, as well as venture capital firms, will no doubt start to muscle in
on banks’ lending business as well. I can see a future
where companies start using your data as collateral.
The next big impact of CBDCs will be on individual behaviour. If you thought behavioural economists
and the ministry of nudges had too big a role in your life already, wait till they get their hands
on programmable money. You’re free to do pretty much as you like with cash, but CBDCs will have
rules programmed into them. The effect will be that thought the money may be nominally yours,
you do not have power over what that money does.
Pretty much anything can be coded into a CBDC and
the behavioural economists are going to love it. Expiry dates for example.
You have to spend the money by a certain time or it expires. If the central planners decide
they want a boost to the economy or that they want money velocity to increase - saving money
is not the patriotic thing to do - then they can just shorten the expiry date.
Expiry dates will eat away the value of your money even more dramatically than inflation.
The reaction of individuals will be to continue to store their wealth in assets - real estate, the
stock market, gold - rather than cash. Asset-price inflation is likely to get even more pronounced.
With CBDCs Big Brother, should he choose, can watch all your spending habits, and,
just as he is the tax system, perhaps nudge you to spend in certain areas should he see fit. He
could make your money invalid in certain places. He could impose harsher rates of interest on you,
if, for example, you have been saying naughty things on social media,
or your phone or Alexa has picked you up uttering wrongspeak at home.
China is already going in this direction with its social credit rating.
It’s likely that other bodies will have direct access to your wallet – for the removal of
taxes, for example. Retrieving money that is yours when the wrong amount was removed will not be
a pleasant experience. We know that tax authorities are trying to move to taxation
of everything in real time - rather like PAYE. It’s a better system for eliciting greater sums.
If some of this is making you squirm, these are the dubious moral areas
into which we are inevitably headed. I say, inevitably,
because the technology is now there. You can’t univent technology.
There will be unintended consequences and loopholes galore. There are bound to be. There
always are. Lord knows what the counterfeiters and hackers are going to make of it,
but no doubt they will exploit any weakness they can find.
Thank goodness for crypto. It will provide much needed competition which should keep central
bank mission creep in check. Why hold CBDCs with expiry dates and unlimited supply when you can
hold bitcoin? One of the unintended side-effects of CBDCs, I’ve little doubt, will be to accelerate
the adoption of apolitical crypto alternatives. On a practical level, day-to-day use of CBDC
wallets will normalise use of crypto wallets and, thereby, aid their transition to the mainstream.
Big Brother will be watching. But he won’t have total control.
Thank you very much for watching I'll be back with another video very soon