Intro:
CBDC's and tokenisation are promoted globally as a government tool to boost financial inclusion, improve payments systems, improve government intervention and be a response to cryptocurrencies like bitcoin. In developed nations, it looks like a solution looking for a problem or another way of extending abstract power hierarchies and gaining more control. In developing nations, people are moving to bitcoin and stablecoins due to untrustworthy, corrupt governments and the improvements in the lightning network.
The below will discuss the effect of CBDC's and Tokenisation as an extension of abstract power hierarchies in the FIAT system while looking at POS (CBDC's and crypto) vs POW (Bitcoin) protocols.
Now, globally coming to the conclusion of a long term debt cycle (introduced by Ray Dalio), a move to a new global serve currency/s looks possible and likely. The BRICS are the main competitors and have already expressed concern about the dominance of the US dollar in the global financial system and have advocated for greater diversity in the international monetary system. To accomplish this, BRICS countries are reducing have been reducing their reliance on the US dollar, while trading more in other currencies. E.g. China recently completed its first LNG trade in Yuan with UAE. Additionally, BRICS nations are increasing gold reserves, Russia has moved up to second in Bitcoin mining and accepts BTC as a valid currency. Globally as part of this diversification of currencies used around the world for trade, bitcoin will become a strategic play for nations and widely adopted for easy cross border transitions and everyday use with the improvement of the lightning network.
Time for a change:
A new monetary system could hopefully be a reversal back to a sound money instead of floating exchange rates. The situations that could impact the current monetary system are all playing out now:
Economic instability. High inflation due to covid money priting and energy prices. Globally, nations are facing a recession with high inflation and increasing interest rates . The duration risk of treasuries is being seen in U.S with banks facing huge unrealised losses due to rising interest rates. Government stimulus is going to be needed again while oil prices will continue rising based on OPECs recent announcements of capping barrels per day. This is bad news for a net importer like the US, when they need economic growth.
Political instability - Rise of populism an more social acts from policy makers is leading to protests and civil unrest around the world, like we are seeing especially in Europe.
Geopolitical tensions - Ukraine war
Bitcoin is the technological answer to this problem through Proof of Work utilising real world energy, as it can transform our society back to one which is underpinned by not only a monetary enablement of physical power but also a cyber security system of physical power and not abstract power. Gold has done this in the past and will play a role in the next stage too, however, bitcoin is it is a digitally improved version of gold. It offers a known fixed supply cap, it is transitioning from speculative to a store of value, it is completely verifiable and decentralised, inclusive to anyone to use or mine, it has better portability and divisibility and it is able to achieve global adoption easily and readily with lightning network. Reserve currencies being backed by sound money, means that policy makers won't be able to infinitely inflate the money supply and choose short term stability and higher leverage over long term instability, like they have since moving to the floating system.
As people like Michael Saylor and many others explain, a money with a lack of scarcity is an economic and societal problem. When money isn't scarce, everything around it becomes scarce due to inflation and hyperinflation decimating purchasing power.
When the energy (money) of the world drains out the bottom, somewhere between 2-20% every year, it leads to economic collapse, like what we see in Turkey, Lebanon, Argentina, Venezuela.
Money needs to viewed, not just as a store of transfer of value, but as fundamental to moral actions. When a fundamental piece of morality is devalued by policy makers in the form of inflation without a vote or possible intervention by the people, the populations will be less moral. As money is being treated more as a coupon and less as a store of value, people fight to get the new money sooner than the others before it is devalued further. This leads to unethical, impatient and irrational decision making.
There is a problem when money with no substance behind it, that can be expanded with no cost is used a paper claim on things society produces, like time, knowledge, capital and even natural resources. It will lead to a lack of trust in the system and thus a lack of trade. Lack of trust stems from the lack of credibility escalating from the top of the FIAT system.
In this system, the people closest to the money are incentivised by the system itself to be immoral and act in their own best interests. This is why we see worsening wealth inequality nationally and globally.
To quote the bitcoin standard: "At this stage of the long term debt cycle the debasement of the currency has to grow at an exponential rate. As the debasement grows, so does wealth inequality and dangerous societal and political ideas begin to grow. This kind of economic system can only continue so long as the everyday person is unaware of how this system truly works. The everyday person feels there’s something not quite right with the world, they work too hard while their purchasing power is consistently diminishing. The money has never been more broken than it is today as we reach the conclusion of this inflationary monetary experiment."
The solution to this is to seal the energy lapse of inflating the money supply. Not with a country and a political process, which have failed time and time again, but with bitcoin; a digital asset which needs no trust, is integral and a civilisation can be built on top of without it collapsing. This is because bitcoin is a way of storing and rationally allocating energy and value across time and space and will not be self-destructive. This is important now because we are seeing the self-destructive nature of the FIAT system play out.
Intro to what TCA, DCFRC promote for CBDC and tokenisation:
A government token alternative to bitcoin and crypto: A main emphasis from the TCA report is for governments to "provide households and businesses with access to a new digital form of the domestic currency, it may be possible to reduce the likelihood of a shift to other forms of money." Maintenance of control authority over the monetary system is required to continue in the Keynesian economic system requiring government intervention. However, the rise of Bitcoin poses a threat to FIAT currencies by offering people a way out of this system. People wanting to escaape there economic system, seen globally but specifically in South America and Africa showcases the problems seen at the end of a long term debt cycle, such as lack of trust in the system and government, wealth inequality, populist movements etc. People choosing to trade in Bitcoin instead of FIAT can impact the government in ways such as decreased tax revenues, less economic control etc. Physical power projection through the bitcoin protocol provides real inclusivity, which is why adoption starts from the bottom.
Monetary policy control: Through CBDC's, a government can intervene in the economy in more direct and specific ways. They can provide financial stimulus by offering coupons into people's wallets and act as a lender of last resort. There shouldn’t be a lender of last resort, people should have a hard, sound money which has real world value that they have the potential to have full custody of. In a situation with bad actors, there should be no bailouts, the company should fail. We can't forever fix problems by printing more money.
Exponential growth through tokenisation. The DFCRC (Digital Finance CRC) states that the tokenisation of the economy is the "beginning of an exponential growth curve". Exponential growth is a typical Keynesian term which places emphasis on government intervention in 'stabilising the economy' during recession times. The multiplier effect from government intervention creates more and more economic growth through each downturn. In downturns, government spending can stimulate the economy in the short term through higher levels of debt, typically leading to inflation. The cycle repeats over and over until we are at the point we are now, where some nations debt levels are out of control and we need to stimulate again despite high inflation and rising rates.
Financial inclusion and better payments system. CBDC's and tokenisation argue for better financial inclusivity through banking the population. This sounds like a solution looking for a problem because 99% of people in Australia are banked and we have one of the best payments systems in the world.
The proposition of tokenisation is for the "universal digitisation of all assets so they can be traded and exchanged directly and in real-time between any individual or organisation". In Australia, TCA (Tech Council Australia) and DFCRC reports state that these will 'potentially' incorporate blockchain technology. The reports discuss the benefits of using blockchain and smart contracts as ways of making the CBDC 'decentralised', however, DFCRC state in fine print that it is "very much an open question as to whether CBDCs would rely on distributed-ledger technology (DLT) and blockchains." If it is not on a ledger/blockchain, it is quite confusing what the CBDC will be and do different compared to existing digital money. If it is on a blockchain/ledger, DFCRC has stated that It will be built on the Ethereum network and will be a POS protocol. Decentralisation and POS will be discussed further
Monetary sovereignty and Deposit risk - A move to bitcoin or stablecoins could "threaten a country's monetary sovereignty and reduce the ability of the central bank to influence domestic monetary conditions and to act as the lender of last resort if required". In addition, a problem with no current solution based on DFCRC and TCA reports is international CBDC's being adopted by people in high inflation or low trust economies.
Deposit risk comes from people moving deposits from banks to CBDC's for safety, but mass withdrawals would mean a banking collapse.
POS vs POW:
CBDC's being offered a a government alternative to bitcoin is most interesting when looking at how they are designed through POW (bitcoin) vs POS (CBDC). In the TCA and DFCRC reports, as with others from WEF and varying crypto's, there is a clear and conceited effort to promote POS and demonise POW. This is typically done through an ESG agenda, criticising Bitcoins energy usage, however, understanding how POS works, it looks like an effort to maintain abstract power hierarchy.
TCA's report states "While proof-of-work mining (requiring virtual miners to continuously solve puzzles) is very energy intensive, a shift is underway to proof -of -stake (which instead requires validators to “stake” crypto to incentivise activity in the interest of the network ). Networks such as Ethereum are making the shift to proof of stake, claiming it will reduce energy consumption by 99.95%." While the report mentions benefits of POS, there is no effort to describe the downsides/risks or any additional information on POW.
Best described by Lyn Alden in https://www.lynalden.com/proof-of-stake/, ETH's move wont actually reduce energy consumption by going, the energy will simply shift to mining? ETH classic. According to the University of Cambridge, bitcoin's annual energy usage as of Sept. 15, 2022, is about 0.42% of the total electricity usage on earth for a near 600bil market cap. In comparison, gold mining takes approximately 0.5% of energy per year, for a 13 trillion market cap.
The assumed reasoning for demonising POW is that it is a protocol offering real decentralisation of money and real inclusivity to participate whereas POS allows for the existing abstract hierachies to continue in a new centrally controlled form. This is achieved through staking traditionally, like for ETH, where validators stake their coins and can 'slash' other validators. Slashing's purpose is to remove dishonest brokers if they are acting unethically. Active validators have control over the ledger as they choose which transaction are or aren't added. A problem is POS protocols do not allow you to see who the stakers are or how much is being staked, so you don’t know who is in control.
Honeypot problem
The effect of CBDC's using POS protocols is POS creates a honeypot problem which Jason Lowery explains best. It is where the protocol creates mass data repositories and has the capacity to control the product globally. However there is no way for the user to impose physically prohibitive costs on the abuse of that/their data or on the ranked people abusing their abstract power over them. I.e. in terms of a CBDC, an individual could not impose anything on the governments visibility and control over the currency. The same is true for things like social media.
Hence, POS software creates systemically exploitative abstract power hierarchies. This style of hierarchy was originally set-up for security with only high ranking people having privileges. This can only last so long as there is trust in the system and a better system does not exist. Trust is leaving the system and we now have a better system for money and cyber security - bitcoin. POW and the hash cost function imposes real world physical cost on people and programs.
In practice, the honeypot problem danger is coupling control authority over a ledger to something that doesn’t physically exist like an abstract power hierarchy based on rank. Meaning people in a high rank, which can't be physically imposed upon have full control authority. It is an extension of the existing trust based system that we have seen manipulated and exploited because there is incentive for high ranking people to do so without consequence.
POS isn't physically decentralised, because you can't see who is staking how much and how much control over validators someone has, so slashing could become the majority holder removing honest actors. POS software protocols are ambiguous and abstract, what you see in these CBDC/tokenisation reports and crypto is promotion 'innovation' such as blockchain or smart contracts as methods of decentralisation without the thing that really makes it decentralised which is the physical cost function and physical decentralisation of control through hashing.
POW and Bitcoin is a decentralised protocol because anyone with the hardware and access to an energy source can participate in mining and anyone with a laptop can run a node. There is no central authority, all nodes work together to maintain system integrity. If there is a bad actor attempting to achieve 51% control, good actors can combine to increase the energy usage of honest participants and take back control. This is not possible in POS because stake is 0 sum and bounded, meaning honest actors can't push out bad actors who have the majority stake. A single entity in POS could control 60% of all stake and split this among millions of validators so you would not know where the bad actors are. In POW, there is no limit to how much hash and energy you can put back into the system to defend it.
Perfect money
Bitcoin is the perfect digital money because it is an open POW protocol which modulates electricity usage through the hash rate and difficulty adjustment, up until the 21 million supply cap is reached.
Money without energy, like FIAT and a CBDC is just a digital credit, because if you take energy out of the coin, you’ve created a coupon, which is bound to be devalued through inflation.
We are seeing around the world, especially in the BRICS countries, the want for a commodity backed money and issues arising regarding oil trade. Trust has and will further decay when inflation continues to stay high with an energy crisis worsening (OPEC stating they will be cutting more barrels per day https://www.afr.com/companies/energy/opec-s-gamble-can-the-global-economy-cope-with-higher-oil-prices-20230410-p5cz7f). BRICS nations with the support of Saudi and Iran are changing the global economic dynamic and we are seeing this now with Chinese Yuan this year being used to trade oil for the first time between China and UAE. (https://oilprice.com/Latest-Energy-News/World-News/China-Settles-First-LNG-Trade-In-Yuan.html)
The point of view of BRICS nations makes sense when policy makers in the US and EU want to print money and trade that for energy and oil. When the value of the money from the buyer is falling 8-10% every year, someone like Russia is not going to sell oil for this devaluing coupon. It is finite oil production for infinite money, and these nations no longer want a coupon.
Global problems arise now because western nations are so indebted, they can't survive if they can't use there printed FIAT for oil and it means that inflation won't end until the war ends. Nations can't keep printing money to buy energy.
People are suffering globally due to the inflation and hyperinflation effects of the FIAT system in countries like Venezuela, Lebanon etc. Countries heavily indebted in US denominated debt have no choice but to debase and devalue their currency to pay their national debt. This is a big contributor to the growing wealth equality gap and why CBDC as a bitcoin alternative is not something people having these experiences will fall for. We are seeing adoption soaring in countries where hyperinflation is decimating peoples purchasing power.
Short term stability in developed nations is and has been favoured and will cause long term instability. At the current stage of the long term debt cycle, major nations are either past or pushing the illusive 120% debt-to-GDP barrier. The 120% debt to GDP barrier is important because 51 out of the 53 nations who have reached this level have defaulted on their debt either implicitly (paid debt back with printed money) or explicitly. The two still remaining are the US and Japan. The way the Keynesian economic system works is bound to breed a lack of trust in the system because system incentivises a self-reinforcing loop in a never ending spiral of more debt and leverage to force more growth. POW offering a protocol through Bitcoin where the money supply can't be manipulated by a central authority is why it is revolutionary.
POS is an technological advancement of Keynesian economics
The POS protocol through CBDC's will keep control centralised as a way to apply specific and direct forms of government intervention. Government interventions purpose is to squash volatility and reinforcing stability in the short-term. In a system that inherently wants to be volatile, the central banks and policy makers trade short term stability for long term instability.
The TCA and DFCRC reports showcase how CBDC's can be controlled by the central authority in a way where end-users money has expiry dates and location limitations imposed on it. Money could become a coupon, like in China, used to fuel short-term liquidity and short-term stability. In the worst case scenario, like in China, if an individual is not acting in compliance with the central authority's rules, they have full control over the persons money. To allow populations to act in a 'voluntary' way, CBDC's could be used like conditional cash payments where governments offer newly created money to people in exchange for conducting certain actions defined by the government.
In 'The Road to Serdfom', Hayek describes liberal constitutionalism where the private sphere of individual activity is defined, and the state is constitutionally limited by the rule of law in its use of those coercive powers. In this regard, CBDC's are a step to a more authoritarian regime. In Law, Legislastion and Liberty, Hayek lamented how western democracies were increasingly circumventing the spirit of liberal constitutionalism by passing coercive legislation, typically under the gyuse of achieving social justice, but in reality serving well organised coalitions of special interests.
Hayek was trying to show his readers that planning, everyones favorite remedy for the ills of the world, might sound good in theory but would not work in practice (or, atleast, not unless the wesern democracies were prepared to accept severe constraints on personal liberty of the sort on display in the systems against which they were currently fighting).
Australia:
Financial inclusivity:
In the case of the Australian CBDC, the stated purpose is to modernise payments and promote financial inclusion. This is despite Australia having one of the most advances payment systems in the world and over having over 99% of people with a bank account. (https://www.theglobaleconomy.com/Australia/percent_people_bank_accounts/).
The DFCRC uses countries like Jamaica, Nigeria and China to showcase how these digital currencies can be used to benefit an economy, however, it is illogical to use such different economies as basis for Australia. Improvement in the number of people banked and payments systems in emerging and developing economies like in Africa needs serious attention. E.g. In Nigeria, 60% of people are unbanked. Because of this, there is a rapidly growing movement in African and South American countries shiftinh away from the clearly corrupted FIAT money and poor banking systems to bitcoin and lightning network, where communities are being banked for the first time ever with nothing more than a mobile phone. Example: https://www.cnbc.com/2023/03/26/bitcoin-is-poised-to-blow-up-africas-86-billion-banking-system.html
In terms of China's authoritarian power regime, a CBDC fits into that perfectly for the control of a population. China is an example of worst case scenario for Australia or Western democracies. CBDC's are imposed as coupons with expiry dates. Money is tied into full digital identities and social credit scores, there are QR codes on peoples houses to check their date. Killing off bitcoin will turn out to be a bad decision because of the national strategic importance it will hold. However, as Jason Lowery argues, because they are an authoritarian regime, once they realise this mistake, they can pivot back.
Tokenisation:
The focus point in the DFCRC reports is that tokenisation will provide the universal digitisation of assets to create exponential growth in what is called to be one of Australia's biggest industries. The purpose of universally digitising assets is to provide ease of access to buy into any asset class such as real estate. Today, real estate is mostly seen as an investment opportunity, which is how the DFCRC also look at it, but the utility of real estate is having somewhere to live.
Fortunately for some and unfortunately for others, real estate is far from its utility value. Tokenisation will only escalate the over-valuation of asset classes by adding more liquidity to the system, some or most through increased leverage. This will create more home owners than homes and make the sole purpose of real estate to be an investment instead of a place to live. To own a home, you will need to compete with more people and potentially purchase from multiple parties. The asset tokenisation is a way for people to participate in real estate because of how expensive the market has become. It is solving a problem that shouldn’t exist.
Similarly, around the world, we are seeing the risky effect of mass passive investing today where dumb money increasingly flows into overvalued equities at a higher and higher rate, making them more and more overvalued. The core problem in markets is extreme over-valuation. Our economic system relies on these self-reflexive loops like Artemis explains, where money pours into these kinds of assets because prices go up leading to more money going in, so on and so on. Tokenising assets and amplifying this is not any kind of solution, its exacerbating the current dilemma. Real estate should largely be based on utility, however, it has become a store of value because we can't rely on our money as a store.
Risks of CBDC's:
In Australia, Jones of the RBA has raised a concern valid to all economies that "the actual adoption of a retail CBDC to replace cash would be revolutionary and come with costs and dangers that had yet to be addressed." "Central banks could find themselves awash in household deposits they don't need and can't usefully invest". "Meanwhile, commercial banks, which do need deposits to finance their operations, could have their funding and lending channels significantly affected."
This issue is not one that is addressed by DFCRC or TCA. The effect of deposits leaving banks for a more secure government backed storage would mean the collapse of the banking sector.
A problem with no current solution based on DFCRC and TCA reports is that a In addition, another risk is threatening a country's monetary sovereignty. If a country such as U.S proceeds with a CBDC, why would someone in Lebanon or Argentina not purchase US CBDC's as a better store of value instead of their own currency. If they are enforced to not be allowed to buy another CBDC, this will just push people more towards bitcoin and stablecoins.
In a political climate where populations are being pushed to support different agendas for the 'greater good', history shows that individual sovereignty is lost piece by piece to government control. F.A Hayek in 'the road to serfdom' describes how during war time this is initially implemented as a short term plan, however, once control is taken, it is not easy to take back. War time can refer to a physical war like Ukraine or a physchological war like War on Drugs, Covid, Save the planet, Fight inflation etc.
The Caldwell introduction of 'The Road to Serfdom' describes how "Hayeks warning concerning the dangers that time of war pose for extablished civil sociaties - for it is during such times when hard-won civil liberties are most likely to be all too easily given up. Politicians instinctively recognise the seductive power of war. Times of national emergency permit the invocation of a common cause and a common purpose. War enables leaders to ask for sacrifices. It presents an enemy against which all segments of society may unite. This is true of real war, but because of its ability to unify disparate groups, savvy politicians from all parties find it effective to invoke war metaphors in a host of contexts. War on drugs, poverty, terror of which none have a logical endpoint; each may be invoked forever. "
DFCRC website - https://dfcrc.com.au/research-programs/
DFCRC report 1 - https://dfcrc.com.au/wp-content/uploads/2022/01/Digital-Finance-CRC_Prospectus_19-01-2022.pdf
DFCRC report 2 - https://dfcrc.com.au/wp-content/uploads/2022/12/Central-Bank-Digital-Currencies-CBDCs-An-update-on-rationales-for-issuance-and-systemic-design-considerations.pdf
TCA report: https://techcouncil.com.au/wp-content/uploads/2022/11/Digital-Assets-in-Australia-report-2022.pdf