Central Bank Digital Currencies (CBDCs) are Having a Moment

By John Banks

We are now barreling headlong into the Information Age, the fourth great age of human civilization. The prior three, as we’ve explained before, were the Stone age, the Agrarian age, and the Industrial age.

The Stone Age gave us tools, the Agrarian Age gave us farming techniques, and the Industrial Age gave us factories and physical machines. Now the Information Age is giving us the digitization of the physical world, the merging of the physical and the virtual.

This physical-virtual merging process, in which it becomes impossible to tell where one stops and the other starts, is becoming immensely powerful and consequential through the use of machine learning and artificial intelligence. As the venture capitalist Marc Andreessen famously put it in 2011, “software is eating the world.”

As a part of this shift from physical to virtual, government policy is on the cusp of radical change. New capabilities, enabled by technology and software, are coming online just as big new ideas are being called for to save national economies from deflationary collapse.

For instance, we are already seeing the early stage implementations of Modern Monetary Theory, or MMT. MMT has long been kicked around in theory, but the pandemic brought it about in practice, in the first quarter of 2020, by forcing a need to instantly spend trillions.

Those initial stimulus efforts, via mechanisms like $1,200 stimulus checks, the PPP (paycheck protection program), and stepped-up unemployment benefits — not to mention the Federal Reserve backstopping credit markets — did an okay job of getting stimulus relief to the nation’s workers and small businesses. At the same time, a great many problems were encountered, a great many recipients were left out, and a great deal of effort was wasted or misdirected.

Central Bank Digital Currencies (CBDCs) could have made a big difference in the timely and targeted distribution of funds. In that sense, CBDCs are the future of MMT, and the future of more active fiscal policy in general, to the extent that governments do more to help workers and businesses directly, while shaping behavior through incentives powered by software.

For governments that seek greater speed, flexibility, and creative control over monetary and fiscal policy, the big promise of CBDCs is the ability to offer “programmable money,” along with all the capabilities that entails.

For example, with CBDCs, governments will hypothetically be able to spot-deliver funds to specific regions of the country or to specific industries or worker groups.

The Treasury, in coordination with the central bank, may also be able to issue funds with a time expiration component, meaning, “you have to spend these currency units by such-and-such date, or else they disappear.” That kind of granular fine tuning and control could revolutionize monetary and fiscal policy, plus transform economic assumptions in doing so.

Because CBDCs will be money as a form of software, governments will be able to write rules directly into the software. That means an ability to, say, collect taxes at an immediate point of transaction, or have transactions immediately reported to a database at the point of sale, or have certain types of transaction restricted based on location or user permissions.

As a result of these capabilities — and many others, as the roster of possibilities is nearly endless — CBDCs will have Orwellian levels of potential in terms of surveillance, tracking, and behavioral influence.

On the positive side, CBDCs will enable the development of far more rational and well-tailored economic policies, which could help economies run better by, say, changing lending rates to spot-reduce inflation or encourage small business creation. On the negative side, this means “big brother” will become more of a reality, over the course of the next decade or two, than most of us might have imagined.

To some this sounds like a dream. To others it sounds like a nightmare. Either way, the reality is that is CBDCs are coming.

This also reflects a larger truth: The enhanced power that technology bestows upon governments, and giant corporations, will make civic participation more important than ever. Voting, and paying attention to leaders and policy choices, will be the citizen’s primary means of avoiding the societal top-down implementation of 1984 and Brave New World.

We’ve tracked the development path of CBDCs from 2018 onward via TradeSmith Decoder, and we’ve also written about CBDCs multiple times in TradeSmith Daily — for example, here and here.

But the topic is especially timely this week, because CBDCs are having a moment.

On Oct. 15, a high-profile official at the International Monetary Fund (IMF) gave a speech entitled “A New Bretton Woods Moment,” highlighting the trillion-scale ambitions of global policy change. 

Then, on Oct. 19, Jerome Powell, the Chairman of the Federal Reserve, discussed the prospects of a “digital dollar” as part of an IMF conference panel on CBDCs.

And last but not least, China just finished a digital yuan test pilot, in which $1.5 million worth of digital currency was distributed to 50,000 users in sums of $29.75 each, to be spent via smartphone scans in downtown Shenzhen, China’s fourth-biggest city.

The Oct. 15 IMF speech, delivered by Managing Director Kristalina Georgieva, compared the challenges of the pandemic to the task of rebuilding the global financial system in the aftermath of World War II.

“Our founders faced two massive tasks,” Georgieva said in reference to the 1944 gathering in Bretton Woods, New Hampshire: “To deal with the immediate devastation caused by the War; and to lay the foundation for a more peaceful and prosperous postwar world.”

Substitute a global pandemic for a world war, and you have the “New Bretton Woods Moment” the IMF sees. Georgieva noted that global fiscal actions have amounted to $12 trillion so far, with central bank balance sheet expansions of $7.5 trillion — and the pandemic is far from over, its aftermath not yet begun.

The IMF managing director sees advanced economy debt levels reaching 125% of GDP on average — comparable to World War II levels — and notes that “digitalization also helps with financial inclusion” as a means of beating poverty.

On Oct. 19, Powell weighed in, saying that a digital dollar is not in the works just yet.

“We have not made a decision to issue a CBDC, and we think there’s a great deal of work yet to be done,” Powell said. “It’s more important for the United States to get it right than it is to be first,” he added.

It’s a good thing the Fed is not worried about being first — because China is way ahead.

The Fed is conducting CBDC research in conjunction with the Massachusetts Institute of Technology (MIT), but China is already rolling out mass experiments, having pushed hard for years to be first out of the gate with its “digital yuan.”

During the week of Oct. 11 through 17, China ran a large-scale beta experiment as noted earlier, with 50,000 trial recipients receiving 200 digital yuan each — the equivalent of $29.75 — to spend in one of Shenzhen’s roughly 3,000 retail outlets.

With dozens of central banks now diving head first into CBDC research, it looks like China will be the first to manage a true mass-scale rollout — although the official “first” designation may go to the Central Bank of the Bahamas, where all 393,000 residents officially received access to the country’s digital “Sand Dollar” on Oct. 20.

One might ask: How is Bitcoin responding to all this? By smashing through overhead resistance to new 16-month highs, that’s how.

As of this writing Bitcoin is trading above the $12,400 level, with the various events of the moment — CBDC buzz, multi-trillion-dollar stimulus expectations, and a softening U.S. dollar — all helping BTC power higher.

As we have noted before in these pages, CBDCs are no threat to Bitcoin, and never will be, because they can never compete with Bitcoin’s chief attributes: sovereignty and scarcity. CBDCs by definition will always have an expandable supply profile, subject to the whims of central bankers and politicians.

Bitcoin, meanwhile, will exist outside CBDC regimes — with no government body able to commandeer it or program it — and at the same time remain absolutely scarce, making it the ultimate global reserve asset (even more so than gold).