The Satoshi Revolution: A Revolution of Rising Expectations.
Section 1 : The Trusted Third Party Problem
Chapter 3: Trying to Undo Satoshi
by Wendy McElroy
Do You Want a Government Fiat Crypto? (Chapter 3, Part 4)
It is the ability of governments to acquire money without direct taxation that makes modern warfare possible, and a central bank has become the preferred method of accomplishing that….[T]here can be no debate over the fact that fiat money in time of peace has no such justification….Therefore, it is not an exaggeration to say that the Federal Reserve System encourages war.”
–G. Edward Griffin, The Creature From Jekyll Island
Central Bank-Issued Digital Currency (CBDC) is a national currency that issues from a central bank. It is the crypto counterpart to a physical currency, such as the U.S. dollar. It is also a bitter irony. A monetary wildcat (crypto) meant to undermine the world’s financial system (central banks) is being caged and tamed to serve the status quo. At least, the status quo is trying.
Nations are actively exploring the development of CBDCs. Russia plans to develop the cryptoruble. Japan wants the J-coin. The Bank of Canada released a thirty-page paper arguing for its own CBDC. The Federal Reserve has finally admitted to considering a U.S. crypto. China, the United Kingdom, India…the list of interested nations scrolls on.
CBDCs may seem to parallel free-market digital currencies, but they are actually anti-crypto; they are the antithesis of Bitcoin. Consider some of the technical differences:
- Bitcoin is decentralized; CBDCs would centralize all aspects of digital currency in the hands of one agency.
- Bitcoin is peer-to-peer between individuals; CBDCs would be created and administered by governments.
- Bitcoin is open-source; CBDCs would be patented, proprietary, and undisclosed.
- Bitcoin is mined; CBDCs would be issued by a central bank.
- Bitcoin is limited to 21 million coins; CBDCs’ cap would be whatever governments want.
- Bitcoin is on a transparent blockchain; CBDCs may not even use a blockchain.
- Bitcoin offers individuals possession of private keys; private keys for CBDCs would be owned by the bank, which means it would own the wealth.
- Bitcoin is quasi-anonymous; CBDCs would track both identities and how the currency is used.
- Bitcoin severs the connection between currency and central banks; CBDCs would cement it.
CBDCs and free-market crypto also have fundamentally antagonistic goals. CBDCs are the central-banking system’s desperate bid to retain its trusted third party status and its monopoly on the world’s money supply – a monopoly that benefits government, its creditors, and the elite. Bitcoin obsoletes the central banking system’s status as a trusted third party. This is deliberate. Bitcoin was designed to empower individuals by allowing them to control their own finances, their own futures.
There is one goal CBDCs and free-market crypto may share: the ultimate elimination of physical fiat. But, again, the reasons are antagonistic. Bitcoin rejects a corrupt currency and a monetary system that enriches the elite at the expense of average people. CBDCs want to rescue the status quo.
Fractional-reserve banking and fiat currencies are teetering on a brink. The much-discussed bitcoin “bubble” may well be nothing more than the sight of other currencies collapsing around it, especially the US dollar. The true bubble is fiat currency, which will pop first in developing nations, such as Zimbabwe. An article in the Times Live (November 13, 2017) observed:
For most investors around the world, bitcoin is a volatile and highly speculative bet. For Zimbabweans, however, the cryptocurrency seems to offer rare protection from the onset of hyperinflation and financial implosion. Some are turning to bitcoin out of desperation as their bank deposits lose value almost by the day, while others are using the online currency for housekeeping such as funding family members studying abroad.
Fiat everywhere is losing public support, and the central banking system is looking to digital currency as a new point of stability. The need is urgent. An article entitled “Why Governments Want a Central Bank-Issued Digital Currency,” by Austrian economist Xiong Yue, opened, “On January 20, 2016, People’s Bank of China (PBoC) released an announcement on its website about its digital currency conference. At the conference, the PBoC urged its digital currency team to speed up effort and release its own digital currency quickly.” China demands speed because it recognizes how quickly monetary control is melting away.
Cold cash has always been the enemy of government. In his article, “Why Governments Hate Cash,” the economics professor Joseph Salerno wrote, “Now the reason given by our rulers for suppressing cash is to keep society safe from terrorists, tax evaders, money launderers, drug cartels, and other villains real or imagined. The actual aim of the ﬂood of laws restricting or even prohibiting the use of cash is to force the public to make payments through the financial system. This enables governments to expand their ability to spy on and keep track of their citizens’ most private financial dealings, in order to milk their citizens of every last dollar of tax payments that they claim are due.”
The problem confronting authorities: when cash leaves the financial system and arrives in the pockets of individuals, the government loses the ability to track its use. Individuals buy and sell with an anonymity that blocks the collection of taxes, fees, and other revenue. Governments have sought stop-gap “solutions.” Currency tracking sites record the serial numbers of currency, for example, and allow the circulation to be monitored–that is, as long as the serial number is re-entered. In short, the system requires a high degree of co-operation from cash holders.
Another proposed “solution” is to embed a tracking device into currency. The Reserve Bank of India recently had to reassure people that its newly-issued Rs 2000 notes were not tagged. Nevertheless, rumors persist about the new currency. The most popular one claims NGC chips are embedded. These are “signal reflectors” by which satellites can locate the clumping of high-value bills, allowing government to confiscate the cache as “black money.”
Public resistance constitutes a major obstacle for trackable cash, and the experiment may be inevitable. If so, it will be an inevitable failure. The chips are costly, with the ongoing expensive of tracking. Moreover, the chips could become a revenue stream for impoverished recipients who remove them, sell them, and use the stripped banknotes as anonymous cash. Even if the chips remain embedded, RFID is not difficult to block; a simple wallet of aluminum foil does a fairly good job.
Fortunately, for governments and central banks, digital cash is a perfect substitute. It avoids the pitfalls of chips, and being traceable is coded into its essence. This is unfortunate for individuals and freedom.
If governments manage to make CBDCs work, then the resulting currencies will embody the worst of worlds. They will combine the efficiency of Bitcoin with the totalitarianism of government. The trusted third party problem that Bitcoin was created to eliminate will be back on steroids.
The Politics of a Cashless Society
Governments hate cash. They will move from physical to digital currency at the first opportunity. The process is likely to go through what has been called “the five stages of fiat grieving,” (of course, the stages may occur in a scrambled order or a somewhat different form):
First: A government explores the possibility of digital cash while, at the same time, gradually removing physical cash from circulation. Some nations, like Sweden, have already almost entirely removed cash from the economy. With CBDCs, the process will accelerate dramatically.
Second: A database for digital currency – probably not a blockchain – is written in proprietary code and implemented in a nontransparent manner. National borders are erected around the math. Or, at least, an attempt is made to do so.
Third: A digital cash is issued and “sold” as a viable alternative to both cash and free-market crypto. Many people will prefer free-market crypto, of course, which means government will impose harsh regulations, including bans, to herd people toward CBDCs. Otherwise, little incentive exists to adopt a closed, government currency that is administered by a trusted third party that has proven to be anything but trustworthy. Free crypto then goes underground or flees to friendlier venues, taking a chunk of the nation’s wealth with it. Nevertheless, the majority of people, who are law-abiding or timid, will accept the forced “alternative,” especially when cash begins to vanish.
Fourth: Automatic taxation is embedded in the new digital currency. The absolute tracking of every unit of currency gives government unprecedented control of the flow of wealth. Unhappily, distributed ledgers could become the most efficient means yet created to monitor personal finances and commerce. The government’s problem of anonymous cash would be largely solved, with the digital currency becoming a “slave money.”
Fifth: Because it is not mined or constrained by the free market, the digital currency has no restraint on issuance. Central banks inflate the supply of currency at will and with ease. The supply steadily and rapidly will increase at a gallop, devaluing each unit in circulation. This is a huge, hidden tax on every user.
In addition, a CBDC gives government laser precision in manipulating the economy and society. Yue observed. “[G]iven that these digital currencies are programmable, the government can even control exactly how to spend this new money using scripts. For example, if the government plans to subsidize certain farms, say some corn farms, to support this sector of agriculture, they can directly add a certain amount of money to the wallets of some farms, for instance 100 million dollars and program this money to be sent to certain fertilizer merchants at a certain time, and that each can only spend maximum of 10 million dollars per year…”
There is another, less-explicitly stated agenda of government and central banks: negative interest rates. Negative interest means that depositors do not receive interest on their accounts. Instead, they pay interest to the bank for holding their money, often along with other ruinous fees. This encourages people to spend because they lose money when their wealth sits unspent. It also encourages the use of bank deposits, rather than cash, to pay bills.
The 2015 bank crisis in Greece provided an example of how negative interest works. To avoid bank runs, Greece imposed a surcharge of one euro per 1,000 euros in cash withdrawals. Salerno observed, “It doesn’t seem very big, but the principle at work is extremely big because what they’re in effect doing is breaking the exchange rate between a unit of bank deposits and a unit of currency.” Salerno continued, “To make the calculations easier…let’s say that the Greek ‘surcharge’ is ten dollars for every 100 dollars withdrawn. Now, instead of being able to convert one euro in your checking account into one euro in cash, on demand, you will only be able to buy one euro in cash by spending 1.10 euros in your bank accounts. That’s a negative 10-percent rate in some sense….So, you would only really get ninety cents for every dollar that you wanted to withdraw and that’s very significant because this means it will be more expensive to buy an item with cash than with bank deposits.” People were driven away from cash.
The main problem for negative interest, of course, is that people will keep their cash outside of banks, preferring to make “mattress deposits” instead. As long as people can withdraw cash, even under unfavorable conditions, then large amounts of money will stay beyond government’s reach. But if digital cash is fully adopted, then a bank can insist that clients use it instead of physical money. The wealth never leaves the banking system.
The main hope for economic freedom is that the CBDCs will fail. There are many reasons to believe this would happen. One is scalability. Bitcoin confronts that particular brick wall, but imagine how exponentially more difficult scalability would be for a digital currency that is used by hundreds of millions of people, as well as in foreign trade. And, then, there are the hackers who seem able to steal the keys to the kingdom at will. Incompetence would also play an immense role, not only in allowing vulnerabilities, but also in the general break down of the system. And, of course, not all nations would co-operate. Some will prefer the bonanza of wealth pouring into crypto safe-havens, just as some nations enjoy being havens for physical cash. In short, a jurisdiction war would erupt, and the one thing CBDCs cannot survive is competition.
That’s why there will be a concerted move to eliminate competition, and it will begin domestically within each nation that seeks a CBDC. It is already in high gear in China, Russia and other venues with definite digital plans. An interesting aspect of the repression is the crypto that most governments tolerate: namely, digital currencies issued by financial institutions. These currencies do not challenge the central-banking status quo; rather, they are subsumed by it through regulations that treat the institutions as though they were banks. Commercial crypto becomes the outer lobby of the central banking system.
Cryptocurrency exchanges are next in the line of fire. Respectability is dangled as a carrot in front of the institutions; government enforcement is the stick that hits their clients.
[To be continued next week.]
Thanks to editor/novelist Peri Dwyer Worrell for proofreading assistance.
Reprints of this article should credit bitcoin.com and include a link back to the original links to all previous chapters.
Wendy McElroy has agreed to ”live-publish” her new book The Satoshi Revolution exclusively with Bitcoin.com. Every Saturday you’ll find another installment in a series of posts planned to conclude after about 18 months. Altogether they’ll make up her new book ”The Satoshi Revolution”. Read it here first.