As central banks including the Fed, the ECB and (of course) the PBOC (along with some 85 others) scramble to roll out their own digital currencies, some naive crypto bros might assume that the financial establishment and the government have completely embraced cryptocurrencies. But as pointed out before, this isn’t exactly true. The reality is that while they have spoken of ‘the financial revolution,’ they have only embraced some aspects of cryptocurrency.
For example, they have embraced the fact that all transactions on a digital blockchain can be carefully tracked and monitored, assuming they are the ones in control of said blockchain. This deep level of vision and insight would allow centralized financial authorities (like the Fed) to exert unprecedented levels of control over Americans’ spending habits.
But what impact will the advent of digital currencies have on the dollar’s hegemonic status in the global monetary order? Fed expert Jim Bianco offered some very interesting thoughts on this topic during his latest interview with MacroVoices’ Erik Townsend, where he offered an interesting prediction.
First, Bianco pointed out that many of the central banks that are most advanced in their CBDC projects are members of the emerging and frontier market classifications. As noted before, three CBDCs have already gone fully live in the past two years: the so-called DCash in the Eastern Caribbean, the Sand Dollar in the Bahamas and the eNaira in Nigeria (and, of course, the PBOC is making swift progress with its “e-RMB”).
One reason why central banks in emerging markets are so eager to accelerate the transition to digital currencies is because many are growing frustrated with the realities of American hegemony. Even the IMF (or at least some of its senior officials) has acknowledged that western sanctions are undermining international faith in the dollar-based monetary system.
Here’s Bianco, responding to a question from Townsend about a theoretical global monetary system managed by a consortium of central banks and based on a kind if supranational digital currency.
So you’re seeing the adoption rate, really what’s pushing this is Asia, Africa, the Middle East, knowing that they’ve been at the short end of the stick having not to have access to world capital markets, or to banking services at a reasonable rate. And wanting to have that. That’s why you’re seeing the adoption of places like in El Salvador, and potentially in Argentina, as well, too. Because they have been shut out of the capital markets, they need the permission of entities like the World Bank, or the IMF to do certain things. They are punished if they do things that displeasures, the first world or the United States, or the IMF, or the World Bank. And so that’s why they want some kind of system like that.
This shouldn’t be a surprise to anybody (at least, not those with at least a base level of understanding of economics). As both Bianco and Townsend point out, the concept of “exorbitant privilege” is nothing new.
What you wind up doing is making it fair for the rest of the world because one of the problems the current global financial system has, is it’s more of a tiered system that if you’re further up the list in the United States is at the top of the list, you get more privileges, better, cheaper financing, better access to markets. As you move further down the list, you get less access, things become more expensive.
With this in mind, remember: despite the Fed’s best efforts to develop a CBDC of its own, the US would likely do everything in its power to make sure the type of system described by Townsend above – that is, one where control is distributed among various central banks, and not concentrated in the hands of the Fed (and its supplicants) – never comes to be, since that would eliminate the ‘exorbitant privilege’ of the American economy (and create serious problems as the Treasury would likely be forced to pay higher interest rates on its massive debt).
But there’s another obstacle to CBDCs: the fact that people remember how the Canadian government treated people who donated to the Canadian Truckers (they were essentially frozen out of the financial system for something that was completely legal and normal). Because of this, they remember how easily the government can exercise control over their lives via their money. So, presumably, millions of people wouldn’t be comfortable with central banks exercising even more direct control of the financial system (having wiped out the intermediaries of the banking system due to CBDCs).
A central bank, digital currency makes that a lot more efficient. And so you’ve heard calls in the wake of that incident, that this is going to hurt the adoption of a central bank digital currency. Yes, they may create one. And yes, they might even take on potentially disrupting their banking system. But will people willingly say I want to keep my money with the Federal Reserve. And then one day, they might donate to a group, and remember, this happened with the truckers back in February. That people donated to the truckers, and it was perfectly legal, and it was fine.
And then the Canadian government invented a word called retroactive law, that when you donate it in the beginning of February, to these truckers that was perfectly legal and fine. But by the end of February, when we decided that they we didn’t like that group, we’re gonna go retroactively back and punish you by freezing your account for doing that activity. I don’t want to make it easy for them. I don’t want to keep my money with a central bank directly in a digital currency. So they’ve got issues that they have to resolve the issues are not technological issues. The issues are more about control, privacy rights in policy that they have to work through. And so therefore, I think we’re still a ways away from seeing a central bank digital currency, because those issues haven’t been resolved
For this reason, Townsend says, he believes the launch of a Fed CBDC would be “a big flop”.
And my prediction is CBDCs, issued by central banks will be designed, first of all, to make it much easier for governments to do all sorts of crazy things like freeze people’s bank accounts, and, you know, automatically if they say something against the government narrative, as happened in Canada, as you described. And I don’t think that they’re going to be open to a supranational system. So for that reason, I think what’s much more likely is the CBDCs get developed, and they get launched with a big flop, and nobody really cares.
And both Townsend and Bianco agree: the biggest obstacles to CBDC is skepticism and reluctance among the end users, since CBDCs will never be designed with the needs and desires of the users in mind (on the contrary, they’re being designed in accordance to the rules of the end government).
Bianco offered the launch of China’s e-RMB as an example: the PBOC literally offered people free money to use it, but the currency came with “all these rules” about how people were required to spend it. As a result, the program wasn’t very successful.
I absolutely would agree with that. And it’s not only the permissioning too, it’s the rules too. Just give you one example, in China, they’d have issued a central bank digital currency, a digital yuan. And one of the things that they did with it was, they put on its a bunch of rules that if you actually bought into this currency, you were in to use the crypto version, you are airdropped money, they put extra money in your account. But they put rules on what you could do with the money, you had to spend it in a certain period of time, I think they gave you 30 days. And you had to spend it on certain things, and you couldn’t spend it on other things. And even in China, even though they were giving you free money, with all those rules, didn’t go over very well. People don’t like you know, to have all of those restrictions.
This is why there’s so much excitement in the decentralized space: because users are inherently excited by the idea of a ‘parameter-less’ currency, that’s beyond the reach of governments and sanctions.
The creators want to do it, because they say, good, we could do all these rules and permissions. And we could we can affect behavior by changing the parameters. And the people that would use it say, well, I’d only use it if you left me alone, completely parameterless with it, let me do with it what I want when I want it. And that’s why you’re seeing people more and more gravitate towards the crypto space that is permissionless, that is decentralized, so no one controls it as well, too. And you’re seeing the excitement in the decentralized finance space really starts around what is referred to as stable coins. And a stable coin is just a digital token that is supposed to have its value pegged to something else.