The Empire Strikes Back — Bitcoin versus CBDCs

Last week I waded into bitcoin territory. While I certainly don’t understand the price, I made the case that the underlying technology is revolutionary. Because the ‘blockchain’ is a distributed (decentralised) ledger and peer-to-peer payment system, it has the capacity to completely disrupt the traditional financial system (‘tradfi’ to the cool kids).

How?

By effectively removing the ‘centralised’ middleman from all transactions. No brokers, no banks, no custodians, no market makers, no clearing house function…

All ticket clippers will become redundant under a blockchain-enabled financial system. But it’s not going to happen overnight. This is a 10-year-plus trend that will take out some traditional players faster than others.

Take the banks, for example. There are plenty of functions they fulfil that will become redundant in the years ahead. But their most important role is credit creation. Banks create money when a person or a business obtains a loan. That money then flows into the economy.

The Blockchain System

Under a blockchain system, who creates the money?

I know bitcoin is meant to be decentralised money, but right now it’s not fulfilling that function. It’s a store of wealth, too valuable to circulate as money. And anyway, as a form of money with a finite supply, bitcoin would be deflationary.

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We’ve already tried to operate a monetary system on limited supply money. It was called the gold standard, and it didn’t suit in the emerging age of democracy where the rise of special interests and power-hungry politicians wanted a far more elastic money supply.

Currently, the new, decentralised financial system is getting around the bitcoin not being money problem by coming up with stablecoins. Buying and selling through the peer-to-peer system takes place with these stablecoins.

But these coins are linked in some cases to the US dollar. They derive their value from fiat currency, which is the system it is trying to get away from. It’s early days of course. The system is still in its experimentation phase.

But I guess the next phase would be where banks (or some other entity) create decentralised money, backed by the asset they are lending against.

With no need for banks to act as, well, banks, safeguarding depositors’ money, I have no idea what these new banks would look like in reality. But I’m sure it’s in the planning phase.

And you know the authorities are taking this very seriously as they are designing their own digital currency systems as well.

China is at the forefront. Which makes sense. If there is any country threatened by a decentralised monetary system, it is China, the most politically-centralised country in the world, apart from maybe North Korea.

The Wall Street Journal reports that China has created a digital currency, the first for a major power. Is this an Empire Strikes Back moment?

China’s version of a digital currency is controlled by its central bank, which will issue the new electronic money. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate one of bitcoin’s major draws: anonymity for the user.

Beijing is also positioning the digital yuan for international use and designing it to be untethered to the global financial system, where the U.S. dollar has been king since World War II. China is embracing digitization in many forms, including money, in a bid to gain more centralized control while getting a head start on technologies of the future that it regards as up for grabs.

China’s foray into digital currency creation is about maintaining central government control. It’s that simple. Which is the complete opposite of what decentralised finance is all about…handing control back to the people and out of the hands of the sociopaths.

How they expect the digital yuan will be in demand for international use is delusional. The only people who will use this currency are those citizens who are forced to. From the WSJ again:

Digitized money looks like a potential macroeconomic dream tool for the issuing government, usable to track people’s spending in real time, speed relief to disaster victims or flag criminal activity. With it, Beijing stands to gain vast new powers to tighten President Xi Jinping’s authoritarian rule.

Elements of this kind of control already exist in China, as digital payments have become the norm. Mr. Mu has said the central bank will limit how it tracks individuals, in what he calls “controllable anonymity.”

The money itself is programmable. Beijing has tested expiration dates to encourage users to spend it quickly, for times when the economy needs a jump start.

It’s also trackable, adding another tool to China’s heavy state surveillance. The government deploys hundreds of millions of facial-recognition cameras to monitor its population, sometimes using them to levy fines for activities such as jaywalking. A digital currency would make it possible to both mete out and collect fines as soon as an infraction was detected.

It was always obvious that governments would not stand back and allow a new financial system to evolve without getting involved. Central banks all over the world are now developing their own digital currencies.

What does this mean for the future of finance? Will these currencies knock bitcoin off its perch? Will it allow governments to wrest back control of the system?

Stay tuned for answers on all this and more. We realise the financial system is at a revolutionary moment. And we’re working on a major new project to keep you up to date on all these developments.

We’ll have more info for you shortly.

Cheers,

Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

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