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CBDCs are NOT Cryptocurrencies
CBDCs: A Possible Future Roadmap (Be Very Afraid)

In my earlier post, CBDCs: A Possible Future Roadmap (Be Very Afraid), I predicted a nightmare world where all money is trapped in a digital prison. Some transactions are prohibited, and others allowed but with large fees. Items may be rationed. If the political party in power bans people from buying some good or service, using the power of a programmable currency, there is no way for the purchase to be completed using the CBDC. But there are reasons for hope. Cryptocurrencies play a big part in that hope.

History has shown that total prohibitions are rarely total. Humans are innovative and will find ways around prohibitions in order to satisfy their demands and others will find ways to supply meet that demand. While a good or service may be banned by law, the law of supply and demand has not been repealed. The effect of prohibition is to reduce the supply dramatically (most suppliers exit the business) and to decrease the demand slightly (those consumers that would never think of breaking the law), but not to zero (there are always some who will consume, regardless of legality). The effect of these reductions is to increase the price of the prohibited good or service.

This outcome was seen in the United States, when the manufacture and sale of alcohol was prohibited. Booze was smuggled in or surreptitiously manufactured, and sold at prices much higher than before or after Prohibition. Today, illegal drugs are similarly priced, way above their cost of production, transportation, and distribution. Prostitution has never been eliminated where it is banned.

Cash is used for these illegal transactions. But in the CBDC world, there is no more cash. So, no more illegal transactions, right? Wrong! The demand is still there, and supply will meet that demand.

There is a need for a currency with the anonymity of cash. Cryptocurrencies can fill that role. So can gold, silver, cigarettes, bottles of booze, and ammunition, but all these have some defect that keep them from becoming more than barter items, usually a guarantee of authenticity or quality. How do you know that is pure gold? How do you know that bottle of Scotch is really aged 18 years, or is something distilled last week with some coloring added. If you open the bottle to taste it, you have to use up some of that booze, and, even if it is authentic, the next person who receives the bottle will definitely want to taste it, since the seal has been broken. Gold is too valuable for small purchases, and silver too bulky for large purchases. All transactions need to be face-to-face, too, for trade goods to be exchanged.

Cryptocurrencies will become the currency of the black (more accurately, the free) markets. Wallets on smart phones can be used to send and receive payments, just as they are today. These markets will allow the people to satisfy their demands for prohibited goods and services.

If there are goods or services where the quantity or pace of purchase is limited, then there are even more opportunities for illegal transactions to take place. For example, you are only allowed to buy one can of baby formula each week, your FEDCoin account keeping track of your purchases. But you accidentally spill almost an entire can, purchased that day, into the sink while preparing the formula. What to do? You can't run out and buy more until next week, but you also aren't going to let your baby go hungry. Nobody has any to spare, being limited just as you are. But you know there is baby formula for sale somewhere, as a neighbor had a similar problem last month. You get a name from the neighbor and make contact, asking to buy formula. The reply, "Sent xxx XMR to this address and your formula will be delivered to you." You send the requested XMR and within two hours, a bag with a sealed can of baby formula is delivered. Crypto saves the day (and the baby).

If the size of the illegal market remains small, it may not be cracked down on. Family, friends, neighbors helping each other out will probably escape notice. If a market grows to a size where transactions are occurring between strangers, perhaps with middlemen involved, the government will step in to shut it down.

That people are evading the noble prohibitions put in place the the political party in power will not go unnoticed. Members of the party in power may even make purchases in those illegal markets, but will usually escape prosecution if caught (Rules for thee, but not for me).

Governments may try to pre-empt the development of illegal markets by banning cryptocurrency. We are seeing the beginning of this in the UK where banks are cutting off cryptocurrency-related businesses due to "fraud and volatility". China is furthest along this path, banning crypto mining and prohibiting the buying, selling, or transacting in cryptocurrencies.

My prediction is that most western democracies will not try to ban cryptocurrencies until their CBDCs are in place. Legislation is probably required to impose a ban, although a declaration of an emergency may be used, especially if inflation is getting out of hand and people are fleeing fiat currencies. The same reasons that were used for demonetizing banknotes will be as justifications for a crypto ban: drug smuggling, terrorism, tax evasion; with new ones such as fraud, volatility, lack of backing, bad for the environment, and being unpatriotic. Centralized exchanges will be the first targets of a phased-in ban, along with any other on-ramps, where fiat can be exchanged for crypto. This will slow the growth of crypto by choking off new money (remember bans have leaks, so there will be some way to turn fiat into crypto).

Again, bans have leakage, and a ban on cryptocurrencies is no exception. You may need to use a VPN and TOR, but, as long as your wallet can reach a server or node, cryptocurrencies will continue to work. Even China's ban, under a totalitarian regime, has leaks. According to the Cambridge Bitcoin Electricity Consumption Index, China's underground mining pools accounted for more than 20% of Bitcoin (BTC) hash rate in early 2022.

Cryptocurrencies give me a reason to hope, both as a way to survive in a CBDC world, but with widespread adoption preventing a CBDC becoming a digital prison.

Previous articles:
CBDCs are NOT Cryptocurrencies
CBDCs: A Possible Future Roadmap (Be Very Afraid)