A fork in the road: Digital Fiat vs. Decentralized Money

Part I

I have long thought about and written about the incredible opportunities that decentralized digital technologies have brought forward, especially when it comes to solving financial and monetary problems. The more these technologies and their applications develop and mature, the more I believe they hold many of the answers to some our most complex challenges. Chief among them is the future of money itself: the idea of a decentralized, robust and independent system of freely competing private currencies that protect their users’ privacy and allow for full financial sovereignty. 

However, this vision now appears to be under threat, as statist forces and old institutions have entered this same arena, began using the same tools and started developing their own structures, all pushing towards a very different kind of future: One that is based on strict central control and the concentration of power in the hands of the few.

The digital race

Ever since the last boom in the crypto space in 2016, many large banks and financial institutions expressed interest in blockchain technology and digital currencies in general. This trend went on and intensified over the next few years, with governments eagerly joining the race. While there were some early frontrunners in this space, like China with its digital yuan, over the last year, we saw a dramatic acceleration in the number of new projects and plans announced by governments all over the world. The rise of Central Bank Digital Currencies (CBDC) has well and truly began. 

Sweden recently announced it expects to will have its CBDC ready in 5 years, the Bank of England is also working on one, while in early May it was reported that the US will be launching 5 pilot programs over the next year to research and generate data that could help in the development of a digital dollar. The central bank of Uruguay, Thailand, Canada, and Singapore are also among those that have announced their own CBDC programs.

A wolf in sheep’s clothing

All these governments and their central banks have presented their projects using very similar language. They try to sell them as innovative ideas, signs of great progress and the next natural step in the evolution of money. They promote them as convenient and secure alternatives, efficient and solid solutions and they promise they will make life easier for businesses, banks and ordinary citizens. They will help transmit policy decisions frictionlessly, they will bring down costs all around and they will provide real-time data on economic activity, which would help immensely in improving domestic economic planning. Most importantly though, they claim that they will keep us all safe, as they’ll make monitoring simpler for governments and offer a much wider surveillance net, to catch all the money launderers and tax evaders and other dangerous criminals.

Of course, this all sounds fantastic. The only problem is, none of it is true. You see, in order to fully understand and appreciate the severity of the risks that come with the development and wide adoption of CBDCs, we must make one essential distinction: Unlike cryptocurrencies, most of which are decentralized, independent and privacy-oriented, CBDCs are nothing more the digital version of existing fiat money. There’s nothing innovative about them. They are just digital representations of the same centrally controlled, freely manipulated, and extremely vulnerable and unsustainable state currencies we already have. 

As far as the basic functions of money go, CBDCs have absolutely no advantage to offer over traditional paper money. Not for the average citizen, business owner, or saver, at least. But even though they bring no improvements to ordinary people, CBDCs definitely come with an impressive range of advantages for the institutions that control them. 

The problem of direct control 

One of the longest standing frustrations of central planners everywhere is their inability to make the economy and its participants do what they expect them to do and comply with their forecasts and their models. The policy transmission problem has plagued them for decades, but it becomes even more apparent in times of crisis, when “recovery” efforts and stimulus operations are needed the most. 

Time and time again, all their cures and silver bullets either prove entirely ineffectual, or more frequently, they backfire quite spectacularly and they end up making the problems much worse, or even creating new ones. We saw this in the aftermath of the last crisis of 2008, after the massive waves of QE and artificially suppressed interest rates created serious malinvestmens and distortions in the economy and in the markets. And we’re about to see it again, on a much larger scale, after the unprecedented global stimulus efforts in response to the covid crisis. 

To any rational person, it is plain to see what is wrong with their approach. It is simply impossible to centrally control and micromanage a system as complex and intricate as the economy and it is pure hubris to try. To the central planner though, the problem is completely different. It’s not about getting their theories and models to fit the real world, it is about getting the real world to comply with their models. And to do that, one needs a direct line of policy transmission and a way to keep all other parameters constant, to eliminate unpredictable factors and to ensure the policy direction is followed to the letter. In other words, they need direct control not just over the money supply and interest rates, but also over the range of choices that citizens have.

Claudio Grass, Hünenberg See, Switzerland

In the upcoming second part, we’ll examine how CBDCs have the potential to hand unlimited power over to central banks and governments to manipulate the currency and the economy at large, while we’ll also look at what lies ahead, and at an alternative vision of the future. 

Source: Photo from Holger Schué on Pixabay