October 25

What is a CBDC? Central Bank Digital Currency


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We all have memories, some fond and some not so much, of the time when we were kids. We'd ask our parents, or whoever was bringing us up, for money.

They'd ask: "How much? What do you need it for?" And then we'd go on explaining... And if our case was good enough, we'd get a little cash and buy whatever it is we wanted.

Good times. Now, we are adults. We own our cash. We might not have a lot of it, but we can spend it however we want. There is nobody out there that can go and assess the validity of our purchase before greenlighting it. We can buy 20, or 200 popsicles, if we want to. Or can we?

Enter the CBDC.

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What are CBDCs, really?

Central Bank Digital Currencies, or CBDCs, have gotten an enormous amount of attention. Many central banks are looking into them, from the Federal Reserve to the European Central Bank to African nations. Yet they almost seem difficult to define. Why is that so? It might be because what they propose is so brazen that we can't quite wrap our heads around how it would work.

A CBDC, as the name might suggest, is the digital form of a country's sovereign currency. Digital dollar, digital yuan, you name it. Here is where the confusion starts, as we are forced to ask some obvious questions:

  • What will happen to paper cash?
  • If paper cash is still around, won't everyone just keep using it over CBDCs?
  • Are governments really going to try to eliminate paper cash?
  • If so, does that mean everyone will be forced to use a distributed ledger, from children to senior citizens?
  • What will society look like if this happens?

As we move onto one question from another, this experiment becomes increasingly strange, though one with obvious motivations that we'll soon get to. Believe it or not, we've recently heard of the Federal Reserve considering having a "banknote" for its proposed digital dollar. If that sounds ridiculous, you're only scratching the surface of the subject of the CBDC.

Every article about CBDCs gives entirely conflicting information. It doesn't define them very well, and for every supposed question answered or issue solved, there is another that arises. As an example...

Related: Does a Digital Dollar Threaten Your Retirement Savings?

The U.S. Federal Reserve

Investopedia.com isn't helping, either

 The Investopedia article, which tries to be neutral but comes off as pro-CBDCs as most other mainstream outlets, lists this as things CBDCs will improve:

  • Freedom from credit and liquidity squeezes
  • Better cross-border-payments
  • Improved role of the dollar
  • Improved financial inclusion
  • Expansion of access to the general public

The last two points are ridiculous enough to warrant their own section, so we'll just address the first three shortly. If there is a credit and liquidity squeeze, that means someone wasn't responsible with their money. Even with physical cash, the answer to this squeeze on behalf of a country's central bank is to just print away and give way to inflation.

Thanks to cryptocurrencies, cross-border payments on a large scale can happen within seconds, and even banks can clear them quickly enough. So one wonders how much improvement is needed on that front. We also have the improved role of the dollar. 

Compared to what? The dollar is the global reserve currency. Nobody questions its status as such. The only "competitor" that might try to take the stage with a central bank digital currency is China, which, as it happens, also warrants its own section. Now, let's see the issues CBDCs might create:

  • Changes to the financial structure
  • Risks to financial stability
  • Excessive reliance on central bank monetary and fiscal policy
  • Loss of privacy and protection from governments and other intruders
  • Cybersecurity threats

Boy, that sure is a lot of issues compared to the minimal benefits we are supposedly getting. So by bringing in the CBDC, we've gotten faster cross-border payments which hardly even matter to people and given central banks even more monetary authority.

In turn, we've further destabilized the financial system, made the biggest change to global money in centuries, introduced a "what if the power goes out" scenario, made everyone's money prone to global cybersecurity attacks, and... of course, stripped citizens of their freedom. That's probably a good, or rather bad, way of delving deeper into the muddy waters of CBDCs.

Related: Inflation Continues to Get Worse [Inflation Update]

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Financial-inclusion-be-gone, with the help of CBDCs

It's staggering that there is a mention of improved financial inclusion on behalf of digital money. CBDCs, being a tool of control, exist for financial exclusion. The aforementioned article, as the reasons for supposed exclusion, lists "those without access to commercial banks".

And indeed, needing financial institutions to greenlight every transaction we make isn't ideal. None of us like having the bank as the intermediary in our financial dealings because it has too much authority. But do you know what's an even worse intermediary? The government.

For as much hate as banks get left and right, they come off as a friendly corner store compared to governments. One only needs to read on the history of various governments, certainly starting with China, to see why putting your personal finance in the government's hands is not a good idea. Banks might be guilty of financial crimes, but governments are guilty of every crime man has thought of.

Somewhat amusingly, the ones who will supposedly be aided by CBDCs' "financial inclusion" are those who wouldn't pass a bank's greenlighting system or might not otherwise have access to a bank account. The first group is usually not let through due to bad credit. 

Any other reason a bank might have to refuse service, you can bet that the government will impose times a thousand. In regards to the second, those without access to banking live in some of the most oppressive regimes in the world. They've found their way around it. And giving that regime even more power isn't exactly prudent.

So when we hear financial inclusion in the context of CBDCs, what we're really hearing is financial exclusion. Just as the parents mentioned above, the government has the ability to monitor every financial transaction you make and the power to exclude you from it. The primary issue here is that the government isn't your parent, nor are you a six-year-old. Therefore, no adult should actively desire CBDCs. And many indeed wish they didn't exist.

Related: Gold IRA Rollover Guide - How to Diversify Your Retirement with Physical Gold and Silver

China shows us how CBDCs improve society... not

To the West, Chinese society is a cautionary tale. There is no nicer way to put it, and we shouldn't seek one, either. America stands as the pillar of the West, so to speak, the poster child for it. And its flagship quality is liberty. Liberty and freedom are the core American values. Sure, they've been eroded a little in recent times, but that is still the official line.

Then we get to China, which is on the opposite side. We hear that the U.S. has different wars with China. Trade war, culture war, ideology war... Which is it? That's another complex issue. For example, saying that there is a culture or ideological war paints a picture of Chinese patriots who hate the West, hate the U.S., hate our society, financial system and so on. But that's not really how things are.

As countless Chinese people living in America and Canada can attest, living in the West is nice. They like the West. Can Westerners say the same about China?

Something that not a lot of people know about China, even those familiar with its ultra-totalitarianism, is that the government has developed an increasing disdain for traditional Chinese customs. 

No, that's not a joke. Feel free to research it. The government of China essentially views Chinese traditionalism, including of the religious variety, as a competitor to itself. It wants to become the principal deity of the Chinese people. The well-known religious persecutions that occur there are just one example of this.

What does China's totalitarianism look like, and what makes it possible?

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President Xi to digital ledgers: Thanks, we couldn't have done it without you

China's social credit system has struck the world with various forms of negative emotions. Again, your familiarity with it might vary, so let's outline how that looks like in practice:

  • Every citizen has a social credit score
  • You're given or taken away social credit based on how much of a "good boy" or "good girl" you were
  • The less social credit score you have, the less you have access to... well, anything
  • People with a social credit score in good standing are actively discouraged to mingle with or even be around those with a low one, lest they fall in grades as well
  • One of the surest and safest way to lower your social credit score is to criticize the government in any way, shape or form

It's a rough system indeed. And it's made entirely possible by essentially forcing digitalization unto the people. If everyone is digitalized and on a ledger, it's easy to implement this kind of tyranny. Money is really only a part of it, but an important part.

Oh, before we move on, have you heard that China's latest proposition is an expiring digital yuan? Again, no joke: people will be paid in digital currency with an expiration date to discourage saving. Once again, this is only possible by increasingly introducing centralized distributed ledger technology and making an entire society dependent on it. Now, let's return to the West.

Related: Does the Digital Dollar (CBDC) Put Your Savings at Risk?

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Giving central banks more authority over policy? Yes, please

It's kind of a dual thing with CBDCs. Some sources cite this as a good thing, some as a bad. The general consensus is that central banks don't have the populace's best interest in mind. Among other things, one of the primary goals of their policy is to have a fixed and fairly high inflation rate of 2%. 

This makes it easier for them to pay off their massive amounts of sovereign debt. These days, the inflation rate is around 9% and going up. Why? Because the Federal Reserve printed trillions of dollars in a short span of time.

Why? Because of a government policy that locked down the entire economy. And what is the Federal Reserve a branch of? You guessed it... the government. It printed around 80% of all of the existing U.S. dollars in circulation in months, causing "death of the dollar" to become a buzzword.

Whether you want to believe it or not, history is rife with things like these. There's that whole gold ownership bit, which we'll go over in a second. The more "banana" or less developed a republic is, the more prone it is to complete collapse which usually starts with finance. 

Related: What to Own When the Dollar Collapses

We're all thinking of Venezuela now, but let's not forget that Venezuela's woes are happening partly due to international sanctions cutting Venezuelans off from the global financial system. And that's without CBDCs in place.

With a CBDC, the central bank's job is even easier. It doesn't need to print, just type. Liquidity squeeze? No problem, just make more central bank money with less accountability. It's indeed bizarre that liquidity squeezes are being cited as something CBDCs can or will solve, when liquidity squeezes happen due to monetary irresponsibility. 

If you have a liquidity squeeze in your personal life, that means you've spent all your money. You can't just go and create more out of thin air because... well, because you aren't the government.

In the video below, Sasha Hodder, attorney with DLT Law Group, P.A. and host of the HODLCast podcast, discusses some of the challenges and questions that arise with Central Bank Digital Currencies (CBDCs).

Click to play

Gold, cryptocurrencies and freedom

Mentioning both cryptocurrencies and gold is a great way to round the issue of CBDCs up. Cryptocurrencies were created with the stated purpose of battling financial irresponsibility by governments and giving people financial autonomy. 

That was when CBDCs weren't in the picture. If CBDCs indeed become the norm, it's easy to see how we might move to start treating cryptocurrencies less than assets and more as money.

Gold fits that same purpose, aside from the few decades when Roosevelt made it illegal to own. Remember that one? As it happens, it wasn't so much about taking away freedom back then as it was about promoting the dollar. 

But also about making sure citizens don't have anything of value. Still, the prudent ones held onto their gold holdings, and we imagine many a U.S. family with a sound financial background has some finely-aged bullion in their possession.

The reason gold (and silver) isn't used as money is only inconvenience: to many, it's still the go-to savings tool. Privacy, independence and safety. In other words, everything that fiat currency doesn't provide. Spending with crypto and saving with gold in case we are hit with CBDCs? One imagines this to be the case.

Renowned investor and author Doug Casey has many prudent things to say on the subject of CBDCs, personal finance and more. Most recently, he has called them possibly the worst invention in society's history and "an instrument of enslavement". We concur, and suggest people familiarize themselves with his work before falling for CBDC propaganda. As always, buyers beware.

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About the author 

Steve Walton

Steve Walton is a financial writer, gold bug, and cryptocurrency enthusiast. He's spent the last decade ghostwriting for financial publications across the web and recently launched SDIRAGuide.com to help Americans diversify into alternative assets like gold and bitcoin.

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