Posts Tagged ‘CBDC’

CBDCs Are Programmable Money

Posted: December 18, 2022 in Economics
Tags: , ,

By Richard Martin

Central Bank Digital Currencies are not just digital money, which is simply money represented symbolically in digital ledgers.

They are much more; they represent the switch to fully Programmable Money.

They are similar to loyalty program points, usable in only certain conditions and for specified purposes and durations.

With Programmable Money, the state no longer has to convince or coerce intermediaries to prevent use of money in proscribed exchanges or encourage its use in favoured transactions.

This is part of a wider trend toward private disintermediation, where private parties can contract directly without going through a third party.

Private disintermediation is generally a net positive, as it gives greater power to the parties to the exchange as they don’t have to convince a 3rd party to the transaction, nor do they have to conform to the 3rd party’s rules.

On the other hand, Programmable Money empowers the government as the unique intermediary for all monetary transactions, obviating the requirement to coerce or convince parties in specific transactions, especially intermediaries and other 3rd parties.

In other words, the state wishes businesses to be simple order takers who do the will of the government, rather than exercise their own free will or that of the owners/entrepreneurs.

When the government forces businesses to do its bidding, this is the very definition of fascism, turning the free market business owner and entrepreneur into executors of the government’s will, what the Nazis called Betriebsführer (shop or factory manager).

As Programmable Money, CBDCs will allow the issuer to take even this limited freedom of action and initiative away from the contracting parties and the intermediaries.

The government issuer of Programmable Money can build automatic functions in to the currency to achieve what it views as desirable outcomes or characteristics through predetermined activation and deactivation protocols.

This could include building in functionality to ensure a specified duration of validity (spend before date); specified use cases (only for approved exchanges); geographical constraints (only in certain territories); types of users (e.g., not for minors); and manipulation of currency denominations akin to stock splits, merges, and swaps (1 unit is now 10 units, or vice versa).

The fact that China is implementing a “digital yuan” should have us all concerned about this, especially if it becomes the norm in supposedly free societies.

© Richard Martin

by Richard Martin

Bitcoin has already been attacked unsuccessfully several times. If it were possible for a government to take down Bitcoin it would have already happened, and probably in China first. The ECB head, Christine Lagarde said almost two years ago that it was her goal to regulate crypto and bitcoin. The former is possible and should be done, the latter can’t. The ECB can’t, nor can the Fed. The only thing they can do is to conjure up CBDCs (Central Bank Digital Currencies), but if the market (i.e., the people) don’t accept them, there is nothing they can do. But they’ll try to talk them up and trash talk crypto, hoping that it will take down Bitcoin in the process. It won’t happen.

The fact that BTC can be lost or “hoarded” is irrelevant. In the past, gold was buried in hoards and graves and lost in shipwrecks. It didn’t affect a thing and only made the remaining gold more valuable. Bitcoins and other cryptos have been stolen from online exchanges since the start, the most prominent being the Mt. Gox heist in 2014.

But they can’t be stolen by hacking if you don’t hold them in an online exchange or on a device that can be accessed through the internet. These are known as “hot wallets,” a fitting term. If you hold BTC in a “cold wallet,” i.e., offline, then they can’t be stolen through hacking. There are also services that offer cold storage and multiple signatures to access them. Bitcoin ownership is linked to your private signature, which can be accessed through a 12-word or 24-word seed phrase. If you lose your cold wallet or it is stolen, all you have to do is enter your seed phrase in a new wallet to have access to BTC again, while the old wallet will be automatically zeroed. There are cases of people leaving countries with capital controls who memorized their seed phrase and reaccessed their BTC savings after they left their original jurisdiction.

There have already been hundreds of attempts to change the Bitcoin network by what’s known as hard forking the blockchain. All that happened is that the ones trying to use the “new” BTC lost out, as it depends on the consensus of work nodes (miners), verification nodes and holders/users. In 2017 there was a concerted and coordinated attempt by the great majority of miners — something like 80% — to hard fork the network to allow more and faster transactions. It failed miserably and the original blockchain won out.

There is a theoretical possibility of what’s called a “51% attack,” but that would require some entity to control over 50% of the mining power and then maintain that essentially forever. The energy costs would be astronomical and would require a grouping of sovereign entities around the world to even consider it at this stage. I’ll leave you to consider whether that is a realistic possibility.

The solution to that is to treat all crypto, except Bitcoin, as securities, and thus subject to securities laws and regulations. The heads of the SEC and the CFTC (Commodities Futures Trading Commission) in the US have both stated publicly that Bitcoin is a commodity. This means it’s an actual thing that can’t be manipulated or conjured out of thin air. It’s like pork bellies and corn. You have to expend energy and do work to create them.

 © Richard Martin