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CBDCs – Fear & Loathing

by | Dec 14, 2020 | Fintech, Bitcoin, Blockchain, Crypto, DeFi | 0 comments


While the earlier part of this year seemed to hold great promise for some intelligent movement in the USA on Central Bank Digital Currencies with potential clarity from regulators and agencies on some much needed details, or at least a hint of some direction on Stablecoins and some way forward on CBDCs – the growing rumours regarding Mnuchin’s looming midnight legislation are alarming to everyone in the cryptoverse. The general fear and loathing often surrounding CBDCs [as well as other cryptocurrencies] – whether from the general worry about the ‘banning’ of good technology, or maybe the mishandling of regulations by governing bodies [lobbied, as always, by vested interests] or simply low information worries about technology and privacy – all of which are rational and not unfounded in reality.

It is easy to see how technology can be abused, given the recent era of morally suspect social media giants – so these fears are certainly not unfounded. I wouldn’t want Facebook [which I don’t use], for example, to be fact checking whether I was allowed to spend my LibraCoin – we’ve seen so much overt big tech censorship and rank abuse of the general public by these private companies acting as if they were already government bodies, that it’s abundantly clear that none of those companies – Twitter, facebook, etc, should ever be allowed anywhere near anything like that – and I for one argue strongly for the removal and replacement or total amendment of the tissue-thin and risibly vague Section 230 – written on the back of a napkin in 1996, six whole years before Myspace was launched, and one year before AOL instant messenger was released. Section 230 is not fit for purpose.

But I digress – suffice it to say that there are well founded and highly rational concerns bordering on terror surrounding the potential for abuse with a CBDC.

We have all heard about the types of ‘social credit’ systems used in repressive regimes around the world – like China, for example. The dystopian sci-fi ideas of Black Mirror have, in reality, already been with us for some time. But crypto is a wide area, and when designed and used properly can be of great benefit to us. There are many types of systems, many ways to engineer and build these systems. We are in the ‘Cambrian Explosion’ stage of discovery – a myriad of new systems abound, some empowering, some not so much.

It’s clear that unless the USA speeds up it’s institutional comprehension of all things crypto and deals with their instinctive repulsion towards decentralised, well, anything, and get their collective heads around the very great potentials these technologies offer, then they will shoot themselves in the foot, and lose the good faith that the industry has worked so hard to foster with regulatory bodies.

The USA will also lose an awful lot of money as those assets and associated businesses take flight. Of course, we all know that this is a collision zone of conflicting interests, one of greatest issues of our times, so much so that one bad piece of regulation could be an egregious strategic blunder leading to a cascading of [perhaps] unintended consequences. Luckily for me, at least, the situation in the UK has much more clarity and foresight – see the end of this piece for a great amount of detail on that.

Mises Piece Misses The Mark

I’ve been intending to write on this for some time, but it was a recent article that made me really wonder about the general level of comprehension out there – I saw it linked on a UK website.

Why Central Bank Digital Currencies Are a Bad Idea

This seems to me to be a woeful indictment of current thinking. Often, modern Libertarians have become theological purists, who approve of Bitcoin’s unique situation, sometimes actually taking the time to understand the technology, but who sometimes refuse to engage with most developments that have happened since 2009. I’m guessing they might be okay with Monero. Reactionary attitudes are not helping anyone.

I’ve noticed that the Libertarian stance is often just ‘we need less government‘, but they then offer no practical solutions in law or practice – they just want less of it all. But things progress anyway, and sometimes for the better. How, for example, is that audit of the Federal Reserve coming along? It’s not realistic. But something akin to that might [eventually] be more likely with good CBDCs, not less. Sure, the goalposts might still move – but it would be far easier to see what was going on.

In all my time considering this issue, not once have I ever heard this premise;

The proponents of the central banking tokens argue that consumers need to be protected against targeted attacks on a country’s payment network. “

It may be that the writer has not enough exposure to the crypto space, and these ‘proponents’ may come from the ECB/EU mindset, being as the author is in Switzerland. I would argue that these are the least credible of any of these institutions or blocs worldwide. But straw men arguments suck, so I will leave that there, as an assumption.

Neither Dystopia Nor Utopia

Cognitive dissonance abounds with much fear and loathing around crypto, but there have been some extremely encouraging papers and developments from think tanks.

It seemed earlier this year that The Digital Dollar Project was a great leap forward in mature discussion of the whole complex issue. And as China and the CCP are quite literally years ahead in this space, we need to get our collective s**t together, and soon. Things were looking quite promising until Mnuchin.

WASHINGTON– The Digital Dollar Project today published initial proposals for nine distinct pilot programs to identify practical opportunities to test and evaluate key features of a U.S. Central Bank Digital Currency (CBDC) or “digital dollar.” The pilot programs are designed to explore how a U.S. CBDC could serve important public policy goals while addressing specific challenges faced by different economic stakeholders, including consumers, businesses, financial institutions, and fintechs.

The Digital Dollar Project (Project), a partnership between Accenture (NYSE: ACN) and the Digital Dollar Foundation, was founded in January 2020 to encourage research and public discussion on the potential advantages of a CBDC. The proposed pilots are the result of discussions, research and events that have taken place over the past ten months, as the progression of CBDCs has transitioned from “If” to “How” and “When.”

Unless the plan of the collective West is to vastly accelerate managed decline, either by intent or by simple mismanagement and bad policy, then we need to think about where we are headed. Seems to me there is a fork in the road between 1. Plotting a fair course ahead for all or 2. Burying the vast excesses of QE and financial mismanagement in a grand pile of negative interest rates and restrictive regulations [not to mention loss of liberty].

I agree with the Mises crowd on all the shade they throw in that direction. Anyone that has been considering money, what it is, and where it comes from for any length of time knows all this. Since the gold standard decoupling, everything went south for most people. And we’re all worried about the dark technological panopticon that could easily engulf all freedom-dependent human activity under the guise of protecting us all.

WTF Happened In 1971?

No doubt, many libertarians and maximalists see BTC as a hedge against Central Bank madness, exactly like Gold, and are desperate to not get mired up in any further complications. So they throw shade and paint worst case scenarios and generally refuse to get involved further. This makes no sense to me, and wilfully overlooks the great advances and solutions that are emerging.

Sober and realistic legislators would choose to consider the many options, and how to integrate elegant solutions – and help to create enabling legislation via deep consultation [as is happening in the UK – see end of this piece], rather than be reactionaries who rail against irrational scare stories [Bitcoin is terrorist!]. Commentators can help by not promoting paranoia and FUD – as I have seen countless times from stoic BTC ‘maximalists’ and reductionist purists who just want a juvenile anarcho version of freedom. AML/KYC is not the enemy.

To many of these types, worryingly, everything except Bitcoin is a s**tcoin. This is genuine ‘loserthink‘. It’s a common enough take. Just as unrealistic are the wild unregulated de-fi crazes – although I think they should be allowed to continue to experiment – they’re consenting adults opting into risky business. But my feeling is that they’ll be left behind anyway, as mature 3rd generation operations like Cardano come fully online.

The other main objection in the Mises article is in regards to privacy. Yet nowhere is mentioned the vast progress now available available in terms of privacy coin technology. I don’t use privacy coins myself, it has never felt like an issue to me. I, like many others, have been waiting for progress to be made. For the space to mature. For regulators to catch up. I am already tracked everywhere else in life – there is no hiding assets for someone like me, a little guy with a basket of tokens. And there is always the reality of on ramp and off ramp – you have to cash out somewhere, and pay what need to be reasonable [not onerous] taxes when you do. I’m not trying to live outside the system. I’m also not trying to protect my wealth hedging against national currencies with gold. I don’t have any such wealth.

New technological capabilities have created a dynamic, via tokenization, that allows for a digital version of central bank currency, without sacrificing stability, security or privacy.  This is about more than a federal government payments infrastructure.

What I am doing, however, is to save value I accrue in non-depreciating digital assets and generate a regular return. I’ll only be using FIAT when I need to. And I will never, ever, be using precious metals. If I had bought Bitcoin instead of silver in 2011, as I made the mistake of doing, I would be extremely wealthy already. It’s a redundant position, from the old fashioned goldbugs of the world. Unless you are a sensible central bank or have vast wealth you need to protect with a diverse portfolio. Of course it’s a better bet than FIAT, but it is increasingly the [not so barbarous] relic it was once [wrongly] derided as. Why? Because we have much harder and vastly more practical ‘stores of value’ now. Greyscale Investment Trust and other custody services know this and are busy stockpiling huge stacks of BTC at a vast [one might say ridiculous] premium to their clients. These include many institutions who want exposure but cannot legally hold it on their books, for one reason or another. They know where it’s headed.

Like them, I’m building investments outside of the central banks’ ever decreasing circles of FIAT logic with the ever-diluting funny-money – digital or paper. A currency is worth what it will buy. Prices are discovered. Of course we can all see that there is no point saving in dollars, pounds or, God forbid, euros. Savings accounts that yielded interest were last seen in the 1980s. Which is why those of us with convictions based on knowledge save in BTC or ADA or whatever. Another approach to investment is of course something like real estate, but this can be a risky business. It must be remembered as well that the central banks enabled debt on real estate to be bundled into derivatives portfolios and ETFs, and that’s where a lot of the trouble really got going. That’s how we got the sub-prime crisis, which, in part, led to the very creation of Bitcoin. There are as yet still many bubbles yet to burst.

These days, the crypto community can accrue weekly and compounding interest on our assets [see my previous piece on DeFi]. We see our savings constantly increase for the first time in our lives – small amounts, yes, but it’s always growing. This is new to me – being born, as I was, around the time of the divergence of remunerative fairness so perfectly illustrated in the chart above. Unless the West is taken over by this virulent mutating version of corporate communism by stealth [which is a genuine worry the way things are going, and I’m sure Mises.Org would agree with me on that] – I want a good meritocratic system to live within. And I operate on the knowledge that this is possible and in the the good faith that it’s desired.

But is it desired?

Mnuchin’s Motives?

This brings up to a central question – that of the motive of the Central Banks and Treasuries. Do they seek to bury their collective mistakes [probably!] by introducing negative interest rates that effectively trick the innumerate into paying down the ever ballooning debt which they had no part in creating, and which cannot ever, realistically, be paid? Not without a transition jubilee – which is my vision for a bright future. Odious debt cannot be allowed to fester forever – a reckoning is coming, one way or another. Again, Mises crowd would agree.

Is there another way? Why yes, of course, there are many ways forward. This is exciting thing about the crypto landscape – we have great solutions to real world problems. Are the Central Banks and Governments open to these other possibilities, or do they see them as an existential threat that needs to be shut down? It seems sometimes, that it could go either way, and that we are often left peering through the proverbial glass darkly.

Mnuchin’s suspected intentions have been worrying everyone recently.

In the Crypto technology fin-tech world there are elegant systems coming on line that offer comprehensive and sensible ways forward, innovations in financial technology that can help all sides – if we are allowed to have them discussed.

Slamming the very concept of CBDCs, per se, is therefore unhelpful.

Pointing out the pros and cons of the different directions that we could take most certainly is a better way. This is, essentially, why the Mises article irritated me so much and has subsequently prompted this blog post.

Recent Understandings

I had a bit of a breakthrough in thinking that I had not considered before.

  • “Is the average, casual consumer of money to be trusted with true custody, as in crypto? Is it what they want?”

I would say that the answer is obviously no. Let me put it another way;

“If federal bank funds were to be sent to a custodial wallet held by the consumer [by helicoptering cash relief* direct to a consumer’s digital dollar wallet], and these accounts could not be administered or accessed by the bank in some way, then what would happen if the consumer lost their keys or access? Or if they were tricked into a scam? Or were somehow otherwise compromised [passphrase stolen eg]?”

*[which is in itself not a bad thing to want to set up – whether it’s a good idea as monetary policy is a different topic, and one which is clearly what the Mises article really wants to grind an axe about, but it would be better to write separate articles about that without confusing the already cloudy issue]

I don’t think anyone in the crypto space would agree that the public is ready for that responsibility to be foisted on them. This is new technology, and as custodian of your assets, the buck stops with you – and this is not easy for people to get used to. It’s perfectly okay as an opt-in system, but not as a way of distributing relief or social security payments. Imagine how many dead wallets there could be – hey I’ve lost my password, can you issue me a new one please? The answer would be no, of course we can’t. It would be irresponsible for a bank to not be able to ‘roll back the chain‘, as it were, in some way. Safety of customers is vital. Not overestimating their numeracy or abilities would be wise. But there’s no need to ruin it for the rest of us!

Some people may want to carry on using banks, and some may not. We will all have to interface with central systems in some way or another for the foreseeable future. Laws should facilitate interoperability and the freedom of the crypto and fin-tech world to carry on much as they are, with some sensible regulatory oversight which allows innovation to continue, and new industries to be created [and vast wealth to be generated, of course] whilst mitigating against scams and fraud if possible. Regulating all crypto assets by introducing blanket laws about wallet custody would be throwing the baby out with the bathwater.

At the moment, most people have no desire to ‘be their own bank’ or to administer complex crypto accounts. But in countries that are not developed, such as in Africa, this reluctant or nervous attitude does not exist. Many places have never had systems they could trust. Needs musts. Necessity is the mother of invention.

Cardano – Third Generation Blockchain

I don’t mean to criticise all Libertarians, I agree with most of what they say, and I am a fellow traveller in many ways – perhaps it’s more of a difference of realpolitik and how to get things done. Very often, they are pioneers. And although it might seem that I’m being overly critical, I do very much appreciate The Ron and Rand Pauls of the world.

Cardano’s Charles Hoskinson, who I recently found out also has Libertarian leanings [which should come as no surprise], has been able to bring these philosophies of freedom and implement them in a groundbreaking way. I feel strongly that he’s absolutely correct in saying that so-called developing countries do not have the intellectual stasis and baggage that we in the West have when it comes to using decentralised financial technology.

Venezuelans or Argentinians or many Africans [etc] have no such qualms. They’ve seen their wealth consistently destroyed by government and central bank policy – the frog is being boiled slower over here in the West, and so people don’t notice the death by a thousand cuts. But that chart above doesn’t lie. The subtle fix has been in for a long time. CBDCs might help with that.

So, I think it is clear that there are many separate considerations here.

In any event, these entirely separate markets can happily co-exist, if sensible mechanisms are built. And it is the conversation about how to build CBDCs that needs to be had. My vision is that crypto will offer a bridge to allow us to transition to a system that is no longer abused in the short term by varivarious entrenched interests, and those in office with short term goals.

If the Fed can send a treasury-issued CBDC to a non-custodial wallet, and then if those tokens can be exchanged elsewhere [sent outside the wallet should the holder wish to do this, with requisite warnings in place, of course], then there is no problem. These are two different animals. How the supply of digital CBDCs is created and managed, as well as how they are designed to operate is key.

I think one can see that a free market price discovery would happen around the CBDC – and this might be precisely what is feared most in certain quarters. If you can’t slowly move the goalposts, you can’t massage perception. Or prop things up if you make compounding bad decisions.

Orange Coin Bad!

Bitcoin will not be the basis or backing for any ‘standard’ banking as far as I can see. Perhaps some kind of tokenised gold basket – I seem to remember this is discussed in the Digital Dollar Whitepaper. Neither will ‘stablecoins’ issued on current systems like Ethereum. The code is not mathematically complete enough for banking applications in the ‘serious’ world.

This is one reason why Cardano is written in Haskell, also used in legacy banking systems, and why it will likely provide the first real platform to run these types of products on. There are many other types of industry specific DLT in development too. The mature debate around this issue is yet to be had. I hope 2021 brings forth much more discussion and good governance.

Positive UK Legislation

As I’m in the UK, I am less concerned about the future, due in large part to the extremely positive and well informed approach that both Government and BOE have taken and continue to take. This would perhaps be a surprise to some who see only doom ahead. Watch this space!


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