“This paper is the first step in a public discussion between the Federal Reserve and stakeholders about central bank digital currencies (CBDCs).”
–“Money And Payments: The U.S. Dollar In The Age Of Digital Transformation,” Federal Reserve
Quotations throughout the article will come from the above article unless otherwise linked, which was written by the Board of Governors at the Federal Reserve. It can be concluded that the board’s intentions are to begin a narrative around CBDCs as it relates to the Federal Reserve and USD that falsifies expectations around how this technology would function.
On January 20, 2022, the Fed released its long-awaited outline of CBDCs. Cryptocurrency markets were going red, and bitcoin stood relatively resolute (though the price was dipping, of course). The purpose of this article is to discuss the Fed’s conceptual outline and intentions as it relates to Bitcoin based on this outline, as, ultimately, CBDCs and Bitcoin are diametrically opposed.
The Fed’s Outline
“Federal Reserve policymakers and staff have studied CBDC closely for several years, guided by an understanding that any U.S. CBDC should, among other things:
- provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
- yield such benefits more effectively than alternative methods;
- complement, rather than replace, current forms of money and methods for providing financial services;
- protect consumer privacy;
- protect against criminal activity; and
- have broad support from key stakeholders.”
Keep these points at the forefront of your mind as we explore the undertakings of the Fed: protect privacy and garner support from key stakeholders.
‘Protect Consumer Privacy’
“Irrespective of any ultimate conclusion, Federal Reserve staff will continue to play an active role in developing international standards for CBDCs.”
The idea of “digital privacy” increasingly presents itself as an oxymoron for the standard user of a CBDC. China has already piloted its CBDC, and it began research for it in 2014. Paired alongside its social credit system, the CBDC has become a tool for the surveiler.
Gone are the days of worrying about someone seeing your search history, now governments want to establish currencies of digital surveillance maintained by a network of good behavior in which they set the rules to determine your worthiness.
This isn’t just China, or America, or any one country. Here is a CBDC tracker that shows 87 countries currently developing or researching CBDCs, and the Federal Reserve “will continue to play an active role in developing international standards” for every single one of them. This global oversight of CBDC technology development is horrendous.
Every cent of a CBDC comes complete with a surveillance bundle and goodwill tokens that say the government plans to make sure your money is safe, secure, and most importantly, not yours.
Who Are ‘The Stakeholders’?
“While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends.”
–”Who Owns Reserve Banks,” Federal Reserve Bank Of St. Louis
If the Fed wants buy-in from “stakeholders,” then they want support from the people who hold reserve bank stock, such as member banks. As for the public? No need. It will get public support from the congress that “represents the people.” Your opinion means nothing in this decision-making process.
Financial Market Structure
“CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.”
The liability, or more accurately, ownership of funds; able to be rehypothecated, tracked and controlled, would belong to the Federal Reserve, not banks. What does this mean? Let’s use a Bitcoin lens.
Banks in the fiat world act as exchanges in the bitcoin world, for a simple analogy. The exchange holds all of the actual assets, and you are rewarded an IOU as a participation trophy for providing liquidity to the exchange. You hold a claim to the asset, not the asset itself.
Banks are the same, Anyone who uses a bank or spends money on a daily basis has a settlement period, because all transactions are based on these IOUs, which is why fiat final settlement requires a lengthy waiting period (sometimes weeks).
What do I mean by “the banks own your funds?” Here you will see the Federal Reserve removed the reserve requirement on March 15, 2020. In short, the reserve requirement is the total amount of actual reserves (money) required for banks to keep on hand, based on a percentage of their deposits.
Relative to the amount of claimed dollars they say they have access to, they are required to have none of that on reserve. This incentivized ridiculous leveraging and massive bank expenditures as they needed to hold less capital on-hand. Point being: once the reserve requirement disappeared with 0% rates, banks made bank. This happened because they control the funds and can move them wherever they want and do what they want, so long as their digital IOU that shows in your online banking account keeps saying what you expect it to.
Your money was used to make them money while they made a computer tell you how much money you had, when they had no incentive to actually have that money in reserve.
CBDCs would give this power and ownership to the central bank, or Federal Reserve. What happens to the banking industry then? Even the Fed sees banks wouldn’t be necessary.
“CBDC could also pose certain risks and would raise a variety of important policy questions, including how it might affect financial-sector market structure.”
And isn’t there a word for a centrally-planned economy? I’m sure I’ll remember later, and I’ll be sure to put it in my manifesto.
Security And Risk
“Commercial bank money has very little credit or liquidity risk due to federal deposit insurance, the supervision and regulation of commercial banks, and commercial banks’ access to central bank liquidity. Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.”
So, commercial bank money is low risk because it is insured, and central bank money doesn’t need to be insured because they can just create more of it. The definition of monetary safety hinges on insurance and its security is based on fully-autonomous inflationary practices to solve liquidity issues.
“As a liability of the Federal Reserve, however, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value.”
Translation: “No real value is needed because we will print more of it if we screw up.”
Bitcoin Fixes This
We all know that the real reason the Fed wants to create a CBDC is because, “Another potential benefit of a U.S.-issued CBDC could be to preserve the dominant international role of the U.S. dollar.”
It’s just about staying on top. This paper presents selling points for CBDCs like instant pay, cross borders access, digital security and privacy protection, which were already provided by Bitcoin. The differences are Bitcoin is not controlled by anyone, nation states cannot achieve surveillance through Bitcoin and Bitcoin is thermodynamically-backed monetary energy that requires actual expenditure to create. The fiat CBDC is the direct opposite because there are no expenditures for its creation which allow it to be an infinite unit, nation states can use CBDCs to achieve the highest level of financial surveillance and the fiat CBDC is controlled by the central node (Federal Reserve) and its operators (the Federal Open Markets Committee Board of Governors, U.S Treasury, Congress, International Monetary Fund, World Bank, etc.).
Provide Value, But Not Too Much Value
“... an interest-bearing CBDC could result in a shift away from other low-risk assets, such as shares in money market mutual funds, Treasury bills, and other short-term instruments. A shift away from these other low-risk assets could reduce credit availability or raise credit costs for businesses and governments.”
Translated, this means the “low-risk” investments typically held by those who already have massive amounts of capital would lose their value if the fiat CBDC provided any amount of savings capacity. Low-risk investments wouldn’t serve the money makers well if the CBDC operated as a stablecoin that provided an interest rate for providing liquidity. By design, the CBDC does not need your liquidity, therefore the Fed would have no reason to reward you for providing it. It can create at will when necessary. Since it doesn’t need your liquidity…
“These concerns could potentially be mitigated by CBDC design choices. A non-interest-bearing CBDC, for example, would be less attractive as a substitute for commercial bank money. In addition, a central bank might limit the amount of CBDC an end user could hold.”
Did The Federal Reserve Just Say It Could Limit Your Funds?
Didn’t miss that last sentence, did we? “A central bank might limit the amount of CBDC an end user could hold.”
If the central bank gets to tell you how much money you’re allowed to hold, and it would also be able to set stipulations that required you to spend the money in the timeframes that it would create, it is not your money. You don’t control how much you can have. You don’t control when you spend. You don’t own your money.
Not only do you not own the money, but it won’t be as safe as the current banking model (which is already pretty risky).
“Designing appropriate defenses for CBDC could be particularly difficult because a CBDC network could potentially have more entry points than existing payment services.”
Devil’s advocate for a moment: One could argue the Fed states limiting CBDC funds is a way to maintain the old form of digital dollars. I find this point of view to lack base, as a purely digital form of money would completely overtake its analog predecessor, which is the entire purpose of its creation to begin with.
Let’s recap: In a CBDC world, you don’t own your money, the money the Fed allow you to use becomes a surveillance tool, you can’t save as much as you want because the Fed can step in and set limits on your money, financial market structure upends as we see the wasted resources, stakeholders and elected officials will make this decision for you, and the effort to make CDBCs is a global initiative being overseen by big brother that is less secure because there’s one, gigantic point of failure.
Bitcoin cannot be controlled, manipulated, surveilled or otherwise contorted by malicious ne'er-do-wells, and it is antipodal to central bank digital currencies.
This is a guest post by Shawn Amick. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.