The invention of blockchain technology solved a decades-long computer science problem and unleashed a monetary revolution in the form of bitcoin. This decentralized, digital currency has taken the world by storm. It has been adopted by hundreds of millions of people globally and is worth approximately $1 trillion in market cap based on daily fluctuations in US dollar price.
Not bad for a technology that is completely open-source. Bitcoin has no CEO, no marketing department, and raised no venture capital dollars as it was being built or scaled. Decentralization means that no one individual or group controls the product. Any major changes need the agreement of a large portion of the community, including software developers to miners to node operators, in order to be implemented for users.
As you can imagine, the legacy system has watched the rise of bitcoin with a combination of admiration and fear. Many of the traditional institutions, especially central banks, are impressed with the creation of truly digital currency, along with how quickly people have adopted this technology in every economy. These same people are watching in fear as they realize that their organizations have zero control of the money supply in this new digital financial system.
The control and production of money has historically been reserved for central banks, but this monopoly on money is directly tied to the central bank’s close relationship with government. The government has a monopoly on violence, so they are able to ensure that central banks will continue their singular control and production of money. Any attempt to circumvent the central banking structure has been met with a swift and ruthless response.
This is why the decentralization of bitcoin is so important. Without a single point of failure, including a CEO or corporation or centralized servers, there is a much smaller attack surface for governments and their violent monopoly. Since central banks can not rely on governments to shut down this new entrant to the system, central bankers have been forced to consider how they can compete in the free market.
Central bankers aren’t known for being innovative. In fact, I would argue that central bankers are successful because they move at a glacial pace and make systemic bets on the world changing very slowly. But bitcoin has forced these institutions to consider digitizing their fiat currencies in a way that emulates bitcoin’s technology, but contains some key differences.
Digitizing the dollar/euro/peso/etc is merely a technology upgrade. The monetary policy of these fiat currencies are unchanged. Similar to how physical currencies were transitioned to electronic CUSIPs in centralized databases, central banks are considering a technology upgrade to token-based fiat currencies that are compatible with digital wallets.
So why are they considering this transition?
The optimistic person would argue that the incorporation of new technology is an attempt at modernization for an antiquated system. Individual users of central bank digital currencies (CBDCs) would be able to send any amount of money 24/7/365. The thought of hours of operations would be a thing of the past. The payment rails that CBDCs would be built on would be more efficient - faster settlement times, cheaper transaction fees, etc. Lastly, there would be an increased transparency in the system which theoretically could decrease crime and increase the safety of the market.
That is the positive perspective. But we have to be very careful here. Central bank digital currencies will likely be one of the greatest violations of human rights in history.
Central bank digital currencies remove the privacy and decentralized nature of physical cash. It creates an environment where central banks have complete control over every aspect of a citizen’s financial life. Here are a couple of examples of the nasty shit that we can expect to see in the coming decades:
Personalized inflation — Central banks currently have the ability to manipulate interest rates and expand/contract the supply of money. Any changes that they make are applied to all citizens equally. Individual market participants may make decisions to benefit or suffer from these decisions, but the dollars that I hold are subject to the same monetary policy as the dollars that you hold. This is going to change with CBDCs. The central bank will be able to personalize the monetary policy to the individual. Just as your newsfeed, search results, and music playlists are personalized based on vast amounts of data, the same is coming to money. Maybe I get a higher inflation rate in an attempt to get me to spend money, while you receive a lower inflation rate. The differentiation of monetary policy can be cut a million ways, including where you live, who you are, your wealth status, your occupation, your purchase history, and much more.
Financial censorship — Once a central bank digital currency is in the hands of a population, the central bank has solidified complete control. They will no longer have to go to the court system or invoke emergency powers to tell you who you can transact with. This can all be implemented through remote, digital technologies. These central bankers will be able to see what is in your bank account, who you transact with, what you purchase, and anything else they are curious about in your financial life. That full transparency with the state removes all elements of privacy, while also giving the institutions the ability to censor any and all transactions, regardless of whether they have a legitimate reason or not.
Social credit system — When central banks and governments gain complete control over the financial system, they have the ability to reward or punish individual citizens for the actions they take. Have you been eating too much candy? You can’t buy candy anymore. Have you been gambling? Now you can’t use public transportation that heads in the direction of the casino. This all sounds like crazy talk until you realize that the Bank of England is openly talking about this in public now. China already has one in place. Canada is implementing one in real time right now. Are you fat? Only healthy food can be purchased. Do you associate with people the central bank doesn’t like? No entertainment for you. This is a slippery slope that is approaching quickly.
Expiration of money — If you’re a central banker, you are constantly trying to incentivize people to spend money in the economy so that you can increase the velocity of money. Without the velocity of money, the system starts to break down. So what better way to increase velocity of money than to have people’s money expire if they don’t spend it in certain period of time. The US already has a version of this through SNAP benefits and EBT cards, where the money expires one year after it is issued unless it has been used. The expectation is that the government will expand this idea of expiration of money to include shorter timelines and a larger number of programs in the future.
These are just four examples of various activities that I anticipate central banks will engage in once they are successful in creating and distributing central bank digital currencies. As the saying goes, absolute power corrupts absolutely. The dream of every dictator or authoritarian leader globally is to have full control over every aspect of their citizens’ lives. If the government can not only censor your financial transactions based on a social credit system, but they can also personalize the monetary policy and give you money with an expiration date, then we are headed to a dystopian future that no one will want to live in.
The basic human right is that we are all born free people. The creation of central bank digital currencies will completely eliminate that premise. Every human born will be starting off in an authoritarian state that requires them to be a digital slave to a central bank that has total control over their life. If you don’t have the freedom to transact, you don’t have freedom.
Central bank digital currencies are the next frontier for the battle of freedom. Every human should have the right to financial privacy and independence. This is an important conversation that must start now. Without global awareness, central banks will pull off the greatest violation of human rights we have ever seen and citizens will cheer them on while they do it.
Hope you have a great day. Talk to everyone tomorrow.
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