CBDC Central Bank Digital Currency – What Does It Mean?

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CBDC or Central Bank Digital Currency is a term that’s recently become quite popular among mainstream, financial media in the context of its impact on the society of the future. In this article, we will discuss what CBDC means, how it impacts you as an investor as well as a general member of the populous.

Before we can talk about CBDC, it is important for many of you to understand the true nature of the currency that’s in use today – also called FIAT currency.

FIAT Currencies Explained

FIAT currency is basically the local money in your country. For Australia, that’s AUD. For the US, that’s USD, for New Zealand, that’s the NZD and so on. Fiat money isn’t backed by anything other than a promise from the government that issued it, to uphold its value.

However, prior to 1971, all money was backed by actual gold, but President Nixon, removes that gold standard back during his Presidency. So now, all you have is a promise from government to pay you the amount that’s written on the currency note.

Fiat currencies, by their very nature are troubled by three key issues.

Inflation, Devaluation and counterfeiting.

Because the currency itself isn’t backed by anything of value, as governments print more and more of the currency to manage debt to fund a social welfare system, the currency experiences inflation over time.

Sustained inflation over longer periods, leads to devaluation of the currency. For instance, what you paid for a loaf of bread 10 years ago, is likely to be quite different to what you would pay for it today.

Isn’t It Ironic?

However, for the most part of the last 4 decades, FIAT money has behaved much the same way a digital currency would. I say this, on the basis that ever since quantitative easing programs were issued (post GFC), central banks have relied on creating more FIAT money in the system by simply making ledger entries into their books. In other words, the creation of more money to deploy in QE programs has only been successful because central banks have not gone to the mint and “printed” cash notes. They have simply gone to their computers and “created” more money.

Although this practice has been prevalent for decades, it has only become part of the psyche ever since the world began to understand the relationship between treasury notes and money in people’s bank accounts.

Think about it this way. When a central bank announces $100b in “asset purchases” as part of the stimulus package to boost the economy, where do you think they get this money from and what do you think are the assets that are being bought? The central bank, after all, is not a revenue generating institution (in the true sense of the word), definitely not to the level of being able to come up with $100b to buy back assets. And as for the “assets”, these are mostly treasury bonds.

Consider the irony in all this. The central bank, which is a state-owned entity (except the US Fed, which is a private institution), buys treasury bonds (which are state-issued financial instruments). Its like You buying your own produce from yourself using money that you created by making a journal entry into your accounting program. This is no longer a conspiracy theory. It is a known fact among bankers and people with knowledge of how financial markets operate. So central banks have been involved in producing digital currency for a very long time. So why, all of a sudden, all this fad about CBDC?

With the true nature of FIAT currency now understood, lets look at what caused this CBDC drama to emerge now.

The Case for CBDC

Post GFC and in the emergence of Bitcoin as the first mainstream cryptocurrency, central banks began to realise that there was a potential for bitcoin to become a runaway “store of value” that needed to be reigned in.

Bitcoin by its very nature, provides very strong alternatives to traditional, FIAT money. The fact that it works in a decentralised manner, has a finite volume (which ensures a strong store of value principle is maintained) and offers speed and efficiency in transactions is a huge threat to the “system”.

So countries began regulating its use. First, by trying to remove the “anonymity” buffer by forcing exchanges to seek full identity verification from its customers and then secondly by classifying it as an asset and forcing declaration of any such holdings for taxation purposes.

China, India, and Russia, among several other countries, are known to be some of the strongest opposers of cryptocurrencies and have gone as far as making it illegal (in some way or form) to hold or transact in such cryptocurrencies.

But why? Its because they recognise the strength of the (decentralised and anonymity) principle behind cryptocurrencies and know that if left unchecked, “the people” will not want to use mainstream FIAT currencies at some point in the future. Not to mention, the corruption that exists in these countries, makes bitcoin the obvious choice for transactions in order to maintain secrecy of the money trail.

So what do they do? They decided to come up with their own version of cryptocurrency but regulated by a central authority. While this goes completely against the foundational principle of bitcoin, people are being fooled into thinking that CBDC is going to be something like bitcoin. It’s not.

Central Bank Digital Currency or CBDC is the digital form a FIAT currency and is issued and regulated by the competent monetary authority (central bank) of the country.

According to Investopedia: “Also called digital fiat currencies or digital base money, CBDC will act like a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or forex.” – I’m not so sure about the “monetary reserves” bit.

If the underlying FIAT money being represented by CBDC isn’t pegged against a reserve, then how can the derivative (CBDC) of a debt instrument (FIAT Money) be reserved by something?

At any rate, the plan is to have each CBDC unit to act like a secure digital instrument equivalent to a paper note, and can be used as a mode of payment, a store of value and a unit of account. So something like e-NZD or e-AUD or e-USD.

Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes and bonds.

The Bank of England (BOE) was the first to initiate the CBDC proposal. I’ve recently come across a paper produced by the Bank of International Settlements (BIS), which most of you would have never heard of.

The BIS is a very important cog in the machinery that runs the global money supply. So when the BIS produces something, all banks listen to it with very close attention.

Take a look at this interactive map from the the Harvard Kennedy School. It shows you the countries that are currently engaged in research and development into CBDC for their region. Note that Canada is in development phase with Australia, UK and NZ in research phase.

It is also important to note that a joint treaty called CANZUK is being heavily lobbied for, to bring Canada, UK, AU and NZ into a single unified treaty, much like ASEAN or EU.

Perhaps Canada will be the front-runner in using CBDC to fulfil its socialist mandate and pass the baton down to AU, NZ and UK, the other three socialist siblings in the family.

Potential impact of CBDC on society

In Western Australia, the government already uses the CBDC concept to make welfare payments. Payments are made into a card which can only be used for making payments for services, not for withdrawing cash from the ATM. You can read more about the DSS cashless welfare card program here.

DSS Cashless Debit Card Australia

The second stimulus payment in the US (during the Covid-19 crisis) is also delivered through a plastic card with limited ATM capabilities. The card, called an EIP Cashless VISA card, just like the WA welfare card, can however be used for cash withdrawals but only at selected ATMs.

Furthermore, every central bank that is currently researching CBDC, has also presented a view that all citizens of a country, should be given a “universal” account, directly with the central bank for payment of certain “credits” in the form of the CBDC equivalent of FIAT money.

Their rationale for doing this is so that the central bank, being the central monetary authority in the land, should have complete visibility into ALL monetary assets in circulation – be it, FIAT or CBDC.

This is further supplemented by the statements made by BIC in its CBDC report around inclination to use CB issued tokens for wholesale payments among other things.

This poses a huge risk to privacy and exposes every individual to higher risk of total financial ruin, in the event the central bank gets hacked. There are other risks that I’d rather not spell out here. Those that have the eyes to see and ears to hear, should already understand what other risks exist if all monetary transactions were to be held and scrutinised by a central authority.

Further, you have to ask. If this is all digital money, created by making appropriate ledger/journal entries into a computer, why is there a consequence of paying back the “debt” if the money that’s being given out to beneficiaries never existed in the first place?

CBDC is likely to diminish the purchasing power of the underlying FIAT currency even further. This is based on the fact that historically, as more and more FIAT currency is generated electronically, the purchasing power of the underlying currency as gone done dramatically. This is well posited in the graph below.

Decline in the purchasing power of the dollar

CBDC is not being presented as any solution. It is simply being designed as an “alternative” to crypto, one that can be controlled by the central bank. The use case is deficient to say the least and the motivations are unclear (shhh!).

However, one thing is for sure.

The debt ceicling

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