Central Bank Digital Currency is coming.
Many central banks across the globe (including the Bank of England) have started discussions aimed towards introducing Central Bank Digital Currency.
Conveniently, the Bank of England actually released a ‘Discussion Paper’ on the 12th March 2020 describing an ‘electronic form of central bank money’. You can find the full Discussion Paper here.
There have also been recent tweets from Christine Lagarde (President of the European Central Bank) stating:
“We’ve started exploring the possibility of launching a digital euro”
As well as tweets from the Reserve Bank of Australia, stating:
“We are partnering with Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software to explore the potential use and implications of a wholesale form of central bank digital currency using distributed ledger technology.”
Many people might immediately say something like, “I use my card or phone for payments so money is digital now anyway?”. Not really. Central Bank Digital Currency is very different and you need to know why.
Digital Currency which is directly issued by a Central Bank to a consumer, is another way to essentially pursue their goal of getting rid of physical currency.
Central Bank Digital Currency is also an easier way to control the whole payment system by being able to easily track each and every transaction.
This Digital currency is also ‘programmable’, meaning the currency could in theory be programmed to give a negative interest rate if you save, restrict what you are able to purchase and automatically take tax payments.
It is also a way for Central Banks to compete with the ever growing demand for cryptocurrency.
“A central bank digital currency (CBDC) would use digital tokens and blockchain technology to represent a country’s official currency. Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country’s monetary authority”. (www.investopedia.com).
What is money?
Technically, money itself can be pretty much anything as long as it performs three basic functions of medium of exchange, store of value and unit of account.
Two traditional forms of money are fiat currency and commercial bank currency.
Fiat currency is a form of money that the government declares to be legal tender and can be in the form of notes and coins. Because fiat currency is legal tender, it requires citizens and businesses to accept fiat currency as a means of settling debt.
Commercial bank currency is created through fractional reserve banking.
Fractional reserve banking is a system in which banks only hold a fraction of the money their customers deposit as reserves. This allows them to use the fractional reserve system to make loans and thereby, essentially create new money.
Financial institutions and commercial banks hold these balances at the Central Bank.
Why do Central Banks want to get rid of physical currency?
The ‘War on Cash’ as some people call it is nothing new, and many say this ‘war on cash’ has already been lost with the European Central Bank discontinuing the production of the 500 euro note and recent calls for the elimination of the $100 bill in America.
Essentially governments around the world are trying to eliminate cash in order to make it easier to weaken or debase currencies to try and stimulate the economy. This is causing a “race to the bottom” in the value of fiat currency.
Central Banks are also looking to push the trend towards the use of negative interest rates.
Negative interest rates already exist in Switzerland, Sweden, Japan and the eurozone and are being discussed by the Bank of England. It seems negative rates are even being contemplated by the U.S.
In theory, negative rates would aim to boost the economy by encouraging consumers and banks to take more risk through borrowing and lending money.
However, in reality if retail banks have to pay negative interest rates to central banks, they will eventually have to pass this cost on to their customers.
If a bank charges you the customer to keep money in your bank, then you are much more likely to withdraw your money in the form of cash as it is at least one way you won’t have to pay negative rates.
With a ‘cashless society’, it makes it much harder for consumers to avoid negative interest rates, as you would not be able to withdraw physical cash.
Physical currency is also more anonymous, it is hard for Central Banks and governments to track.
Central Bank Complete Control of Money.
It seems that Central Banks now want full and complete control of monetary transactions under the guise of it being more efficient for consumers.
It is simply a way of forcing people to spend more, while at the same time debasing the value of currency via an increasing digital currency supply.
Global central banks and governments are now consistently pushing for negative interest rates and inflation. This is a sure way to make your money disappear by destroying your purchasing power.
Tracking through transactions.
CBDC would be able to track your whereabouts, your purchases, choice of restaurant, and more, as well as sharing that information with police and tax authorities where necessary.
Your financial privacy would be pretty much non-existent.
Financial Repression.
At the moment, many households and businesses face an uncertain economic environment, which means many are unable or unwilling to borrow or spend more money.
Many people and businesses understand that the economic environment is difficult right now and there are very few opportunities to invest.
It often seems that central banks and governments are consistently punishing savers, inappropriately putting the blame on people with savings.
Central banks cannot simply force people to spend and invest, even if the policies they come up with are consistently aimed at incentivising debt.
Excessive debt levels.
To put it simply, the financial system is drowning in debt.
The U.S. national debt alone is now over $27 Trillion with a debt to GDP ratio of 128% (USdebtclock.org). The UK national debt is over £2 Trillion (NationalDebtClock.co.uk). Countries and markets across the globe are addicted to ever easier money via quantitative easing and zero/negative interest rates.
Central banks now have to try and create inflation at all costs, and keep interest rates at or below zero due to these excessive debt levels.
Debasing currency.
Central Banks will likely resort to continued debasing of currency via an even higher increase in the supply of central banks’ digital currency.
Could citizens simply reject CBDC?
If citizens become to realise that the central bank policymakers will constantly dilute the purchasing power of the currency, then citizens could be more persuaded to move to other means of payment such as cryptocurrencies, and look to store wealth elsewhere in assets such as gold.
Exiting the system with gold.
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More and more people are now choosing to exit this monetary system, and defend the purchasing power of savings and salaries.
People are now turning to precious metals and cryptocurrency, as they no longer want to be controlled by central banks that are continuing to increase the fiat currency supply and, therefore, generate depreciation of money.
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