Cryptocurrency: CBDC's or Crypto or Gold... Happening?

[grarpamp]

https://www.youtube.com/watch?v=occeZ-rCIMo


Brussels Member Of Parliament To Take Full 2022 Salary In Bitcoin
https://bitcoinmagazine.com/business/brussels-member-of-parliament-to-take-full-2022-salary-in-bitcoin
https://www.christophedebeukelaer.be/post/en-2022-le-d%C3%A9put%C3%A9-christophe-de-beukelaer-touchera-son-salaire-en-cryptomonnaies
The game-theoretic aspect of Bitcoin adoption is shown as politicians
around the world race to establish the most welcoming place for the
industry.
“I think it's not too late for Brussels and Belgium to be at the
forefront of the cryptocurrency industry. We already have some great
companies in the field but it's time to position ourselves clearly and
create a real ecosystem.”


Macleod: Bitcoin, Bullion, & Why 'FedCoin' May Never Happen

https://www.goldmoney.com/research/goldmoney-insights/why-dollar-cbdcs-may-never-happen

The Fed has just released its first public consultation paper on a
dollar-based central bank digital currency. For many, central bank
digital currencies (CBDCs) are a means of heading off private sector
cryptos, but coincidentally the prices of bitcoin and others have
collapsed, losing half their value since early November.

The CBDC proposition is being sold to us by the central banks as
keeping up with the times and taking advantage of the opportunities
presented by new technologies to evolve payment systems.

The Bank for International Settlements has been coordinating research
into CBDCs, and this article gives a brief description of how the BIS
and its committee members sees them evolving. It is early days, and
there are several important issues yet to be tackled, such as will
CBDCs pay interest, and what will be the likely reaction of commercial
banks to seeing central banks muscle in on their territory.

There are also two separate CBDC functions to consider. There is
retail, whereby individuals have direct access to their central bank
as counterparty, and a wholesale function for financial intermediaries
for international settlement.

Whether CBDCs will come into existence is doubtful. To have
credibility, their introduction will have to be coordinated at G20
level, and they are unlikely to be widely issued before the end of the
decade. That will probably be too late to save the world from a
developing financial and monetary crisis which threatens to change
everything. Furthermore, the Americans will need to be convinced that
their dollar hegemony will not be compromised. And what will almost
certainly stop it is the powerful US banking lobby, likely to remind
politicians presented with the necessary legislation, that a political
survivor is one who once bought, stays bought.

Introduction

This month, the credibility of cryptocurrencies came into question as
the price of bitcoin and those of its imitators continued to fall
heavily. Bitcoin has halved from its peak, which was only two months
ago.

It leaves everyone involved with headaches. As the private sector
replacement for failing fiat currencies, the credibility of bitcoin
may have suffered a mortal blow, with many observers now comparing it
not in the context of rapidly expanding quantities of fiat, but with
the wilder tech stocks which coincidentally have taken a battering as
well. But a few state actors on the fringes have become strong
supporters, notably El Salvador.

As El Salvador hoovers up bitcoin, there are other governments seeking
to ban or to restrict them. While appearing to be keen to develop its
own digital currency, the Russian central bank recently proposed
restrictions on crypto trading — admittedly this is an ongoing debate.
China, being the ultimate authoritarian state, banned crypto exchanges
long ago, and is already testing its own state-sponsored digital
currency.

Other governments are treading more carefully, aware that the formally
$3 trillion (now $2 trillion) market capitalisation of
cryptocurrencies reflects considerable private sector wealth in their
own jurisdictions. Surely, major central banks would love to follow
the Russians and Chinese in banning bitcoin and its imitators. But
instead of a full-frontal attack on distributed ledgers and the threat
they mount to their fiat currencies, major governments everywhere
appear to be deploying a strategy of gradual strangulation, hoping the
crypto phenomenon will subside. After all, currency is the preserve of
the state and other than mavericks like El Salvador, who wants a
private sector alternative?

This is the statist’s view. But just in case, research is being
conducted into central bank digital currencies — CBDCs. Cynics can
anticipate how the relationship between private sector distributed
ledgers and a centralised state version will evolve. As the
development of national CBDCs progresses, increasing restrictions on
bitcoin and other rivals will be introduced. There is one thing that
governments and central banks cannot abide, and that is private sector
rivals to their currency monopolies.

Research into the development of CBDCs is being coordinated by a
committee at the Bank for International Settlements, led by the major
central banks (with the notable exception of the Peoples Bank of
China) and the BIS itself. All other central banks can expect to
benefit from the project and follow its recommendations.

Only last week, the US Fed issued the first in what promises to be a
series of consultation papers on a US CBDC. The importance of the
Fed’s strategic approach is paramount, since the dollar is the big
daddy of all currencies through which America controls the world. A
CBDC replacement must not threaten the dollar’s hegemony. If it does,
then we can assume the whole CBDC concept will end up being stillborn.
What is a CBDC?

A CBDC is a digital form of central bank money that is different from
balances in traditional reserve or settlement accounts. It is a
digital payment instrument, denominated in the national unit of
account and is a direct liability of the central bank.

Two separate functions have been identified. There is a general
purpose, or retail function, whereby a CBDC is an alternative to
currency cash and commercial bank deposit money. And there is a
wholesale function for use between financial intermediaries,
incorporating cross-border settlements. Figure 1 above illustrates the
flows of these two different functions.

The adoption of a CBDC requires a central bank to upgrade their
banking systems to deal with tens or even hundreds of millions of
depositors and businesses — a task whose sheer scale and technological
challenges should not be underestimated.

Figure 2 illustrates the relationship between a retail CBDC and
existing currency liabilities.

CBDCs are intended to be an addition to current settlement systems and
currency quantities. Declining use of banknotes and coins, which are a
bearer form of central bank liability and a direct claim on it, is
being claimed as a justification for a new electronic settlement
medium with the same currency standing in the form of a retail CBDC.

The widespread use of debit cards has blurred the distinction between
the cash notes and coins issued by a central bank, and deposit money
which is a liability of commercial banks. Users of currency in retail
transactions are generally unaware of the distinction, and bank
regulators believe that their oversight provides justification for the
seamless operation between these different risk categories.

Nevertheless, central banks are aware of the potential disruption a
CBDC might cause to existing settlement systems, and for this reason
amongst others are certain to proceed cautiously.

The wholesale function of a CBDC is a different one to being purely an
alternative to bank notes, being more attuned to reserves on a central
bank’s balance sheet. If a wholesale CBDC is introduced it will be
with the objective of extending a central bank’s function into
cross-border settlements, with the intention of making them more
efficient with lower transaction fees. That will require the same
operational and legal standards between different CBDCs, necessitating
international cooperation in the way they are set up — hence the
likely future role for the BIS, which already sets out the global
regulatory framework under the Basel Committee to which commercial
banks must adhere.

Undoubtedly, cross-border cooperation in CBDCs is a multiyear project.
All that the BIS committee can do for now is come up with guidelines
to which individual central banks can make long term plans, so that
different CBDCs might eventually be integrated into a global
settlement system. This is also behind an initial phase of designing
CBDCs for retail, or domestic use with a view to them being compatible
with wholesale use.
The benefit of a retail CBDC for the state

Augustin Carstens, General Manager at the Bank for International
Settlements made the following comments in an IMF sponsored video
about central bank digital currencies:

    “We intend to establish the equivalence with cash, but there is a
huge difference there. For example, with cash we don’t know who is
using a $100 bill today, we don’t know who is using a MX$1,000 bill
today.

    A key difference with a CBDC is that a central bank will have
absolute control under the rules and regulations that will determine
the use of that expression of central bank liability, and we will have
the technology to enforce that. Those two issues are extremely
important and make a huge difference with respect to what cash is.”

Clearly, the attraction to Carstens is that CBDCs offer the potential
for central banks to increase their controls over how currency is
used, control not only over markets and economies, but over
individuals and businesses. Carstens seems completely unfazed by the
issues for personal liberty. However, Figure 1 above suggests there is
an option of token based CBDCs to provide anonymity. But given all
central banks’ desire for control to minimise criminal transactions
and tax evasion, it is unlikely that anonymity will be preserved. And
for any jurisdiction where personal freedom might be regarded as
important, there’s always the pull of international conformity to
ensure that in the name of preventing international fraud and tax
evasion personal freedom cannot be protected.

The issue of individual freedom to buy and sell goods and services
with the state being automatically informed of every transaction is a
huge departure from using banknotes and coin. This could become an
impediment to the widespread adoption and success of a retail CBDC in
some countries. But for individuals there may be no option if retail
CBDCs become the pretext to do away with cash entirely.

Furthermore, while some central banks will be wary of a CBDC
interfering with the implementation of monetary policy, other central
banks have expressed the desire to use them to extend control over
economic outcomes. For example, by deploying CBDCs with an expiry date
beyond which they become worthless, it would enable a central bank to
accelerate capital spending, employment expansion, or consumer demand
in favoured industries, such as green energy, or other sectors deemed
worthy of state promotion and protection.

The application of positive and negative interest rates selectively on
retail CBDCs might be seen as a further tool for enhancing monetary
policies by directing capital investment and economic management.
This, surely, is one of several possibilities that will excite the
planners as CBDC concepts develop.

That is in the future. For now, the CBDC concept needs to be
consistent with promoting improved settlement options. Through
commercial bank reserves, central banks supply the ultimate backstop
for the banking system, and in respect of settlements generally, they
offer guarantees of safety, integrity and access to currency and
deposits. Central banks are also tasked with providing sufficient
liquidity to ensure the smooth workings of the payments system,
ultimately as the lender of last resort. Through their banking
regulation, central banks oversee the integrity and efficiency of
their national settlement systems.

The introduction of a CBDC must not undermine these functions but be
seen to enhance them.
The consequences for commercial banks

One of the problems that is yet to be addressed is the effect of an
introduction of retail CBDCs on bank deposits. The origin of bank
deposits is always loan creation, acting as the double-entry
bookkeeping liability counterpart of bank credit recorded on bank
balance sheets as assets. As borrowers draw down their loans to make
payments, deposits received by their payees are distributed throughout
the banking network, and rebalancing is achieved through wholesale
interbank markets.

A new class of central bank liability to be used for electronic
settlements risks draining the commercial banking network of deposit
money that would otherwise be recycled between them. And while it is
tempting to think that deposits at the larger banks are likely to be
safe, there will be many smaller ones around the world that could face
deposit runs into the relative safety of a CBDC.

The effect of deposit flight into central banks from highly leveraged
commercial banking systems, particularly the euro system and the
Japanese sector, could be catastrophic. Both sport asset to equity
ratios of over twenty times on average with some banks even more
highly geared, so a shift of less than 5% of their deposits could tip
them into crisis.

Furthermore, for bank depositors the convenience of transferring
deposits electronically and immediately for a CBDC without the hassle
of queuing up for cash which a bank refuses to release in quantity
could turn a bank liquidity crisis into an intraday or overnight
event.

For this reason alone, a CBDC giving access to the public without
hinderance seems unlikely. Furthermore, when commercial bankers are
presented with a CBDC scheme, they are likely to oppose it strongly
because of the threat to their customer deposits. This is even likely
to be more important to commercial banks than the risk that a CBDC
will represent unfair competition with commercial banking, a
possibility upon which views are likely to be divided.

In authoritarian regimes, the competition argument might not matter.
But in the US, banks are powerful lobbyists paying for politicians’
election spending. It seems likely that their antipathy will become an
insurmountable obstacle to the introduction of a dollar CBDC, if
proposals get that far.
Practical and political considerations

While some central banks might find there is minimal political
opposition, most jurisdictions will require enabling legislation to be
passed without which a global CBDC regime cannot proceed. The course
of action is probably as follows:

    With the agreement of the major central banks, the BIS finalises
draft proposals for CBDCs to present to finance ministers at a G20
meeting. At the earliest, this initial step will be put before the G20
Summit in 2023 in India. More likely, it will be 2024 or 2025. Bear in
mind that Basel 3, which was the response to the 2008—2009 financial
crisis, is still not fully implemented more than a decade later.

    Central banks will want to reassure their legislators that their
proposed systems are thoroughly tested, secure and robust before
framing the necessary legislation. Testing by pilot schemes could
start as early as next year in some cases but given the seriousness of
this issue and the bureaucratic nature of the introduction and
implementation of government IT systems, and the sheer scale of
opening accounts for the entire population and its businesses, it is
likely to take some time.

    The earliest an international agreement for CBDCs on common
standards and the necessary legislation passed in the G20 nations and
their implementation is unlikely to be before the end of this decade
at the earliest, if not well into the 2030s.

To complicate matters, objections could arise from Russia and China.
As a G20 member, Russia ploughs its own furrow, with the West
periodically threatening to cut it off from SWIFT and imposing other
penalties — hardly conducive to international cooperation. China is
already testing her version of a CBDC, so is unlikely to conform to a
BIS template which does not yet exist. But by far the most serious
problem is likely to be with the US.

>From remarks on the subject by Jay Powell, the Fed is taking a very
cautious line. Earlier this month the Fed issued what promises to be
only the first in a series of public consultation papers, and from
reading it there emerges an impression of a reluctance to engage with
the real issues. A suggested list of twenty questions to be answered
makes the point, so that this CBDC plan is likely to be kicked into
the long grass.

That the Fed is dragging its heels is obviously a matter of opinion. A
crucial issue behind this opinion is the effect of CBDCs on the
dollar’s existing hegemony. While the Fed might engage with a retail
dollar CBDC, arguing it will offer the prospects of an improved
settlement system, we can be reasonably sure that the Treasury will
balk at the BIS setting the agenda for a wholesale version of the
American currency. For international settlements, the dollar is
already under attack from the renminbi and the euro, a rot which the
Treasury will be keen to contain.

We cannot guess the outcome of this issue. And there are also the
spanners to be thrown into the works by powerful commercial banking
interests, which will not want to see their credit creation monopoly
threatened because of the drain on their deposits.
The threat to state fiat currencies from bitcoin

That central banks are banding together to provide a viable
alternative to bitcoin and its imitators before banning them from
being used as media of exchange is a supposition supported by the
interests and actions of the central banks. If this is indeed the
case, we should not be surprised, given that the monetary authorities
have demonstrated that they do not admit to the relationships between
money, currency, and credit. They are therefore unable to decide on
whether bitcoin fits into any of these categories, and therefore the
seriousness of the threat.

To act as the principal media of exchange as a replacement for
government fiat, bitcoin must fulfil all these functions. Through
millennia, gold has been money without counterparty risk, more
recently as the backing for currency substitutes with only small
quantities of physical gold actually circulating. In theory, bitcoin
in a wallet could fulfil that role of traditional money, backing a
currency system based upon it. This backing would also be fundamental
to its backing for a new currency, perhaps in the form of an
obligation to deliver bitcoin held in custody by a trusted
counterparty. Where it will fail is as the medium of credit due to its
inflexibility compared with gold.

Besides its physical qualities, gold’s success as money is because the
quantity of above ground stocks used as money is flexible and demand
for the money function is set by its users (not the state, which is
the important distinction from fiat currencies). The quantity of gold
circulating as money draws upon reserves used mainly for
ornamentation. Consequently, over the centuries there has been
remarkable price stability for commodities and products exchanged by
those dividing their labour measured in gold.

This is not possible with bitcoin, whose quantity is finite, and if it
was to be adopted as money its purchasing power measured in goods
would rise inexorably as billions of people build their cash reserves.
This would continue after the shock of the collapse of the fiat regime
because of the hard limit on bitcoin’s quantity, while the purchasing
power of gold and its substitutes can be expected to stabilise.

A borrower of bitcoin investing in production would be faced with
repayments of uncertain value measured against his final output,
making it impossible to conduct the economic calculations necessary
for the investment.

Besides this hurdle the promoters of bitcoin would have to convince
most of the inhabitants of this planet that it is the only replacement
for fiat currencies when they fail. Unlike the promoters, people
dividing their labour are not speculators, only seeking a stable means
of exchange. Indeed, the speculators’ motives are to encourage as high
a price for bitcoin as possible, which is not the function of money.

It should therefore be obvious that bitcoin and other cryptocurrencies
are incapable of providing a monetary role because of their
unsuitability as media of exchange. This being so we can only surmise
that cryptocurrencies are little more than a concept which has
succeeded in attracting speculation on a scale seen only when currency
and credit to inflate it are available in unlimited quantities. In
short, the phenomenon is a bubble that eclipses most of those seen
hitherto.

As such, cryptocurrencies do not pose a threat to fiat currencies. It
is gold the authorities should look out for, and there is no sign of
them doing so.
The economic and monetary consequences of CBDCs

It is clear from Augustin Carsten’s comments quoted above that the
objective is to use CBDCs to increase state control over how
currencies are used. That being the case, personal freedom and free
markets will be further suppressed through their introduction. All the
evidence is that state-determined economic outcomes are failures. We
can explain this simply by pointing out that only acting individuals
can take the decisions that lead to economic progress, while
government plans always lack the basis of economic calculation.

Instead of providing solutions for failing economic and monetary
policies, CBDCs are a continuing move in the same direction. Nowhere
in all the literature emanating from the BIS, or in the Fed’s
consultation paper, is there any suggestion that an expansion of the
quantity of CBDCs will be offset by a contraction in central bank
balance sheets or in the quantity of bank credit. The only offset is
the declining use of banknotes and coins, which is a minor portion of
the circulating currency.

Therefore, CBDCs represent an additional source of inflationary
finance, reminding us of the fate of mandats territoriaux in
revolutionary France in 1796, when they replaced the assignat which
had become virtually worthless. The mandats lasted barely six months.
The only material difference is that CBDCs are planned to be issued
contemporaneously with existing fiat currencies while they still
retain public credibility.

There can be no doubt that the expansion of currency and bank credit
since the Lehman crisis in 2008 has instilled in all major states an
enhanced dependency on inflationary financing of government spending.
Rather than raising taxes or cutting spending, it is far easier to
cover their deficits by expanding the media of exchange, and while
notionally independent from the political class, central bankers have
fully embraced this use of inflation.

But inflation is an invidious tax, eventually realised by those who
suffer under it. A lethal combination of the monetary arithmetic that
an expansion of currency invokes, together with a loss of all
confidence in the integrity of the issuer is always the death knell
for fiat currencies. The only question remaining is the time taken for
the public to realise that far from its government providing free
lunches ad infinitum, they are not only paid for through their taxes
but also through currency debasement.

There comes a point where this realisation leads to a widespread
revulsion and rejection of the currency, when it then becomes
worthless. The best that might be said of CBDCs is that by adding a
layer of confusion, the final rejection of government fiat by the
public might be delayed briefly. But as the experience of
revolutionary France showed, the replacement of one fiat currency with
it in another form changes nothing.

Existing currency problems are more immediate than plans for the
adoption of CBDCs can possibly allow. In the coming months, a fatal
destabilisation of fiat currencies is in prospect as central banks are
forced to choose between submitting to the inevitability of interest
rates rising to reflect the loss of their currencies’ purchasing power
or continuing to provide inflationary finance for their governments.
Without doubt, the problem is becoming urgent. Only this week, we have
seen the hold fire in the face of rising interest rates, leaving US
Treasuries on negative yields of over six per cent, according to
official CPI figures.[iv] On an independent estimate of price
inflation, negative bond yields for US Treasury debt exceed double
that.

Clearly, a consequence of monetary policies is that markets now fail
to function. The Eurozone and Japan face the additional difficulty of
surmounting negative interest rates as well as negative nominal yields
on government bonds. We can only surmise that these extraordinary
conditions persist due to the success of central bank propaganda
backed by false and misleading statistics, while the financial world
is in thrall to the false gods of Keynesianism.

As pointed out above, a further falsity is the belief that
cryptocurrencies could become a viable medium of exchange. It is those
dividing their labour who decide their medium of exchange, and not a
shadow issuer comprised of technology enthusiasts who have achieved no
more than create a bubble to end all bubbles. Bitcoin is simply
another form of fiat, and as fiat dies, we can expect bitcoin and its
imitators to do so as well.

And given the time taken to introduce CBDCs, not only will we be
writing a further chapter on extraordinary popular delusions and the
madness of crowds over the entire cryptocurrency phenomenon, but we
will have found CBDCs to be stillborn.