One after another, countries around the world have been announcing plans to launch their own Central Bank Digital Currency (CBDC).
China is already in the lead with the launch of their digital yuan earlier this year. In a test run, 50,000 Chinese citizens were chosen lottery-style to be "airdropped" a total of 1.5 million USD worth of yuan to be spent at businesses in Shenzhen. The banks of Japan, England, Switzerland, and Sweden have teamed up and announced plans to explore the development of CBDCs as well.
In this post, I will discuss the purpose of these new CBDCs, and whether or not they will be able to compete with existing decentralized cryptocurrencies.
As interest rates continue to be pushed further into negative territory, it no longer makes sense for citizens to store cash in a bank account. They are better off keeping it under their mattress at home in the form of cash, where it won't be eaten away by negative interest rates. The central banks know this, and therefore need to enact policies that guide the world towards a cashless society.
The reaction to COVID-19 has been swift and crushing. Governments have implemented laws regarding masks, social distancing, business hours, etc. The next step "to stop the spread of COVID-19" may be to outlaw corporations and small businesses from accepting cash entirely.
With the successful elimination of cash, and the launching of a digital currency controlled entirely by the central bank, periphery banks may no longer be required, and the power to monitor citizens' purchasing activity could become even more concentrated.
The IMF recently announced news of a "New Bretton Woods Movement", and these national digital currencies are likely part of the plan to reset the financial system, but it's unclear how CBDCs will solve the actual problem.
The Real Problem is Debt
... And the only way out is through inflation.
Consider that the fiat currencies we use today were digitized into mainframe databases decades ago. Issuing a new digital currency (blockchain-based or not) will not solve our debt problem, which has grown exponentially over the past five decades. The traditional debt-based financial system has been designed in such a way that the debt can never paid off. There is always more debt than currency in circulation, meaning it's impossible to pay off the debt without the entire system collapsing in on itself.
The world's nations, corporations, and individuals all owe over 250 trillion dollars worth of debt. That figure has been growing over the past few decades and went into hyperdrive since the COVID-19 restrictions were put in place, which slammed the brakes on the real economy. With little to no actual revenue, the only way corporations and small businesses can service their debts now is through massive government bailouts to the tune of billions of dollars. Unfortunately, these bailouts are not being distributed equally to all businesses and individuals. Similar to the financial crisis of 2008, the government is choosing the winners and losers in this economy.
Why can't we just declare a "debt jubilee" and forgive all this debt? Because it's owned by nation states, private investors, and pension funds that all rely on the principal and/or the interest payments for people's livelihoods. Forgiving all the debt means some countries would take huge losses, pensioners wouldn't get their monthly paychecks, and those who have been paying into retirement funds for years would lose all their contributions.
Keep in mind that the stimulus isn't paid for with tax dollars collected by the government, but rather from freshly issued money by the central banks. As trillions of new dollars rapidly enter the system, the value of each existing dollar is diluted and we get inflation - first in the stock, bond, real estate and cryptocurrency markets, and then eventually in consumer prices.
The bottom line is that our current financial system is not sustainable. There needs to be some kind of reset and transition into a new system, and it won't happen through honest bankruptcies, but rather through debasement of fiat currency and inflation, which I believe will eventually force individuals and businesses into alternative currencies. The question is will people opt for central bank digital currencies, or decentralized community-backed cryptocurrencies.
For more background on the current worldwide debt problem, check out my article Why a Paradigm Shift in Finance is Inevitable and Coming Sooner Rather Than Later.
Of course, the central banks have seen this coming from miles away, and have long been preparing for a transition. They already control the issuance of all fiat currency, and therefore have the influence required to push individuals and businesses into using their new digital currencies over existing decentralized alternatives, like Bitcoin.
In order for the masses to adopt non-government-backed cryptocurrencies there needs to be a paradigm shift, where people prefer an open and borderless form of money, as opposed to the government-backed fiat currencies that they have been accustomed to their entire lives. I believe the accelerating debasement and (hyper)inflation of fiat currencies could be the trigger that finally pushes the majority of people into cryptocurrencies, which are limited in supply or at least have a transparent and predictable issuance cycle.
Competition Breeds Innovation
Any person or group on the planet can create their own cryptocurrency by forking the Bitcoin code (or any other public cryptocurrency), launching a small network of nodes, and making an announcement on the BitcoinTalk forums. In my mind, this level of competition is a good thing, because it breeds innovation, accelerates progress, and leads to an overall better experience for everyone.
A central bank digital currency (CBDC) is a fiat currency, because it's simply declared to have value by the government. It doesn't have to innovate, market itself, or form a grass roots movement. On the other hand, the value of a true cryptocurrency is proportional to how much it innovates and the size and backing of its community.
For as long we can remember, governments have had a monopoly on the creation of money. We have had to follow their rules when in comes to banking hours, banking holidays, international transfer timelines, the amount of money we can send or withdraw from our account, etc. But now the creation of money is returning to the free market, and unless central banks can hire some incredibly talented developers, marketers, and business managers, I think they'll have a tough time competing in this space.
The Nature of Cryptocurrency
There are still many unanswered questions about Central Bank Digital Currencies. Will they be blockchain-based? If so, who will run the nodes that validate the transactions? Will it be an entirely new form of money, or integrated with existing fiat?
By its nature, a cryptocurrency is supposed to be decentralized and universally accessible. A CBDC will be under the control of the government, which completely defeats the purpose. They will decide who gets privacy, and who doesn't. Who can access the system, and who can't.
What we need are transparent, accountable, universally accessible, and easy to use cryptocurrencies. I believe that a cash ban, out of control inflation, and unfair bailouts will eventually cause the majority of the population to place more trust in cryptocurrencies than government backed digital currencies.
The Natural Evolution of Money
Since the financial crisis of 2008, to the COVID-19 crisis we are facing today, the power behind the issuance of fiat currency has become too concentrated, and people have less trust in traditional financial institutions with each day that passes. With the release of Bitcoin and its open-source software, the creation of money has been returned to the free-market and we now have a new form a money that is more accountable and convenient.
As inflation in real goods and services (outside of financial assets) accelerates, people will finally lose faith in their government's fiat currency and at that point I believe there will be a rush into well-established cryptocurrencies. Rather than hand over all their financial data to a central bank and risk losing access to their funds, people will more likely opt for cryptocurrencies which are universally accessible, open-source, limited in supply, and governed in a transparent manner.
As with previous technological innovations such as cars and personal computers, it will take some time before the majority of the population accepts cryptocurrencies into their daily lives. However, considering the quickening collapse of the traditional financial system, and the continuing success of the overall cryptocurrency market, I think the natural evolution of money may happen faster than we think.