CBDC Being Accelerated By IMF and BIS

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CBDC or Central Bank Digital Currencies have seen a lot of activity in the month of October, with crucial policy statements coming from the International Monetary Fund (IMF) as well as the Bank For International Settlements (BIS). In this article, which is arguably the most important article I have published this year, we will look at the impact of the CBDC rollout in the context of everyday citizens across the G20 nations.

If you remember from my previous article about CBDC, central banks around the world are currently engaged in fairly advanced initiatives and policy directives aimed at bringing out a digital currency that will be used for various purposes.

With increasing tensions between some of the largest economic producers such as China and the US, hindrance to international trade and cross border settlements is being heralded as the primary motivation for looking into CBDC.

It is important to note that the CBDC conversation within the central banking community isn’t something that started just this year. It has been in the making for years and with trade tensions at an all time high, now is the ideal time for central banks to roll this out.

IMF Managing DirectorCBDC – First Order of Business

In her most recent video address, Kristalina Georgieva, the IMF Managing Director, has made it abundantly clear that international trade is the only way for countries to come out of the post-pandemic recession and get the global economy back into the black. No rocket science there Krys.

She also sighted the challenges faced by central banks and the private sector in managing cross border transactions with speed and scale in order to overcome some of the hurdles faced by everyone.

This is not a new problem. With the US dollar still being treated as the global reserve currency, most countries that carry a trade surplus with the US have been seen as a threat to the US local economy and rightly so.

Be it Mexico or China, as the US has seen (under the leadership of Mr. Trump), the dangers of these countries packing in massive quantities of US treasury bonds, is an obvious credit risk that the US shouldn’t have to shoulder.

So what will be the difference if and when CBDC is rolled out to combat this issue? Well, before you can understand the impact, you’ve got to look at how the cross border market works. But even before that, we have to look at what drives liquidity in the interbank market, or the wholesale market, as it is commonly referred to in central banking circles.

Central Bank QE Programs

Central Bank QE Programs

We all know the lengthy quantitative easing programs central banks are currently engaged in. For those of you that still don’t know, quantitative easing is a fashionable term for “creating liquidity”, which is a technical term for printing more FIAT money into the system.

When I say printing, I’m not referring to the printing of physical bank notes – they don’t do that anymore. Nowadays, QE that creates liquidity, does so by making simple ledger entries to create additional cash that’s then made available to the banks for use in the retail market.

So who prints it? Central banks being a non revenue generating centre of the economy, buys treasury bonds (stage one) from the government. It then converts it into cash on a 1:1 basis. How? By using “Thin Air”.

That money then gets lent out to the retail banks at wholesale rates (currently below 0.25%), which is then supposed to reach the hands of mom and pop on main street.

Being able to create unlimited amount of cash at the click of a button, is obviously a boon for how Keynesian economic theory has been applied since Bretton Woods Phase 1. The less physical bank notes in the market, the easier it is to keep printing money with the click of a button.

It is for this reason, welfare payments are now 100% electronic across many G20 nations. It is for this reason, there’s such a strong narrative against cash and even during the pandemic season, they emphasised the need for contactless payments, all in the name of hygiene and “keeping you safe”.

If that was really the reason, they should have made contactless transaction costs lower to at least match the current transaction costs at the point of sale. But that’s not what happened. In fact, contactless fees rose during the pandemic and anyone that wishes to argue this point with me, should remember how heavily I have been involved in the banking and payments space for a good part of the current century.

g20 Finance Ministers Meeting 2020

Wholesale Payments in CBDC

Like I mentioned above, QE is there to pump liquidity into the retail banking system by creating free money to buy government bonds. This wholesale level of the bank is where CBDC lending will create a massive revolution for central banks.

The emergence of a G20, standardised stable coin as a wholesale token for interbank settlements, cross-border payments and wholesale market liquidity is where the first phase of CBDC is likely to become prevalent.

Stable coin, if you don’t know, is a digital/cryptocurrency token that is pegged in value to a FIAT currency.

At the October meeting of the G20 Finance Ministers and Central Bank Governors, a consensus was reached for the development and deployment of a G20 stable coin. However, it is not something you will see affecting banking at a retail level… at least not yet. But does a G20 stable coin mean a unified currency as a peg for said stable coin? Good question Watson…

Now with CBDC, this is about to get even better for the banks. However, its not all bad, if you know how to play your cards. More on this a bit later. Let’s now look at how the CBDC infrastructure is likely to be rolled out.

Lessons from the EU

The EU has been the pioneer (in my opinion) in the area of payment processing and unification of cross border regulation to facilitate more fluid transactions. The European Economic Council, The Schengen Area, The SEPA Treaty and the obvious unification of the Euro in the Eurozone are all examples of how EU has made cross border trade between its member states an absolute breeze.

Of course, they could do that because it was a unified currency and even in cases where it wasn’t a unified currency (e.g Schengen zone countries and non-Euro, European trade partners), given the way banks had developed the ability to easily reconcile cross border transactions with the Euro being the base currency as opposed to the US dollar, transactional banking became a lot easier.

Its no surprises that the policy makers leading the charge on CBDC through the likes of BIS and IMF are led by European stalwarts of economic theory.

Klaus Schwab

Klaus Schwab being one of them, Christine La’garde and Krystalina Georgiva being the others, to name a few. And don’t forget Mr. Draghi and what he showed the world in terms of his beautifully phrased, “forward guidance” programs. Even Mark Carney couldn’t sell it better than Mario did back during QE phases 1, 2 and 3. You might also want to read Schwab’s 4th Industrial Revolution to see exactly where their train of thought is currently headed.

Continued Stimulus

Its an absolute no-brainer for anyone that understands economics to see that stimulus needs to continue for at least another 18 months in order for things to get back to some form of normalcy.

The only folly in all this is whether central banks will have the foresight to recognise that its about financial stimulus, not fiscal stimulus or monetary policy alone. You can’t expect tax cuts and “post-transactional” benefits to be the same as “money in the bank”, which is what is needed for so many small businesses that have been decimated due to the series of lockdowns and other shenanigans.

Increasing depreciation schedules, relief on tax credits, relief on GST/VAT/ or Fringe Benefit Taxes are great – but they are all “post transactional” events – not interested. Sorry. Jane and Joe need cash now. So retail banks have to ease up lending and yes, while there’s a near certainty that such a move will create a sub-prime septic tank again – this is the bed that poorly managed capitalist theory has made (over the decades) so we all have to now lay in it. No other way.

Be it UK, Australia, US, Canada or Singapore – the impact of covid on small businesses has been unquestionably gruesome. It has been BRUTAL.

So, central banks continue their Long Term Asset Purchase (LTAP) programs, print more money, but if in between they can convert it into a CBDC token that can be used for the secondary conversion (from treasury notes to lendable money for retail banks), and subsequently for interbank/wholesale settlements (think Nostro/Vostro), then a huge bottleneck in international trade and finance can be lifted.

This is great and I strongly support the idea and if I was a central banker, I would have been the first to advocate for this. It makes sense. Until, it becomes a weapon of mass economic destruction.

The Dark Side of CBDC

The Dark Side of CBDC

The first question you ought to be asking is this: What will be the peg for this G20 stable coin? USD, EUR, RMB (The Chinese Renminbi, yes its possible because they are leading the charge on CBDC for the last 3 years and have a pilot in place for nearly 18 months now), RUB (Russian Ruble, another strong candidate) or is there a chance that a completely new, unified FIAT (purely for wholesale banking) is going to be created? This part is unclear and open to mass speculation.

I have doubts if the US dollar can hold onto its status as the world’s reserve currency for too long. The EUR is not as stable as it looks. NATO officers are likely to commit the European equivalent of Seppuku (if there is one), before they will let anything Russian become a global standard, which leaves the Renminbi – YIKES! That’s a bad bad bad option, unless there can be a Kempeitai, with Kido Taisa at the helm to oversee their activities (pipe dream).

However, China’s geopolitical weight in this CBDC conversation is far more significant that just its trade relationship with the G20.

You see, China has held a monopoly on crypto mining hardware since 2010. It has super low power costs and some of the most profitable crypto mining pools operate out of china. In short, they have a huge amount of control on the mining process, which is as much about maintaining network efficiency in the blockchain, as it is about reaping the rewards of any Proof of Work (POW) algorithm that pays well for solving the math.

So if the digital renminbi is to be a candidate for this stable coin peg, then a lot needs to be considered in terms of how much influence China will have on the global wholesale market (banking) in the context of its “credit scoring” system.

Which blockchain?

The second consideration is which blockchain technology is likely to be the candidate for this? Will it be the ERC20 technology based on the Ethereum blockchain? Will it be Ripple’s blockchain that was specifically designed (surprise surprise) for managing such wholesale banking arrangements on the back of smart contracts? Will it be something like ChainLink, BAT or DAI? Don’t know. Hard to speculate, but Ripple (XRP) is an interesting candidate.

We have discussed this at length in our Cryptocurrency Specialist course, which is in its final stages of production and is due for launch before the US Elections. Be sure to opt in to receive early-bird invitation for the course webinar when we are ready to go live.

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Why should I care?

When CBDC hits the wholesale market, the only impact Jane and Joe on main street are likely to experience, is a bit more liquidity in terms of loans and finance. Nothing life-changing there.

Banks, on the other hand, are likely to make an absolute killing by creating crypto assets in their balance sheets, which are going to be balanced by interest bearing FIAT loans to Jane and Joe. Oh, by the way, if you didn’t know, bank loans are an asset for the bank, not a liability. Scratch your head over that, the next time you see your accountant.

The “why should I care” part is relevant only in the next 2-3 months, 6 months max. Once the decision has been made as to which blockchain is going to become the backbone of CBDC, your opportunity to buy and make massive gains from that token will be on a receding scale as time moves on.

Ripple is currently at around 25 cents (USD). If it becomes the standard, it is likely to hit $11. Is that true? I don’t know. Its being talked about online so take it as you will. This is not any financial advice or support of any particular asset valuation. The truth of the matter lies in the fact that the internet of value, backed by crypto assets is the new norm that is coming.

It is the great reset you know that’s going to have to happen. Such a reset is likely to emerge after some form of re-denomination of FIAT against wholesale CBDC. It might be 1:1. It might not be. At any rate, when CBDC reaches the retail market, which it inevitably will, you’ll see the same transactional methods shown in the Netflix series Altered Carbon. Everything is digital. Full transparency of all payments, in and out. Absolute control over financial spending. Orwellian? Sure. True? Not yet, but will be – happy to make a wager with you.

This is especially true when you consider the BIS research paper I cited in my last article and how that paper posits the deployment of CBDC to the “citizens” from the central bank, as opposed to a retail bank. Meaning, in Australia, for instance, you will hold an account with the RBA where your “allocated” CBDC will be kept.

As you spend FIAT (until such time that CBDC becomes 100% mainstream), CBDC gets deducted from your RBA account. The RBA no longer needs banks to monitor retail transactions. The RBA will have full visibility into every cent in and out of the network and because its based on blockchain, there’s no way to “fudge” the system, unless you’re the one holding the keys to the Kingdom… Muwuahhaaaa…

Now what?

Learn how to understand the crypto market and explore whether it is the right alternative investment strategy for you. The time has come for SMART investors to savvy up to this upcoming move. Don’t take my word for it. Do some research yourself. Take some time to understand what’s really going on and how the landscape is shaping up.

You’ll need to be prepared with a strategy when the chips begin to fall and unfortunately, the amount of time you’ll have to react might be days as opposed to weeks or months.

Re-denomination isn’t a small matter. If it is to happen, it is most certainly going to wipe out the lower third of the economic pyramid, or at least the lower quarter. If that’s where you are right now, you’ve got to find ways of getting out of there. Get away from the ropes, lest you get knocked out by a nasty uppercut.

However, if you own some tokens today, and if those tokens end up being the backbone of the CBDC infrastructure, could you have an unfair starting point when CBDC does become mainstream? Food for thought.

As for me, I’m considering using my free energy project to rebuild a crypto mining infrastructure with significantly low power costs, despite the fact that I live in one of the most geothermally rich countries on the planet, yet one with extremely high cost of electricity.

Time to move folks… don’t be naive. Don’t think this is just some conspiratorial blah blah… don’t say to yourself “well this all goes over my head…” – well make the effort to learn. Don’t allow your lack of knowledge in a particular area be the reason why you miss out and fall through the bottom of the pyramid in the next 5-10 years.

You’ve been exposed to this truth. Now you have an obligation to yourself to do something about it. Crypto is coming to main street. Whether you like it or not. You have no idea what bankers will do once they have this weapon of mass economic destruction at their disposal.

You will be hearing a lot more about “forward guidance”, the “new norm” and another big phrase “for the greater good”… over the coming weeks and months as the narrative is prepared for mass adoption and acceptance.

CBDC is the corolla, the working man’s favourite car, until someone figures out that you can load it up with a boot full of explosives and drive it into the wall at the embassy.

Sic Mundus Creatus Est.

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