Central Bank Digital Currencies and the remaking of the world order
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“Give me control of a nation’s money, and I care not who makes its laws.”
- Mayer Amschel Rothschild circa 1800s.
Driven by fear of losing control of the payment system, Central banks around the world are exploring Central Bank Digital Currencies(CBDCs). This shift is happening in part as a response to the threat of cryptocurrencies and as a way to update and open traditional finance to the new digital age.
In a recent survey, 80% of central banks responded that they were looking at implementing CBDCs, and more than half have already started running experimental pilots in their respective countries.
CBDCs would allow holders to make payments on the internet and even offline, directly competing with existing electronic payment means like digital wallets, online banking, and cryptocurrencies. An official digital currency would be fiat-based and backed by each central bank like cash and coin.
Most CBDC projects are at an early stage; however, ever since Facebook’s stable cryptocurrency (Libra) announcement in May of 2019, most of them have switched into high gear.
The emergent threat of private money solutions has central authorities on edge, as these alternatives make it harder for them to detect money-laundering and terrorism, but mainly also weaken their grip on the supply of money, which is the main driving force behind the way they steer the economy.
What is a Central bank digital currency?
“CBDCs are far more likely to dominate the fiscal landscape in the future than bitcoin and other cryptos” -Ray Dalio Founder and co-CFO Bridgewater Associates
A Central bank digital currency is the electronic equivalent of cash, and as cash gives the holder a direct claim on the central bank. CBDCs bypass commercial banks by issuing the currency directly to the holder. Access to central bank money beyond cash has been limited so far to financial institutions; extending it to the broader public can have significant economic and financial disruptions.
Central bank authorities argue that a CBDC would provide a neutral means of payment for all, at a time when cash use is dwindling around the world. They claim that they can also offer a safer and cost-efficient alternative to private solutions.
Another element in favor of the transition to CBDCs that central bank authorities have presented is the benefit that a digital currency would bring to emerging markets. Their argument is that a CBDC would help foster financial inclusion in regions with large underbanked economies while extending the central bank’s monetary policy’s reach.
The threat of CBDCs, how they might look like
“There is no answer in the available literature to the question why a government monopoly of the provision of money is universally regarded as indispensable…it has the defects of all monopolies.”
- Friedrich Hayek
In a utopia, CBDCs can take the form of a token saved in a physical device similar to a USB drive, like a mobile device, prepaid card, or a combination of all of the above. They are making it easier to transfer offline and anonymously.
But in reality, CBDCs seem more likely to look like a digital currency managed by an intermediary like a bank, which will police and enforce it — exponentially increasing centralization in the economic system where they are deployed. This poses serious threats to privacy, economic sovereignty, and freedom in general.
Widespread use of CBDCs could equate to vast numbers of people unknowingly granting unlimited and unrestricted access to data on their economic lives to a central authority. According to experts in the field, CBDCs can even act as vectors for crony capitalism in Countries with the fragile rule of law and accountability.
Another threat to the current financial order that CBDCs pose can be in the form of massive migration to a CBDC and the resulting hollowing out of commercial banks, depriving them of a cheap and stable source of funding. Additionally, in a crisis, they would be more vulnerable as clients would prefer the “safety” of an account guaranteed by the central bank.
The most crucial threat to highlight is that the current approach of Central banking authorities towards the problem as mentioned earlier is to cap how much a consumer would be “allowed” to hold in CBDC and, potentially, even mitigate or eradicate any potential remuneration like an interest rate on the currency “to reduce its attractiveness.”
As covered in our first essay, the fractional reserve banking system and the international order that enforces it systematically erode the wealth of the majority of the world’s population. A digital version of fiat currencies will amplify their central grip and all of the system’s flaws and bias towards a privileged few.
On US & China and the new world order
“There is no country with more to lose from the disruptive potential of a digital currency than the United States.”Josh Younger & Michael Feroli, J.P. Morgan Chase, May 2020 Bloomberg press.
The People’s Bank of China aims to become the first to issue a CBDC in its push to internationalize the Yuan and deleverage its reliance on the global dollar payment system. According to current geopolitical discourse, China’s push forward signals a direct action by the country to outcompete the US dollar and ultimately dethrone the USA as the global hegemon.
A widely accepted digital Yuan weakens and limits the options of the US in terms of economic warfare. Because of this, a complete revolution is happening in China’s financial system. Major state-run commercial banks are conducting large scale pilots, behemoths such as Didi Chuxing are also participating. China’s DCEP(Digital Currency Electronic Payment) is a priority for the CCP and will continue to be so.
J.P. Morgan has been part of a growing number of voices heralding the potential for disruption towards US Dollar hegemony that digital currencies can unleash if left unchecked. Furthermore, they mention that the US’s ability to issue the global reserve currency and the medium of exchange for international trade in commodities conveys immense advantages and outlines the weaker links of the system such as SWIFT.
The bank states that SWIFT’s strategic value to the US cannot be overstated enough. As an example, the system was instrumental in imposing sanctions on the Iranian regime in 2018, when the US suspended the access of Iranian banks to the network. If countries were able to circumvent SWIFT, the United States would find itself less able to achieve its geopolitical strategic goals, which in part relies on the US dollar global hegemony.
The bank also underscored that the US should consider its digital currency approach as “an exercise in geopolitical risk management.” Even mentioning: “offering a cross-border payments solution built on top of a digital dollar would, particularly if designed to be minimally disruptive to the structure of the domestic financial system, can be a very modest investment to project power in the global economy.”
Most countries consider CBDC’s a strategic issue and are shifting towards this modality of digital money, accelerating the disruption to the US Dollar hegemony.
The next essay will deliver the second part of this content. Stay tuned for more information and follow us on social media.
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