Trading is a primordial human activity. Since time immemorial, our ancestors exchanged goods, even in nomadic societies, between hunter-gatherer tribes, and then to a greater extent, when a sedentary lifestyle was necessary for agriculture and livestock.
The economy develops based on trade, and for this money is necessary.
Let’s look at the definition of money. Money is any asset or good, generally accepted as a means of payment by economic agents for their exchanges, and which also fulfills the functions of being a unit of account and a store of value.
The money became a means of exchange after replacing the barter of goods. It began being represented by stones, seashells, salt, silver, gold, or another type of commodity that was accepted by the majority as representative of value. Then the minting of coins was a technological advance for money. Later, paper money as a title of credit was another advance. Currently the issuance of digital or electronic money is the most widely used modern use in the world.
It is fiat money when it is not backed by commodities, without a reserve that maintains a ratio, that is, money that is issued with a counterpart in debt, as has happened since the early 1970s, when the gold standard was abolished in the United States, and then copied to the rest of the world.
The Central Bank and Money Management
Money is not only that issued by Nation-States, but currently, for most of world trade, it is. In some minor cases, and in certain situations, trade is carried out by barter, when an economic agent pays another with services or goods, but this is not the most common.
The Central Bank, (the Federal Reserve in the United States), is the institution that in most countries acts as a monetary authority, and is in charge of managing legal money, designing and executing the country’s monetary policy.
All of the World’s Money and Markets in One Visualization
The current payment system is mostly digital, used for electronic currency transfers, leaving very little use for paper currency or minted coins. For example, physical US currency in circulation is only one-tenth of the total money supply, the rest is held in various bank deposits in electronic form.
The only entities that have accounts at Central Banks (such as the Fed) are private and public commercial banks and other financial institutions. Citizens and businesses cannot open an account at the Fed.
To understand how the monetary system works, let’s assume that “ABC Bank” has reserves of USD 1,000 million at the Fed. During the course of the day, it makes loans and takes deposits. The loans end up as deposits in other banks. At the end of the day, all of these transfers are “settled,” meaning that if “ABC” lent a total of USD 200 million and received a total of USD 150 million, their account balance at the Federal Reserve would be reduced by USD 50 million, and one or more other banks in the system will see their balance increase by a total of USD 50 million as well.
The money that people spend (with the exception of cash) is not Central Bank money. It only exists in the ledger of your commercial bank or other institution. If one person transfers USD 1,000 to another, the balances in both accounts change, but nothing happens at the Central Bank. Individuals’ account balances go up and down, but their banks are even with each other and the Federal Reserve is not involved at all.
CBDCs Are an Advantage for Rulers
Central Bank Digital Currency (CBDC) is money issued by a Central Bank in a digital format, programmed with computer code, and its validity secured with cryptography. They are digital tokens, similar to public cryptocurrencies, with the value of fiduciary currency of the country.
The digital or electronic money that is used today is not CBDC, since it is not registered in a blockchain ledger, but in databases.
Many tend to confuse CBDCs with stablecoins, which are tokens pegged to the market value of a fiat currency, encoded with open source algorithms that run on a public, permissionless and decentralized blockchain, whereas CBDCs are cryptocurrencies of permissioned blockchains and centralized in one authority. At the end I leave an article I wrote about stablecoins (1).
There are currently several Nation-States that are developing their own CBDCs, to varying degrees of progress. In the United States, CBDCs are under study, and the FED published a document: Money and Payments: The USDollar in the Age of Digital Transformation. Two States have already launched their CBDCs, Nigeria with the e-Naira and the Bahamas with the Sand Dollar. China is well advanced with its CBDC, called e-CNY, which is already being partially used by its citizens. You can see the global situation here: Today’s Central Bank Digital Currencies Status or better here: Central Bank Digital Currency Tracker.
I will cite some characteristics of CBDCs:
- Any intermediary costs and taxes on transactions can be eliminated at the consumer level, allowing fast and frictionless money transfers and transactions.
- Electronic registry that provides regulators with a powerful weapon against money laundering, tax evasion, terrorist financing and other criminal activities.
- The funds of criminals and terrorists could be instantly frozen.
- They can be programmable, allowing authorities to limit purchases, payments and receipts in whatever way they deem “socially beneficial”. For example, if rationing becomes necessary, the authorities could impose a weekly limit on purchases, or if they need to activate the economy, establish a time limit to spend the funds, that is, money that expires (John Maynard Keynes‘ dream).
- Programmable currency, citizens could be rewarded for good behavior, or penalized for bad behavior, at their discretion.
- Taxation and wealth redistribution could be automated. Universal basic income, welfare payments, stimulus payments could be implemented algorithmically.
- Transaction traceability, with data on when, where, and how much funds have been spent by a wallet holder, provides valuable insights for policymakers.
As you can see, there does not seem to be any benefit for the citizens, (or at least I do not see it), since there is total control by the issuing States over the use and disposition of the money, and much more efficient (in that meaning) than the current monetary system.
Poor cryptographic security design can allow hacking to double spend, i.e. reuse money already spent, thus increasing the monetary base.
Thus, a CBDC allows individuals and companies to hold accounts at the Central Bank, replacing cash, without the need for intermediaries, unlike the current system.
Control as the Main Objective
CBDCs offer an unprecedented opportunity for social engineering, and it is a giant step towards technocracy.
The ruling elites, who are preparing CBDCs, are well aware of their totalitarian potential, and they would not be as effective if they were not imposed exclusively as money, but they will be, as fiat money is today.
Paper money, or cash, has characteristics of anonymity, unconditional fungibility, and non-confiscatable, and thus inherently reduces government power and, indeed, social control.
The standard of policy making can be automated through artificial intelligence algorithms, thus maximizing the results of the decisions made by the rulers.
Progressive political discourse would go like this: “The more accurate and complete the data set we have on people, the more capable we are of improving human life”.
Without entering into a field of ideological discussion, the notion that money is free from political interference poses a more general problem, the relationship between the economic and political spheres. Communism unifies the two, and Libertarianism seeks the opposite, to separate money from political control. Both money and government are modes of agreement and power in societies.
In this Nation-State context, when centralized authority subjugates money and property, we have Communism, and when money and property subjugate centralized authority, we have Oligarchy.
In the modern era, little control remains outside the Nation-State, or more precisely, the central authority. The State and money have shaped almost all modes of social organization.
In one way or another, the centralization of power tends (sooner or later) to totalitarianism and corruption.
The answer to the threat of centralized totalitarianism is to build a decentralized community, and this is where decentralized digital currencies, cryptocurrencies, (native tokens of decentralized, public, permissionless and trustless networks) gain prominence.
Could a CBDC be developed on a public and decentralized blockchain, for example like Cardano?
Yes, it could, in fact, a non-native protocol such as stablecoins, (similar to CBDCs), are developed in different blockchains, such as USDT or USDC in Ethereum, or DJED, soon, in Cardano. But from everything you have read in this article you will understand that it will not be a reality, since the Central Banks will want their own private and authorized network to achieve their true purpose of control.
The Fourth Industrial Revolution, which includes digital currencies, biometrics and high-tech surveillance, will present itself to the world as a dystopian era of profound changes in an accelerated manner, which makes them more difficult to assimilate, and to stop.
We must understand CBDCs as part of a broader ideology of progress, and in a data context, information is power.
The development of the decentralized crypto economy can provide a balanced solution to a threat of totalitarianism. Blockchain technology is still immature, only 13 years old.
It is an experimental technological innovation where a minority of the population has been encouraged to participate, understood by some as a risk investment, and by a few others, as a true tool of value and utility, and they are the ones who use it for real use, both economic and social.