The Breakdown - How CBDCs Give ‘Absolute Control’ to Central Banks

Starting point is 00:00:00 Quote, we believe a digital euro is a preemptive response, a crypto-cryptanite, a big tech neutralizer. For my part, I think it is worth being forceful in our separation of these two things, peer-to-peer network cryptos and big tech monies like Libra. One is an extension of power of an old but already powerful entity in big tech. The other is a new organizational form that leaches power from institutions and distributes it across networks. I think this distinction is going to be incredibly important in the future, including and especially to regulators, because there is no doubt that fintech is the enemy they have their sites on. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin,

Starting point is 00:00:44 and the Big Picture Power Shifts remaking our world. The breakdown is sponsored by nexo.io, Casper, and NEM, and produced and distributed by CoinDes. What's going on, guys? It is Friday, March 19th, and today we are discussing CBDCs and the absolute control of central banks. First up, however, let's do the brief. First up on the brief today, U.S.-China talks. So one of the hallmarks of the last presidential election cycle was, frankly, a competition to see who could be harder on China. Well, the first face-to-face high-level talks between the two countries are happening, and at least when it comes to the show, toughness is definitely the name of the game. U.S. Secretary of State, Anthony Blinken, accused Beijing of being a force

Starting point is 00:01:30 for undermining global stability. His counterpart on the Chinese side said that the U.S. wasn't qualified to speak to China from a position of strength. As Bloomberg pointed out, both sides' comments seemed designed primarily for domestic consumption. Coming out of their recovery from the coronavirus, China is emboldened and coming off of four years of Donald Trump, the U.S.'s course is to some extent set. The question really is whether this bluster is just for public consumption and there's more room for cooperation behind closed doors, or whether this is really the state of things. At least one professor said it's probable that after this Anchorage diplomatic summit, Sino-American relations may deteriorate further. My favorite interpreter of this stuff,

Starting point is 00:02:11 however, is Graham Webster, who has been on the show before and who basically said, who expected anything else? He effectively calls out the Twitterati reaction as forced and feigned surprise for the sake of the reaction tweet. He tweeted, so the Chinese side went over time in front of the press and delivered some of the expected litany in public. Also for public effect, the U.S. side sanctioned a Politburo member days before, not after, requiring some extra display. The people in that room get it. On here, less so. Yang is well known for laying into U.S. visitors to send a message. Sometimes it's that and then shift gears to a productive agenda. Sometimes his job is the message and that's it, this visit. I mean, the U.S. messaging about this meeting

Starting point is 00:02:48 has been that they're going to lecture China about all the bad stuff China does. Do people expect the Chinese messaging to be, hey, nice to see you guys. I just get the U. I just get the a sense people either had unrealistic expectations or more likely had few expectations in specific, but just love a good reaction gif. This is Act 1, Scene 1 in a sequel that never should have been made, but we don't get to opt out. Let's see how it goes. Next up on the brief today, let's talk about U.S. spending coming back. The lead story in the Wall Street Journal this morning was economy revs up as Americans increased spending on flights, lodging, and dining out. And effectively, what this shows is that there is huge pent-up demand for the experiences that were most

Starting point is 00:03:25 compromised during the COVID-19 pandemic. The Biden administration has announced that they met their distribute 100 million vaccine doses in 100 days goal in just 58 days and continue to push states to have the vaccine be available to everyone by May. This is leading to big potential growth. Economists surveyed by the Wall Street Journal raised their average 2021 economic growth forecast to 5.95% up from 4.87% in February. This would be the fastest pace in four decades. And as I mentioned, there are some specific indicators that the chief beneficiaries are travel experiences and hospitality experiences that were lost. Airbnb and VRBO are currently above pre-pandemic levels. U.S. hotel occupancy hit a 20-week high of 49% a week ago.

Starting point is 00:04:10 The article in the Wall Street Journal also had a great little segment about the Mohawk Mountain House, which is a resort in my neck of the woods over here in the Hudson Valley. They had it worse than the 2007-2009 recession, but now they're getting tons of inquiries about of all things family reunions. Nature is, as they say, healing. Third and finally on the brief today, let's talk about Decentraland. For those who are still uncomfortable in the physical world, the virtual world is growing fast. Quindus is reporting that a casino in Decentraland, which is a decentralized virtual world, is actually hiring real-life people. So real-life hosts now work the floor, helping visitors explore roulette, blackjack, and slots. They're doing

Starting point is 00:04:51 four-hour shifts and getting paid about 500 bucks a month in dye. The first full-time floor manager goes by the name G-LHF, said to be a veteran online poker player who quit their previous jobs in February to go full-time. Before the whole NFT boom happened, I wondered if it would take the rise of virtual worlds for something like digital art and digital collectibles to take hold. It felt to me like they solve a lot of the problems of display. And while it's obvious that those problems don't seem to be enough to stop the momentum in the NFT space, I do think it's pretty interesting to see more of this blend of real commerce and real employment happening in virtual spaces. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need.

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Starting point is 00:06:12 Casper provides the blockchain ecosystem with a solution that makes no compromises around decentralization, security, or performance. Learn more at casper.network. Hey guys, I'm excited to share that this week we have a special product launch sponsor. Symbol, the next-gen public blockchain from NEM, is here. Symbol from NEM is the connector between blockchain and business. It boasts enterprise-grade security and programmability, bringing cutting-edge technical features to projects at the heart of the new economy.

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Starting point is 00:07:16 more transparent, and more inclusive cross-border payments. It's actually a pretty short little speech, and this is how Powell sets up the context. Last year, the G20 asked the Financial Stability Board, FSB, to coordinate the development of a roadmap on how the global community could enhance cross-border payments. It is long-bit acknowledged that the existing system, while safe and dependable, suffers from frictions, including processes that make it difficult to comply with anti-money laundering and counter-terrorist financing requirements, difficulty in managing payments across time zones, and in certain areas, a reliance on outdated technology.

Starting point is 00:07:49 Moreover, these frictions contribute to higher costs of cross-border transactions. Now, in response, Powell said that there are two approaches, improving existing rails or laying new tracks, and he said that the Fed is doing both. When it comes to existing rails, he gave the example of introducing faster instant payments via their Fed Now service and upgrading the design to maintain uninterrupted processing 24 hours a day, seven days a week, 365 days a year. The plan is to launch those upgrades sometime in 2023. The laying new tracks side of the equation is, you guessed it, Central Bank Digital Currencies or CBDCs. In terms of their work on CBDCs, he cites two parts. First, is research being conducted at the Board of Governors level, specifically calling out a research

Starting point is 00:08:33 collaboration between the Federal Reserve in Boston and MIT. And second, he pointed to a collaboration with the Bank for International Settlements with a group of seven central banks, including the Fed, that produced a report on the feasibility of CBDCs in helping central banks deliver their public policy objectives. The statement that people most picked up was this one. Quote, one of the three key principles highlighted in the report is that a CBDC needs to coexist with cash and other types of money in a flexible and innovative payment system. One of the key questions for CBDCs is will they be an outright replacement for cash or will they work in a hybrid system? This idea of something more hybrid echoes what we've heard from European Central Bank chief

Starting point is 00:09:14 Christine Lagarde who has been talking about it frequently over the course of the last year. She has said repeatedly that a digital euro would not be a replacement for cash but a supplement to it. However, it is hard to deny from a central banker's perspective that a true CBDC would be massively preferable to cash. Cash is completely opaque, offering near-perfect privacy of use. This is why cash is the preferred tool of money laundering and criminals despite what they say about Bitcoin. Indeed, money laundering makes up a dramatically larger portion of the traditional system's activity than cryptos. Chain analysis reports suggest that less than half a percent of crypto transactions were used for illicit purposes, and most of those were internet scams. Meanwhile, the UN estimates that between 2 and 5% of global GDP,

Starting point is 00:09:58 between 800 billion and 2 trillion annually, comes from money laundering. Given how much emphasis the traditional central bank establishment puts on anti-money laundering, cash would seem to be quite dangerous for them. Enter CBDCs. To be clear, CBDCs could be designed to be more or less opaque, more or less privacy preserving. In fact, former CFTC chair Christian Carlo has strenuously argued for a US digital dollar saying that it would have to be privacy preserving to meet obligations set out in the Constitution. However, whatever the theoretical level of privacy, those knobs will still be set by the implementing central bank, and so presumably could be tweaked and reset by that same actor. This is why many human rights and privacy advocates are extremely nervous about the prospects of

Starting point is 00:10:42 the coming CBDC era. Today, Alex Gladstein, the CSO of the Human Rights Foundation shared a clip of Augustine Carstens. Carstens is the general manager for the Bank of International Settlements. The BIS is basically the central bank for central bankers, and they have increasingly been beating the CBDC drum, especially since the announcement of Libra. Let's listen to the clip that caught Gladstein's attention. Our analysis on CBDC, in particular to the general use, we tend to establish the equivalence with cash.

Starting point is 00:11:12 and there is a huge difference there. For example, in cash, we don't know, for example, who's using a $100 bill today. We don't know who is using a $1,000 bill today. A key difference with the CBDC is that central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability. And also we will have the technology to enforce that. Those two issues are extremely important, and that makes a huge difference with respect to what cash is. Obviously, the standout line from that is the absolute control piece, and I want to emphasize what Gladstein said alongside this clip.

Starting point is 00:12:04 Quote, this isn't some mask slip. This is repeated over and over again as the primary benefit of CBDCs over alternatives like cash and Bitcoin by central bankers. and monetary experts. Of course, they claim it's to keep you safe and to keep things stable and to fight bad guys. Just reifying what Alex said, this is a clip from a cross-border payments conference last October, and frankly, you could find a half dozen more just like it. Now, as I mentioned, there are theoretically different ways to design a CBDC such that you could guarantee more or less privacy. However, some of the CBDC race leaders, i.e. China, don't even pretend to be interested in that privacy preservation. For them, they are transparently

Starting point is 00:12:42 interested in the control. Now, if you want to give the BIS the benefit of the doubt regarding this statement, you might contextualize this idea of, quote, absolute control to be specifically focused on the prevention of crime. But as many Bitcoiners will tell you, if the cost of preventing crime is the effective criminalization of everyone, that's likely too high a cost to pay. What's more, even assuming no initial malintent, designing a system that is as abusable as a perfectly transparent controllable money creates immense future risk. As I've said in previous episodes, I think that CBDCs are more or less a foregone conclusion. There are simply too many benefits for central bankers not to go down this path.

Starting point is 00:13:22 But there are some roadblocks. One of them, interestingly, is commercial banks. Right now, commercial banks own their relationships with their customers. CBDCs that involved an account held directly with the central bank could suck trillions out of that system overnight. In fact, a new Bank of America Securities report argues that European commercial banks would be collateral damage in the instance of a digital euro. That same report argued that the real enemy that CBDCs are trying to beat is private cryptos, specifically private monies from fintechs.

Starting point is 00:13:52 Quote, we believe a digital euro is a preemptive response, a crypto-crytonite, a big tech neutralizer. For my part, I think it is worth being forceful in our separation of these two things, peer-to-peer network cryptos and big tech monies like Libra. One is an extension of power of an old but already powerful entity in big tech. The other is a new organizational form that leeches power from institutions and distributes it across networks. I think this distinction is going to be incredibly important in the future, including and especially to regulators, because there is no doubt that fintech is the enemy they have their sights on. In America, the Libra hearings were a referendum on Zuckerberg and Facebook. In China, it is extraordinarily clear that the

Starting point is 00:14:35 digital yuan is a part of an attempt to break the growing power of AliPen, and and WeChat pay and integrate them into a new entirely controlled system. All that said, one last line from Powell's speech that I want to point out, improvements in the global payment system will come, not just from the public sector, but from the private sector as well. The U.S. then is at least giving some talk space for some public-private partnership. I still tend to think that there is a much better chance than most people would give it for the U.S. government to decide to effectively nationalize an existing private dollar-stableness.

Starting point is 00:15:09 coin like USDC as a way to accelerate a digital dollar rollout should they decide it becomes important. I could be wrong on that, but I think there's a much bigger chance than we might think. Anyways, guys, always interesting to keep track of how the narrative and ideas around CBDCs are changing. This is now the second time and we're only in March that Powell has talked about it, which is a lot more frequent than last year. So I think it's likely we hear a lot more about a digital dollar and how it might be designed and where the Fed actually is in the process. over the course of the rest of 2021. For now, though, I hope you are getting excited for a great weekend.

Starting point is 00:15:44 It looks like it's going to be in the 60s here in the Hudson Valley, and we are going to be out grilling, and I can't wait. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - How CBDCs Give ‘Absolute Control’ to Central Banks

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