Do you know what the banks have planned?
The continued and growing adoption of cryptocurrencies has turned up the heat on governments around the world; their reckless money printing has only added fuel to the fire and now their is an ever growing eagerness to develop their Central Bank Digital Currencies (CBDCs) before its too late. In this article I will explore a recent report that reveals what features CBDCs will have, how governments plan on rolling them out, and what implications this could have for cryptocurrencies.
The report in question was compiled by the Bank of International Settlements (BIS). If you are unfamiliar with the role of BIS it is effectively the bank for central banks and its primary role is to facilitate co-ordination between central banks around the world.
Over the past few years BIS has been trying to come up with a template for CBDCs. If the name doesn't give it away, CBDCs are intended to be digital currencies issued by their respective central banks. However I have to emphasise that CBDCs are not cryptocurrencies by any stretch of the definition, this is because they are centralised, permissioned and offer next to no privacy. They would be controlled completely by central banks and the governments that they beholden to.
Almost every Central bank is working on a CBDC of its own and 7 of these have been actively helping BIS formulate a template. These are the US FED, the EU Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, the Bank of Canada and the Swedish Central Bank.
In October 2020 these 7 Central banks and the BIS published the first of many reports detailing what the CBDCs will look like. The second report came out on September 30th 2021, which is what I will cover in this article and it is divided into 3 parts: design and interoperability, user needs and adoption and financial stability implications.
The authors provided a short 6 page summary of their 3 part CBDC report and there are a few interesting points in the summary which were seemingly not mentioned in the 3 parts of the report.
One rule for them and another for us
The first thing worth pointing out is the most important and that is everything that I am writing about applies to a public or retail CBDC. This is a small but extremely important detail because central banks, governments and select institutions will use their own so called 'wholesale CBDCs.' A wholesale CBDC template is being devised, however one thing is abundantly clear regular folks like us will be expected to use a completely different digital currency to the people in power. Let that sink in for a moment!
Another concerning detail can be found at the very end of the first page of the report summary and I quote:
CBDCs would be likely to have wide-ranging impacts on public policy issues beyond a central bank's traditional remit
This seems to imply that CBDCs will be used to enforce public policy mandates which are not financial in nature.
However there is more:
Different users and needs would need to be defined and addressed in the system's design
Central banks might consider measures to influence or control CBDC adoption or use. This could include measures such as access criteria for permitted users
This seems to suggest that even retail CBDCs will have different rules for different groups of people.
At this point you might be getting a little upset, however fear not the BIS and these central banks know that, and I quote:
there might be some measures that may face obstacles to public understanding and acceptance
I'll tell you how they plan on helping you understand and accept these terms and conditions shortly, however lets first look at how these CBDCs will be designed.
Much of how these CBDCs will be designed has to do with the roles financial intermediaries will play in such a system. To start with and I quote:
Central banks would be the only entities entitled to issue and redeem a CBDC and would bear the ultimate responsibility for the design of the CBDC system and the operation/oversight of the core ledger.
Although central banks could theoretically cut out all existing financial intermediaries the report stresses the importance of partnering with the private sector, simply because the central bank can't recreate, much less maintain the same infrastructure on its own.
The above diagram is what a CBDC based financial system would look like according to the report. As you can see the exact role each party plays here is not entirely clear but the report notes:
If the central bank were to play too operational or dominant a role in the ecosystem, private intermediary participation could be curtailed
Given that private financial intermediaries are going to be a part of the picture this means that CBDCs would need to be interoperable, not just internationally but also domestically with their existing infrastructure.
Because this will likely cause a lot of technical issues the report recommends limiting the number of financial intermediaries that are allowed to operate. Also, quote:
Approval processes for new intermediaries or certain services and strong oversight could help mitigate technical issues
Essentially this means that the central bank will decide exactly which financial intermediaries are allowed to operate.
When it comes to privacy and I quote:
full anonymity is not plausible, as central banks would design CBDCs to meet anti-money laundering and combating the financing of terrorism requirements.
Thankfully your data will be safe and I quote:
The central bank would have no commercial interest in end-user data and may be better placed than a commercial entity to commit to a minimal use of such data
Well, what a relief!
The report also mentions the infamous "travel rule" put in place by the FATF (Financial Action Task Force) which means that every CBDC transaction above a certain amount would be automatically tracked.
The next part of the report briefly touches on the interoperability requirement for CBDCs and notes:
The essential foundation of interoperability would be 'standardisation', which would allow compatibility'
Furthermore it is envisioned that a CBDC could also be introduced with an explicit policy goal to catalyse a migration of national standards such as an internationally promoted standard. Effectively the intention is for CBDC standards to be global. I for one cannot wait!
How to convince us plebs to adopt CBDCs
It starts off not so subtly admitting that the main reason why central banks are developing CBDCs is because of cryptocurrency adoption and I quote:
Without continued innovation and competition to drive efficiency in a jurisdiction's payment system, users may adopt other, less safe instruments or currencies, potentially leading to economic and consumer harm.
Even though central banks can see the writing on the wall the report seems to imply that rolling out CBDCs too quickly could do more harm than good.
Ironically the report acknowledges technological innovation has been transforming the markets for retail payments at pace over recent years with many new payment methods, platforms evolving to become faster, cheaper and safer.
The logical conclusion of such an acknowledgement would be to allow this kind of payment innovation to continue, but the BIS and their banker buddies feel that it is better done in a different way.
The report lays out the 3 ways in which CBDCs can be achieved:
Fulfilling User Needs
Achieving Network Effects
You Can Keep Your Phone
The main selling points are:
Privacy (Ummm really?)
In terms of achieving network effects the report suggests the CBDC design might choose to emphasize 'peer-to-peer' functionality in order to facilitate adoption. This recommendation is based on existing research on the adoption of digital currencies although I don't think the authors realise that they aren't really comparing apples with apples here.
Not requiring everyone to buy a new device is quite self explanatory, although it comes with its own set of issues in relation to performance because the most wide spread technology is the most basic.
As the report goes on it starts to detail some of the manipulative ways of achieving CBDC adoption, namely and I quote:
to incentivise consumer use of CBDC by disbursing social benefits and transfers to individuals in CBDC
Allowing consumers to pay their taxes in CBDC may also provide a stable, concrete example for consumers to use CBDC
The report contains a sort of rubric for how targeted marketing campaigns could be run and how to engage different consumers with different pain points and needs. The funny thing though is one of these consumer architypes is someone who effectively doesn't want commercial banks to know his or her identity or track his or her spending.
The best solution to this issue per the report is to give all of this information directly to the central bank instead!
An ideal middle ground?
The ideal middle ground would be to offer transparency and compliant privacy in a similar way to certain cryptocurrency projects operate such as Secret Network does.
This leaves just one area of the BS....I mean BIS report to cover and that's the financial stability implications of a CBDC.
In this section is the first mention of cryptocurrency when the report notes that
stablecoins are only only starting to be developed and will need to satisfy regulators that they are safe
Well, I guess that the author missed the memo that mentioned that stablecoins have been around for years and generally the users know which ones are safe and which ones are...less safe.
The report then goes on to claim something so ridiculous that it pains me to even repeat it, quote:
Unlike central banks, issuers of stablecoins are not bound by principles to design products that would co-exist and interoperate with other forms of money or to promote ongoing innovation and efficiency
This is categorically false, as far as I'm concerned. Stablecoins like USDT and USDC are available on almost a dozen different blockchains and it's in their economic interest to be as interoperable as possible.
Stablecoins are literally leagues ahead in interoperability terms of any CBDC. Even Visa has tested USDC as part of its own payment infrastructure.
The real truth of the matter is in fact mentioned in the following quote:
Significant stablecoin adoption and the potential consequent fragmentation could result in excessive market power and the type of deposit disintermediation described as a risk for CBDC issuance
This officially confirms that stablecoins are seen by central banks as a risk to the role out of a CBDC. Furthermore they are well aware that the actual introduction of CBDC could be some years away and that in the interim providers of private money and tokens are expected to continue developing and expanding their services.
Because central banks can't possibly catch up the only way that they can slow stablecoins down is through onerous regulation which is probably why this topic has been recently making the headlines.
Central banks know that CBDCs can't compete with stablecoins because they can't offer the same yields on savings that you find in DeFi.
Yield is something that wealthy individuals and institutional investors crave and their influence could potentially protect stablecoins from harsh regulations.
A threat to the financial system?
Besides the fact that the projected adoption of CBDCs in G20 countries is between 4% and 12% they could pose a huge threat to the financial system via the banks. But why?
When the stock market started crashing in the lead up to the great depression in th 1930's and people tried to withdraw their cash from the banks they found out that they didn't have their money because it had all been lent out.
These bank runs caused the banking sector to collapse and was what ultimately caused the great depression. The FDIC was subsequently formed to make sure that banks always have enough cash on hand to make sure that this type of situation could never happen again.
However the BIS report highlights how many investors would see a CBDC as a safe haven in the time of crisis, meaning that they would move their money out of the banking system and into the central bank. This would ultimately lead to the collapse of the banking system like it did 100 years ago.
Of all the side effects that a CBDC could have on the banking system one of them is worth mentioning:
the central bank could cause a reduction in commercial bank deposits which would consequently translate into more expensive credit lines
In plain English CBDCs could make loans more expensive and that could make it next to impossible for the average person to buy a house or other valuable assets.
Funny, its almost as though you'll own nothing and be happy. Where have I heard that one before?
Has a bank run already started?
The same run on the bank risk exists with stablecoins and one could argue that it has already begun.
The $120 plus billion in stablecoin's market cap didn't come from no where, it came from bank balance sheets.
After highlighting these risks as well as others the report explains how central banks can use their omnipotence to prevent these scenarios from playing out.
Quantity-based safeguards would restrict the use of CBDC through imposing hard limits on the transfers and/or holdings of CBDC
Limits could also be applied varyingly for different CBDC account holders
Such limits could be imposed on a permanent basis or on a transitional basis
In other words if the economy were to start collapsing and everyone runs to CBDCs to protect their wealth the central bank will prevent them from doing that to prevent the crash...investors be damned!
In its conclusion the report highlights that with a shift away from bank deposits to CBDC there could be a non-trivial, long-term impact on bank lending and intermediation. So, where do I sign up?
Easier said than done
As terrifying as this BIS report is it reveals just how difficult it would be to roll out such a dystopian system. I would actually go a little further and say that its next to impossible. This is simply because there is no way to introduce a CBDC without eating into the bottom line of banks and financial intermediaries. They would sooner side with crypto than let that happen.
Furthermore, there is absolutely no way that an average person is going to adopt a CBDC without being forced and the moment you start to introduce force to mandate something you claim is good, it becomes clear that it isn't.
This begs the question as to why central banks would go to all this trouble to create what is likely to be a piss poor payment method.
I reckon the answer is that this isn't their actual goal and the evidence is easily found in the design of what they are building.
CBDCs are nothing short of a tool for total control and every stated benefit and feature only exists to entice people into this totalitarian scheme.
There are numerous technologies that already exist that can do everything that CBCDs can and more. Most of these technologies have come from cryptocurrency and it is somewhat odd that the report doesn't mention any cryptocurrencies besides stablecoins. And on that note it didn't mention the word blockchain either.
I suppose BIS doesn't want to draw any more attn to cryptocurrencies either; it would be a real tragedy if any of the governments reading the report got the idea of adopting Bitcoin like El Salvador did.
Other countries are likely to follow suit especially as its much easier to plug into a financial system that has proven to be reliable and secure rather than build one from the ground up. It looks like they won't have any choice either as fiat currencies are quite clearly losing value and credibility as each day passes.
This may be what central bankers want though, after all there is only really one way that they could convince anyone to adopt their CBDCs is if their existing fiat currencies are worthless. Even then the crash could happen much quicker than they anticipated and their CBDCs are far from being ready to fill that void.
It might be a crazy idea but we could end up with a scenario where the only money left with any kind of value are select cryptocurrencies and China's digital Yuan. I think we all know which one the world would pick.