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Time for an update on Central Bank Digital Currencies (CBDC's)...
First, this graphic is a great visualisation of how the digital currency space is evolving 👇
The pace of digital currency adoption has been pretty stunning and the CBDC chatter has moved on from 'will they?' to 'when will they?'
Some central banks have already launched their own versions, and China have launched a few pilot schemes including the latest trial of using the Digital Yuan for salary payments...
By now, most people know that CB digital currencies are on the agenda, but it's important not to get caught up in the Crypto vs CBDC battle narrative.
People often bash CBDC's with arguments like this 👇
These concerns are legitimate and obvious...
Everyone sees the downside to central banks being able to track everything you do, tell you what you can and can't spend money on... Any freedom-loving citizen would be out of their mind to accept this.
Which is EXACTLY why they won't have to.
Look, the only reason central banks are getting involved is because they stand to lose control of the money supply if they don't!
They need to keep up with the private sector.
CB's can't let the corporations take over control of the money supply.
It's against their remits of financial stability.
Imagine if Tesla launched TeslaCoin and it became the dominant payment system. The value of your currency is now in Elon Musk's hands.
One day Elon jumps on Twitter...
"I've decided that colonising mars is the only thing that truly matters, so I've launched a SpaceX rocket containing half of the TeslaCoin supply in a digital wallet.
First one to Mars keeps the money. 🚀🚀🚀"
Better or worse than a central bank/government?
Same goes for Facebook and their Libra (now Diem).
The U.S. dollar has served as a political tool for decades.
Don't like something a country is doing?
Cut off their access to the dollar system and harm their ability to trade with the world. Should bring them into line. (e.g. Iran/Russia)
Facebook has 2.7 billion users.
For context, if Facebook were a country, it would have twice as many citizens as China.
Let Zuckerberg take control of 'global money' and see where we end up.
However, Facebook have negotiated with regulators, agreed to peg Diem to the dollar (rather than a basket of currencies) and now expect to launch within 6-12 months.
So, before we get too far down the privacy rabbithole, bear in mind that CBDC's are only coming as a response to this 'threat', NOT because of some nefarious plot to track our every move.
But now that they're doing them, central bankers are thinking about other uses...
BOE's Jon Cunliffe pointed out that digital money could also be programmable, and used the clumsy example of “giving your children pocket money but programming the money so that it couldn’t be used for sweets.”
"Read the room Jonno!"
For now, there are only a few things that matter for CBDC's and all of them are based around convenience & efficiency.
If you can make things easier and cheaper for people, that's at least half the battle.
Anyone who's had dealings with the tax office knows how infuriating it is to deal with taxes.
An accountant once told me that the UK tax system is now so complicated that even the tax office don't know how to calculate taxes properly.
All of the loopholes and fixes just create more loopholes and fixes.
To some extent, CBDC's could mitigate this, at least for small businesses and the self-employed.
Most people don't have a problem paying their fair share in tax, but many do fear the accounting battles and getting it wrong.
In the private sector, Stripe have just launched Stripe Tax to simplify this process:
OK, making taxes easier to pay probably isn't a big vote winner.
How about targeted government spending?
Everyone loves to moan about governments wasting money, and how the money doesn't end up where it should...
Every time the government announces "we are providing funding of £20bn to support this struggling sector of the economy", where does that money actually go?
It gets swallowed up by large companies who can actually afford the bureaucracy of applying for the grants/loans.
Some of the funding might make it through to the sector itself, or it might not.
Where I live in Spain, tourism is a big industry and it's obviously been decimated by the pandemic.
Now, at some point the Spanish government will produly announce funding to support the tourism sector.
None of the local businesses will see that money directly.
It will get spent on wasteful advertising campaigns, tourism fairs, and end up in the pockets of large tourism-related firms.
What if the government could program that money into 'fun coupons'?
Can only be spent in Spain in registered tourism-related businesses and expires this year.
Would that not be a better way of generating revenues for the tourism sector?
AND getting data on the success of the support?
Don't come at me with your ackshually takes and secondary effects, I'm indulging my imagination, OK?
Admittedly, there will be far better ideas than just giving free money to people to spend in sectors that need a boost, but there's no reason that CBDC's need to be all bad.
They could actually make government spending more targeted and more efficient.
The speed of payments can only benefit from these advances too.
Moving money quickly and efficiently is a huge priority, especially in times of emergency.
If CBDC's existed and everyone had an account on the BOE ledger, this would have been far less of a problem 👇👇👇
As for the privacy aspect, I really don't get the panic.
CBDC's will exist in relative harmony with private coins.
Over time, many of those coins will be competed out of existence, and a few private coins will dominate the private markets.
There will always be a market for privacy, and there will always be a market for a privacy coin.
Politicians have vices too you know?
Regulation doesn't mean complete control.
Take this example from China and their authoritarian, all-seeing government...
Want to control how much our houses are worth?
We'll list them as fruit to get round it.
Governments and regulators are always lagging behind human ingenuity.
And that won't ever change...