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

Part II

CBDCs as the ultimate central planning tool

So far, this kind of direct transmission line was available to central bankers and governments only for large, “systemic” banks. However, CBDCs are set to change this. As Denis Beau, deputy governor of the Bank of France, stated in an interview in April, they could give new types of businesses access to ultra-cheap central bank funding and open up the sphere of direct control way past the baking system. CBDCs could be distributed to private businesses of all sorts, but also directly to consumers, allowing savers to store their money at the central bank. 

The implications are as obvious as they are disastrous. The kind of absolute control this would hand over to state authorities would essentially spell the end of financial freedom. We saw how much existing policies like negative interest rates already curbed these liberties, by penalizing savers and conservative investors. The damage this caused was severe, even without a direct transmission mechanism. In a CBDC scenario, that would have been immeasurably worse. In that scenario, negative rates can simply be directly enforced, straight on to the savers’ account. Other inspired policy ideas, like bail-ins and “haircuts” we already saw in Cyprus and elsewhere, become much more efficient and practical to implement. Account freezes, confiscations, unlimited monitoring, blocking certain transactions or trades and incentivizing others… the manipulation potential of the entire economic edifice is limitless. It is also certain to end in a total disaster, but we know from history this never stopped central planners from trying anyway.

A fork in the road

As more and more governments enter the fray and try to claim the digital space for themselves, it is important to understand the full scale of the threat they present, but also to be aware of the ways and opportunities we have to avoid it. We are still going through the early days of it, but there’s a battle ahead, one that is set to prove historically definitive. That battle is between the old powers that keep pushing for even more control and further centralization and the forces that seek protect and preserve liberty, individual self-determination and a truly free market, in money, but also in everything else.

On the surface, it might seem like all the legacy institutions, government agencies and state authorities have the advantage. After all, they already control so much ground and they already have all the “legitimate” tools to enforce their will and punish dissenters. However, it is useful to remember that in this day and age, most of these old tools are blunt instruments and most of state power is brute force. Even when they try to enter the digital arena, they lack the innovative spirit, the agility and the creativity to do so in a meaningful way, so they just end replicating antiquated strategies and structures that have long ceased to be seriously competitive or even viable. 

On the other side, however, stand those who espouse the true principles of our new digital word and of technological progress. They’re much more nimble and they have purpose-built tools. Truly decentralized systems will always prevail, as they’re not just infinitely more resilient, but also in line with the natural order of a free market, of voluntary exchange and of spontaneous human cooperation. 

For those of us who understand monetary history, and especially for precious metals investors, what happens next is quite easy to predict. We’ve seen this so many times in the past. When empires and central authorities or all sorts become weaker or threatened, they tend to overreach and embark on desperate campaigns to regain power that always backfire. The battle for the future of money is likely to be no different. And after the dust settles, we’re bound to see a new landscape. I personally expect the only thing that will remain unchanged is the role of physical gold and silver as a reliable store of value, likely dominating the physical space, while the realm of daily transactions, payments and investments will be shaped by competing currencies. 

At that point, it matters not which digital coin will emerge as a leader for which function or whether there will even be such a thing as clear leader. The more important thing is the process through which we arrive there. Free competition and the freedom to choose whatever alternative one prefers is the key to a better, fairer and much more robust system.

Claudio Grass, Hünenberg See, Switzerland

Source: Photo from Holger Schué on Pixabay