DIGITAL CURRENCY: The Central Bank Rush toward a Global Cashless Society is on and Very Public!

This Premium Post continues where my last one, “Teasing out the Fed’s Big Plan for our Future,” left off. As a refresher, I noted in that article 1) the Fed Chair’s concern that the Fed is losing public trust and 2) that its monetary policy independence (its monopoly on money) is at risk along with 3) Powell’s clues in his speech about what the Fed plans to do about that. (For those who have just become donors and who want to read that last Premium Post for more context, you can read it by entering the password “fed up” when prompted after clicking this link.)

Fed talks

Here is a quick recap to refresh everyone’s memory:

“We live in a time of intense scrutiny and declining trust in public institutions around the world. At the Fed, we are committed to working hard to build and sustain the public’s trust. The Fed has special responsibilities in this regard. Our monetary policy independence allows us to serve the public without regard to short-term political considerations, which, as history has shown, is critical for sound monetary policymaking”

Powell indicated that the Fed is considering such major changes that he was advocating town meetings in order to build public trust in whatever the new plan turns out to be. Powell also stated that the new changes would included increasing the inflation rate for awhile. That could cause people to flee the Fed’s money and move to the Fed;’s digital competitors, such as Bitcoin — money that is not controlled by banks.

Those town-hall meetings, Powell said, in which Fed monetary policy would be publicly reviewed,…

“May or may not produce major changes…. Things will be different. The world has moved on in the last decade, and attempting to re-create the past would be neither practical nor wise…. While there is a high bar for adopting fundamental change, it simply seems like good institutional practice to engage broadly with the public.”

I noted that statement sounds like Fed Chair Powell is anticipating changes large enough that meetings around the nation will be required to get public buy-in and to make sure the changes are done in a way the public will accept since they will apparently be fundamental changes in the way the Fed does money.

Most of that article dealt with what appeared to be Powell’s predominant concern — how to deal with persistent (in the Fed’s view) low inflation. He suggested what he called a “make-up strategy” that would target inflation above the Fed’s normal 2% target in order to juice the economy for as many years as inflation, as measured by the Fed, remained below that target. It sounded like he was building a public argument for QE that goes higher and longer or is in some more intense form than before. That will be necessary because the Fed’s recovery is crashing and their only way to avert the crash is QE on steroids (even though QE was already monetary policy on steroids). So, on steroids squared.

One other thing I noted in that article was …

Knowing their recovery was dependent on continued expansion of that liquidity is why I said last year the stock market would crash as soon as their balance sheet reduction got up to full velocity. The Fed would not need to make this shift if its Great Recovery had actually worked. In full recovery, the patient doesn’t need continued life support. What the Fed’s shift to a new norm … really proves is my longtime tenet that the Fed chose a recovery path where diminishing returns will forever require the Fed (just like Japan) to do more and more QE. Their idea that you can build enduring wealth by piling up debt was never sustainable.

Now the Fed has learned what I could have told them and was telling everyone last year and the year before that and ….

The Fed has just learned by experience that it has to continue lose monetary policy (and probably return to more QE at some point). It learned this when the market crashed all around Powell’s claim that QT would continue on autopilot. His concern now is how to keep the public believing the Fed has not lost control and that this is not going to turn into QE forever, given they failed to ween the recovery off of QE. If those efforts result in to inflation running hotter than normal, Powell has to be just as concerned that the public will think the Fed has lost control of inflation. If the Fed loses public trust, as Powell starts out fretting about, the public could revolt and do away with Fed’s independent control over money — the other thing Powell started out worrying about. That could happen if the public perceives the Fed has lost control of the economy or inflation or of money supply.

Thus, the public will be told that running inflation extra hot with extra QE is the plan. As Powell termed it, it’s “a make-up strategy” for recovering from years of excessively low inflation:

The central bank would deliberately make up for the lost inflation by stimulating the economy and temporarily pushing inflation modestly above the target.

So, prepare for more QE as the new norm that Powell even mentioned in his latest speech this week:

“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future….”

Zero Hedge

Since QE has come up against the Law of Diminishing Returns, Powell may looking to do QE in a way that puts the money more directly into circulation in order to get more bang for the buck, which will mean more inflation. One path is what is sometimes called “helicopter money,” referring to the idea of just dropping money out of the sky so people run out, grab it up, and buy things, though you can be sure the Fed would never actually do anything that distributed money without it circulating through its member banks. It’s not ever going to print “real” money and just give it to people; but it may do things in a manner that take the money somewhere other than just financial markets.

The article explored a variety of these possibilities in a lot more detail and then stopped at mentioning one more possibility to which the Fed may be seeing the need to build public acceptance — digital money, a.k.a. becoming a cashless society.

I noted that the Fed currently has no control over digital currencies, and that one risk to the Fed, if inflation runs hot on Fed money, is people won’t want Fed money. They’ll go to gold, which the Fed manipulates by owning a hoard of gold that it can release like ballast to crash gold prices, or they’ll go to digital currencies over which the Fed currently has no control. That is what people do when the national money is rapidly losing value.

One solution — since the Fed has no power to stop the public interest in digital currencies — is for the Fed to go with the flow but gain control over that argument by gaining full control over digital currency. That would require a huge number of “town-hall meetings” to convince the public that it is in the “best security interest of the American people” to let the Fed issue the ONLY legal digital currency in order to avoid some of the scandals we’ve already seen (more of which are certain) There are bound to be some digital currencies that aren’t anything other than a digital Ponzi scheme.

The Fed would have to acquire that power from the government, and that means it must first win the public argument because right now the public is dead-set against the Fed seizing control over digital currencies. It will also have to convince the government that Fed control is a security need for the government….

A switch to digital currency certainly would require broad discussion and much preparatory groundwork, but it would also give the Fed more independence, which is another reason I bring it up here, given that Powell brackets his entire speech by focusing on the primary importance of Fed independence.

Digital currency would actually give the Fed much more control than it has over cash that floats to unknown whereabouts or that could have simply been destroyed in the explosion of a getaway car or a downed plane without the Fed even knowing anything happened to it….

Loss of trust in the Fed would move the already digitally oriented masses toward digital currencies, so it’s not hard to see how that would be the Fed’s biggest concern should it lose its “most important asset [public trust].” Still, the switch to digital currency controlled by the Fed would require huge public persuasion because a lot of older people fear it. 

Congress balks

That’s where I left things about a month ago, and already the concerned about digital currency is front burner. In mid-May Forbes published an article that noted …

Bitcoin, which has roared back over the last few weeks after what many feared was a terminal decline since its peak in late 2017, has long been called a threat to the existing financial system and the central banks that run it—though these claims have in the past been largely fringe ideas.

Forbes

Well, fringe idea no more. In the past month, Congress has also intervened in this public discussion about “digital money,” which would naturally lead in time to the US becoming a “cashless society” if this new money was the Fed’s new money. By digital money, I’m not longer talking Bitcoin. I’m talking Fedcoin because Bitcoin and other freelance digital money is the Fed’s nemesis that threatens its monopoly (or “policy independence”) over the global currency.

Now, U.S. Democrat Congressman Brad Sherman has urged his colleagues to consider banning bitcoin and cryptocurrencies due to the threat they pose to U.S. international financial power, saying bitcoin needs to be “[nipped] in the bud.”

“An awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions,” Sherman said at a meeting of the House Financial Services Committee last week.

“Clearing through the New York Fed is critical for major oil and other transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant.”

“So whether it is to disempower our foreign policy, our tax collection enforcement or traditional law enforcement, the advantage of crypto over sovereign currency is solely to aid in the disempowerment of the United States and the rule of law,” Sherman added.

Whoa! Sherman sees crypto as a serious threat to the petro-dollar and wants congress to ban it altogether. The time for congress to intervene in order to protect the hegemony the US enjoys due to the US dollar being the global currency, as far as Sherman is concerned, is here!

Intriguingly and a little surprisingly, one of Bitcoin’s big apologists, Anthony Pompliano, founder of Morgan Creek Digital Assets, quoted in the Forbes’ article, agrees with Sherman’s statement that digital currencies are a huge threat to the USA, saying Sherman recognizes the threat exactly:

He sees the increased probability that we are moving to a world where non-sovereign currencies are the default and it sounds like he is scared. Mr. Sherman realizes that the United States, and other countries with major currencies, will lose considerable power if they are no longer in control…. Congressman Sherman is worried that global superpowers will have no response to Bitcoin’s decentralized, immutable, non-censorable, and non-seizable advantages. He quite literally states that cryptocurrencies have an advantage over sovereign currencies (which is the first time a politician has admitted this publicly I believe).

Off the Chain

Pompliano notes that Sherman’s main backers are financial companies with a strong interest in a strong US dollar, since the Fed is wholely owned by financial institutions.

There is, however, a better approach from the government’s standpoint than an outright ban. What better way to fight these growing concerns without dissing all the crypto kids than for the Fed to come up with its own digital currency that operates through its own member banks under a US government charter because, as Pompliano notes, the likelihood of successfully policing a ban on crypto is small since it is global, too. Do, instead, as Microsoft did with personal computers when it got IBM’s endorsement, which made MS DOS the global operating system of small business machines.

Pompliano notes,

If Congressman Sherman is upset that Bitcoin could hurt the prospects of the US dollar, wait until he finds out that Facebook has the possibility of becoming a digital central bank to 2+ billion people around the world. Simply, the genie is out of the bottle and fiat currencies backed by sovereign nations are in deep trouble.

And they know it.

Maybe that is why the government is working to chisel down the Facebook giant right now. Pompliano goes on to state numerous reasons crypto will take over the world of finance, but maybe Pompliano, who has an iron in the fire as an investor, is mistaken in thinking congress will try to solve the matter by legislating against it. Maybe congress will, instead, use its considerable power to charter the competition by backing something like Fedcoin that has both the full faith and credit of the Fed (what’s left of it) and of the US government behind it, making it “legal tender.”

Blockchain technology is being adopted around the world at a rapid pace, and while Bitcoin took a big plunge in value last year, it didn’t fade away. Its staging a comeback, and the US government certainly doesn’t want that … unless it controls it right at its nexus — that be the Fed.

The Phoenix stalks

None of this is any thing that strikes me as new. Four years ago I wrote an extensive article on the topic:

Half a century ago I remember my mother, as she rolled dough on the kitchen table, listening to radio preachers who predicted that the entire would become a cashless society based on a biblical prophecy in the Book of Revelation. Those preachers are now dead, as is my mother, but their predictions are coming to life. Make what you want of their source of knowledge, but what many thought was akin to conspiracy theory back then is now daily commerce.

“Cashless Society Has Arrived, and It’s Global“

I noted then that US banks were already racing toward creating their own digital currencies to compete with blockchain. What they lacked, then, was getting their Father Fed on board to centralize it, denominize it, and monetize it with national government backing.

In part two of that article series, three years ago, I wrote …

The governments and banks of this world advanced rapidly toward forming cashless societies throughout 2015…. If this sounds like some wild conspiracy theory, consider the following: no less Sterling standard of global economics than The Economist predicted thirty years ago that by 2018 a global currency would rise like the phoenix out of the ashes of the world’s fiat currencies:

“Cashless Society War Intensifies“

The concept being discussed back in 1988 was a global currency, but not a digital one:

Americans, Japanese, Europeans, and people in many other rich countries, and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the last twentieth century.

I suggested in my article about all of that three years ago that you have to put the two together to see where the Fed is going. Right now the Fed presides over a global currency. Neither the Fed nor the United States government is going to give that status up. So, yes, the Fed’s answer, if it goes digital, has to be global. The above article expressed the need for a currency that would be more “convenient” and less “disruption.” In a digital world where brick-and-mortar retail is now rapidly losing ground (as often talked about here) to digital retail, that would clearly be a digital, global currency.

It may have been a long time coming, but it’s certainly not hard for anyone to see now that the world’s currencies are, indeed, crashing all around us as we near the coming of this seemingly messianic money that was predicted to resurrect from the ashes of the world’s fallen currencies.

In that January, 2016, article, I thought the following kinds of events would be happening sooner, which would create conditions ripe for the advent of a new currency:

[The central banks] have created a raging beast with many heads that are emerging all over the world — commodity price crashes, junk bond crashes, currency crashes, global stock market crashes, hedge fund crashes, bank crashes and national bankruptcies.

While my timing was a bit off, one can easily see that all of those kinds of events have continued to build to where they are even more likely today, not less, though the currency problems that the devalued yuan, the Russian ruble and the Brazilian real were having at the time seem a little more relaxed for the time being.

China was already on the move for a digital currency that would place China in the center of the fix:

As the war on cash escalates, officials from The IMF to China are seeing the opportunity to control the world’s money through virtual (cash-less) currencies…. As Bloomberg reports, The PBOC is targeting an early rollout of China’s own digital currency to “boost control of money” and none other than The IMF’s Christine Lagarde added that “virtual currencies are extremely beneficial.”

The Fed’s need to compete in this arena is now overdue in terms of how fast the competition was already closing in on them back then:

PBOC has asked its research team, which was set up in 2014, to study application scenarios for digital currency and strive for an early rollout…. It can reduce the traditional distribution of digital currency note issue, the high cost of circulation, improve convenience and transparency of economic transactions and reduce money laundering, tax evasion and other criminal acts to enhance the central bank’s money supply and currency in circulation control, better support economic and social development, the full realization of inclusive finance help

As I noted back then, other nations such as Norway and India were also rapidly working toward becoming digital cashless societies.

Right now there is a more diving need pushing for a digital currency — a need that ties directly to what Powell was talking about in the Premium Post I quoted at the start of this article: sub-zero interest rates are one way the Fed can up the amperage of QE in order to goose the economy harder, but one needs to get rid of cash to keep people from fleeing their banks:

When hitting the zero bound failed to lift economies that crashed in the Great Recession, some central banks moved to force negative interest rates on people who save their money in banks. Charging people to keep their money in the bank is hard to do so long as cash is available, as people may just withdraw all of their money from those banks in the form of the national cash and squirrel the cash away. In order to penetrate the twilight zone of economics, central banks need to abolish cash to terminate this escape route. Then they can force savers to spend, thereby increasing the flow of money through the economy….

Several years ago, the financial industry was abhorrently opposed to the introduction of Bitcoin, a virtual currency that would revolutionize the way we conduct our banking business. Fearful of a massive professional upheaval, the financial cognoscenti steeled themselves in undermining this virtual currency…. Goldman Sachs, Santander and BBVA have invested in start-ups that focus on harnessing this technology. Citigroup and JP Morgan have been conducting internal groups to assess how best to enter this area. And Barclays would like to implement this technology to offer consumer products that are less expensive than credit cards and direct money transfers.

That was three years ago when they started working on this. Now it is no longer just individual US banks looking to get in on the action. The Fed’s consorts in global banking are making similar noises.

International Monetary Fund seeks central-bank control of digital currency

In the past month, central banks and global leaders of finance started more expressly adding to the Fed’s competition as hegemonic owner of the global currency. If the Fed doesn’t make it there first, others are lining up to fill the power vacuum.

José Antonio Ocampo, formerly the United Nations Under-Secretary-General for Economic and Social Affairs, wrote,

This year, the world commemorates the anniversaries of two key events in the development of the global monetary system. The first is the creation of the International Monetary Fund…. The second is the advent … of the Special Drawing Right (SDR), the IMF’s global reserve asset. When it introduced the SDR, the Fund hoped to make it “the principal reserve asset in the international monetary system.” This remains an unfulfilled ambition…. Turning the SDR into a true global currency would yield several benefits for the world’s economy and monetary system.

“Time for a True Global Currency“

Of course, we need this because …

The IMF can use it as an instrument of international monetary policy in a global economic crisis…. Turn the IMF into an institution fully financed and managed in its own global currency. One of the major problems of the global monetary system is that the policy objectives of the US, as the issuer of the world’s main reserve currency, are not always consistent with overall stability in the system.

Christine Lagarde, IMF Managing Director, wholeheartedly agrees:

I would like to … evaluate the role for central banks in this new financial landscape—especially in providing digital currency….

The fintech revolution questions the two forms of money we just discussed—coins and commercial bank deposits. And it questions the role of the state in providing money…. You—young and bold entrepreneurs gathered here today—are not just inventing services; you are potentially reinventing history. And we are all in the process of adapting.

A new wind is blowing, that of digitalization. In this new world, we meet anywhere, any time…. Money itself is changing. We expect it to become more convenient and user-friendly, perhaps even less serious-looking…. We expect it to be integrated with social media, readily available for online and person-to-person use, including micro-payments. And of course, we expect it to be cheap and safe, protected against criminals and prying eyes.

What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. And in ten, twenty, thirty years, who will still be exchanging pieces of paper?

Think of the new specialized payment providers that offer e-money—from AliPay and WeChat in China, to PayTM in India, to M-Pesa in Kenya. These forms of money are designed with the digital economy in mind. They respond to what people demand, and what the economy requires.

“Winds of Change: The Case for New Digital Currency“

Legarde sounds a lot like the head of the Bank for International Settlements in the next section of this article, almost as if they are reading off the same script; and she is right that digital currency is a trend that people increasingly demand.

Let me be more specific: should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.

So, what I wrote about in a more questioning tone three years ago or even at the start of this year is now being openly considered — even advocated — by numerous central banks, so long as they have control over it because they know it is coming from the private sector now anyway.

Today, we are releasing a new paper [1] on the pros and cons of central bank digital currency…. I believe we should consider the possibility to issue digital currency.

By that, she, of course, means central banks should consider the issue of digital currency. Forget Bitcoin, Etherium and others. The central banks will seek to outcompete them and out-regulate them:

For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services. Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust.

Proper central bank regulation of the competition. It seems, however, that Lagarde recognizes some of the risk:

Without cash, too much power could fall into the hands of a small number of outsized private payment providers. Payments, after all, naturally lean toward monopolies—the more people you serve, the cheaper and more useful the service.

It seems she understands the risk, that is, until you read on and realize what she’s referring to:

For a start, private firms may under-invest in security to the extent they do not measure the full cost to society of a payment failure. Resilience may also suffer—with only a few links in the payment chain, the system may stop working if one of these links breaks. Think about a cyber-attack, a glitch, bankruptcy, or a firm’s withdrawal from the local market. Regulation may not be able to fully redress these downsides. A digital currency could offer advantages, as a backup means of payment. And it could boost competition by offering a low-cost and efficient alternative….

In other words, the risk Lagarde sees is that too few private enterprises, like Bitcoin, may end up controlling money. This risk would be mitigated if central banks issued digital currency and competed with those private enterprises with a better regulated currency that safeguards the public interest. What she doesn’t see or, at least, admit to is the great risk of central banks controlling the world by controlling a currency that keeps you from escaping their negative interest and fees and that governments will make sure keeps you under the government eye once they dominate the other private digital currencies out of existence.

You see, central banks can readily out-compete private firms because they have the backing of government behind them (people like the outspoken senator above). That is a lot like when Microsoft got the backing of IBM behind it. Being compatible with the biggest name in business computing at the time turned Microsoft into the defacto computer supplier for small business machines for the next twenty years. Central banks, you see, are government-compatible. They have huge influence over financial regulations. Merely providing another avenue of competition to private firms is far short of their goal, which will be to make sure they continue to own their nation’s money supply as their own proprietary product.

In all that is stated here, there is also an unstated risk to CBs if they let other institutions or private companies run their own digital currencies alongside the central banks. The Fed wants to be able to create what they call negative interest. (That does not mean they pay you interest on a loan, instead of you paying them. It really means they CHARGE you positive interest, even on your savings). The continued existence of digital currencies owned by non-CBs would offer people an escape route — a place where they can bank their money without paying the Fed’s interest on savings. The Fed would like to gain total control over that. So, would governments that don’t want criminals to have anonymity.

On April 10th, IMF launched a tweet poll asking “How do you think you will be paying for lunch in 5 years?” The choices include cash, cryptocurrency, a mobile phone, and bank card. The choice of Cryptocurrency received 56% of the 37,000 votes and the next choice was via mobile phone with 27%. Therefore, could IMF’s poll serve as a clue to what lies in the future?

Hackernoon

We would like to hear from you. ⬇

How do you think you will be paying for lunch in 5 years? #IMFmeetings #DigitalPayments

— IMF (@IMFNews) April 10, 2019

The Bank for International Settlements weighs in with its fat thumb on the scale

The Bank for International Settlements weighed in recently with the same opinion as the IMF: (Big surprise since he was formerly the Deputy Managing Director of the IMF. It’s apparently a small club/cabal.)

BIS General Manager Agustin Carstens gave a speech at the Central Bank of Ireland 2019 Whitaker Lecture. Under the heading, “The future of money and payments,” Carstens mapped out what has been a long standing vision of globalists – namely, to acquire full spectrum control of the international financial system through the gradual abolition of … physical money…. Carstens explains that the current system of central banks issuing banknotes, and commercial banks providing electronic money, is being targeted for reform – in the shape of central bank digital currencies (CBDC’s). A CBDC would allow ordinary people and businesses to make payments electronically using money issued by the central bank…. That would mean that you and I could open bank accounts directly with the central bank….

“BIS General Manager Outlines Vision for Central Bank Digital Currencies“

That summarizes everything well. In his speech, the stereotypically rotund Carstens, who looks a bit like the Monopoly man — the most central of central bankers — said,

I will look to the future – not of work, but of money; and, more broadly, the monetary system…. I am particularly interested in the implications for central bank money and what so-called central bank digital currencies (CBDCs) would mean – not just for the system, but for all of us as citizens.

Bank for International Settlements

No small scope there. How significant are the planned revisions? Carstens makes them sound significant:

“The monetary system is the backbone of the financial system. Before we open up the patient for major surgery, we need to understand the full consequences of what we’re doing….” The bigger picture begins to emerge when Carstens declares that the debate around CBDC’s is not to do with the technology involved, but “partly about the potential decline in the use of cash.” He wants the focus to be on the demise of physical assets rather than the digital transformation…. The idea is that the decline of cash be perceived as organic rather than premeditated.… “At first glance, not much changes for someone, say, stopping off at the supermarket on the way home from work. HE OR SHE WOULD NO LONGER HAVE THE OPTION OF PAYING CASH. ALL PURCHASES WOULD BE ELECTRONIC.… From here, differences start to emerge. A CBDC is not necessarily anonymous, like cash. And unlike cash, it could pay or charge interest.“

“BIS General Manager Outlines Vision for Central Bank Digital Currencies“

Full control, inescapable negative interest, zero anonymity. What could be a more sizable dream for a corpulent central bankster? Then just add full taxability to make the banksters’ political arm happy. Total servitude for everyone else.

Like Legarde, Carstens is reluctant to entrust the role of digital currencies to the non-central-bank organisms that invented them:

Experience has also shown that to be credible, money requires institutional backup, which is best provided by a central bank…. The rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust. Private digital tokens posing as currencies, such as bitcoin and other crypto-assets that have mushroomed of late, must not endanger this trust in the fundamental value and nature of money…. Just because we are able to find a place for bitcoin in our money … does not mean we should consider it as “good” money…. Over the ages, many forms of private money have come and gone. It is fair to say that the same has happened with various experiments with … money issued by a public entity that is not the central bank. While some lasted longer than others, most have invariably given way to some form of central bank money. The main reason for their disappearance is that the “incentives to cheat” are simply too high.

Bank for International Settlements

Central banks, of course, don’t cheat because they set the laws and regulations by which everyone else operates. They don’t have to break the laws because legislative bodies like the US congress, in the end, rubber-stamp just about anything the central bank asks for because congress knows nothing about banking and so bows to the “experts.” Congress may knock the Fed around for show, but rarely does it clip the Fed’s wings.

The unhappy experience with private forms of money raises deep questions about whether the proliferation of cryptocurrencies is desirable or sustainable. Even if the supply of one type of cryptocurrency is limited, the mushrooming of so many of them means that the total supply of all forms of cryptocurrency is unlimited. Added to this is the practice of “forking”, where an offshoot of an existing cryptocurrency can be conjured up from thin air. Given the experience with currency debasement that has peppered history, the proliferation of such private monies should give everyone pause for thought….

Here Carsten’s concern reflects the fact I mentioned earlier, which is that central banks are losing control of total money supply because of competing forms of money over which they have no control or accounting.

We have learned over the centuries that money as a social institution requires a solution to the problem of a lack of trust. The central banks that often emerged in the wake of the private and public money collapses may not have looked like the ones we have today, but they all had some institutional backing…. As the saying goes, trust takes years to build, seconds to break and forever to repair. Historical experiences suggest that these “assets” are probably not sustainable as money. Cryptocurrencies are not the liability of any individual or institution, or backed by any authority. Governance weaknesses, such as the concentration of their ownership, could make them even less trustworthy.

There is no problem, of course, if the nation’s money is owned by bankers who own the Federal Reserve. CBs to the rescue then, ready or not. In fact, the need to demonize the existing crypto-currencies in order for central banks to compete strongly against them is a big part of Carstens’ argument:

To the extent they are used, bitcoins and their cousins seem more attractive to those who want to make transactions in the black or illegal economy, rather than everyday transactions. In a way, this should not be surprising, since individuals who massively evade taxes or launder money are the ones who are willing to live with cryptocurrencies’ extreme price volatility. In practice, central bank experiments show that DLT-based systems are very expensive to run and slower and much less efficient to operate than conventional payment and settlement systems. The electricity used in the process of mining bitcoins is staggering, estimated to be equal to the amount Singapore uses every day in electricity, making them socially wasteful and environmentally bad.

Clearly the war is engaged. One can hear in all of this the fear dogging central banks that they will become like IBM when it advanced into the personal-computing world too late, and the upstarts beat it practically out of existence, behemoth though it was. One can sense these major CB personalities recognizing that digital currency is successfully taking on their proprietary money and changing the financial operating systems of the world to where central banks will lose control of the money supply and, therefore, of influence over the economy and inflation. Most of all, they fear losing the profitable privilege of having all money flow through their fingers.

If they don’t get into the game right away, having already waited too long like IBM did when it finally partnered with Bill Gates to create its operating system, the big fish will be devoured by a thousand little piranhas. Because IBM failed to develop its own personal-computing operating system in time, the developer of its operating system ate IBM down to a “who’s that?” shadow of its former greatness — one of the great dinosaur stories of the business kingdom.

Carstens expresses the need for speed as being a practical driver of the change to digital currency. People making payments online expect rapid transactions, particularly with cross-border transactions. People want the product shipped now, and often are not even aware of what nation the online company they are buying from operates. So, delayed international settlements prior to shipping are not satisfactory in the point-and-click world.

It’s partly about the potential decline in the use of cash, and what central banks should do about it. In a number of countries, the demand for cash has fallen substantially as consumers and retailers have embraced electronic means. Two examples are Sweden and Denmark, where stores and restaurants are increasingly reluctant to accept paper money. Instant mobile payment solutions are gaining ground rapidly. The latest data from Sweden show that mobile payments are being used as often as cash to make payments. Young people use their mobiles to pay almost twice as frequently as they do with cash. But for most countries, cash is still in high demand. The amount of cash in circulation has actually increased over the last decade in tandem with electronic payments. In the short term, there is no urgency to come up with a substitute for cash. Things may change in the future, however, and central banks want to be prepared.

Bank for International Settlements

How involved are central banks in creating this change to meet these various challenges presented by the public’s needs and wants?

Central banks have entered the fray, with about 70 percent either exploring or experimenting with so-called central bank digital currencies…. Central banks are treading cautiously, and only a very few central banks think it is likely that they will issue a CBDC…. The important part of the acronym CBDC is not the “D” for “digital”. Nowadays, nearly everyone has access to digital payments. Whenever you or I pay using a bank debit card or use a banking app on our mobile phone, the payment is made digitally and often instantly. Instead, the important part of CBDC is the “CB” for “central bank.“

But of course. There is no question of their self-importance. And if not many CBs are going to actually do it, that’s OK because it actually only takes one — the Federal Reserve. After all, the important part of “CB” is “central,” and one is more central than many.

What doesn’t make sense in Carstens’ European/global dream is the idea that citizens will bank directly with CBs:

Safety could be an important reason to deposit money in the central bank. In times of uncertainty, more customers would prefer to have deposit accounts at central banks, and fewer at commercial banks. A shift of funds from commercial banks to the central bank could be gradual at first. But the trickle could turn into a flood.

At least, it does not make sense in the United States were banks own the Federal Reserve. Why would they cut themselves out of the equation? Right now, when the Federal Reserve creates money out of thin air, it does so by depositing ones and zeroes in the reserve accounts of its numerous member banks. Free money. Who would give that government-chartered right up?

Perhaps Europe is scheming one way and the Fed another. It is a work in progress. After all, it …

took several decades for membership of the BIS and of its Board to become, in stages, truly global….

According to Carstens, ‘very few central banks think it is likely that they will issue a CBDC in the short to medium term.’ One of the reasons for this is that “there is not yet a noticeable and widespread fall in the demand for cash.”

“BIS General Manager Outlines Vision for Central Bank Digital Currencies“

(Perhaps the Fed hopes to further that progress in order to become the first among central banks to seize control of digital currency by holding the town-hall meetings Chairman Powell speaks of as being the plan for 2019? Just a thought to entertain among many possibilities.)

Carstens also noted another reason so few CBs currently plan to issue CBDCs:

Central banks do not feel compelled to face a major change in the way they conduct monetary policy. 

Bank for International Settlements

That’s nothing another financial crisis can’t expedite.

One thing I don’t get the sense of in all of this is the popular conspiracy theory that says CBs have already planned out a central-bank, global, digital, cashless currency. They look much more like old men and women running to catch up with the technology from all the startups like Bitcoin and Etherium that are running out ahead of them. If they had a plan long ready to go, they would never have let Bitcoin seize such a lead, much as they obviously despise it and try to inspire fear of its success.

One can, of course, invent 4-D chess explanations the say they are only pretending to have lost the lead and have set up Bitcoin to create a bad example that we will all feel we need to be saved from. It only took me thirty seconds to concoct that conspiracy. One can just as easily spin of half a dozen other reasons they would want to look like they have been caught with their pants down and would be trying to scare the world about the perils of digital even as they seek to implement it.

For reasons having nothing to do with actual knowledge or evidence of a conspiracy, I have always found it clear that a global digital currency is the way central banks will go, as it is the way so many trends are converging and have been for some time. Now, the central planners of the world are scrambling to play catch-up before the cryptos turn them into the dinosaurs of the banking world, just as Microsoft did to IBM, which once ruled the world of computers like T-Rex.

One of the biggest shortfalls of all crypto currencies is that they are still derivative of national currencies. They are valued based in national currencies and require standard credit accounts in order for people to exchange them:

Central banks need to safeguard payment systems. To date, Bitcoin is not functional as a means of payment, but it relies on the oxygen provided by the connection to standard means of payments and trading apps that link users to conventional bank accounts. If the only “business case” is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.

Bank for International Settlements

There you can see one more reason central banks want to flush cryptos and a means by which they can do it. They freeload on the payment systems created by regular banks, which also means banks can simply cut them off from access or by regulation remove the competitive edge they have due to remaining unregulated:

Authorities should … provide a level playing field to all participants in financial markets (banks and non-banks alike), while at the same time fostering innovative, secure and competitive markets. In this context, this means, among other things, ensuring that the same high standards that money transfer and payment service providers have to meet are also met by Bitcoin-type exchanges. It also means ensuring that legitimate banking and payment services are only offered to those exchanges and products that meet these high standards…. The meteoric rise of cryptocurrencies should not make us forget the important role central banks play as stewards of public trust. Private digital tokens masquerading as currencies must not subvert this trust. As history has shown, there simply is no substitute.

So, there you have it. The heads of the world’s most international central banks are taking up the war. Central banks have finally seen they are being beaten out of their familiar market because they have not been innovative in creating digital currency. The race is now on, though, as is the PR game to convince the peoples of this world that we really need Central Bank Digital Currency, not just digital currency. CBs are now openly determined to take us to a digital, global currency that will eventually leave the world a single cashless society. You can see all of those concepts throughout the impassioned speeches now coming out from central bankers on an almost weekly basis. They are ginning up the masses, town-hall meetings and all.