This is an opinion piece by Shinobi, a self-taught educator in the Bitcoin space and tech-oriented Bitcoin podcast host.
Since the recent White House report on Bitcoin and cryptocurrencies, the discussion around a US central bank digital currency (CBDC) is once again raging. Will they make one? How long will it take? Of course, the government will benefit from the vast increases in capacity and oversight powers that a CBDC will bring. Right?
Their own report specifically mentions greater efficiency as a payment platform, faster cross-border payments, economic growth and stability (easier control of monetary policy), protection against cyber risks and operational risks ( security breaches of financial institutions), protecting the confidentiality of sensitive data and minimizing the risk of illicit financial transactions. So in other words, they want to have total insight into all of your financial activity, have the ability to deposit money directly into people’s accounts for stimulus and monetary policy purposes, and be in able to arbitrarily block “illicit activity,” which, as we know these days, is a rapidly changing goal that means who knows what next year.
In 2017, an average adult made 41 economic transactions per month, of which about 12.4 were cash. This would mean looking at these numbers that approximately 3,192,200,000 cash transactions take place in the United States every month. To compare with Bitcoin with some napkin calculations ignoring the efficiency gains achieved through batch processing of transactions and other optimizations, the Bitcoin blockchain processes around 3000 transactions per block on average, reaching somewhere in the figure of 13 million transactions per month. So, just to replace the average cash transaction volume, a CBDC would need to process 246 times more transactions each month than Bitcoin. And it’s only replacing cash, not eating into debit or credit card payments, or absorbing some of the payment volume from fintech apps like PayPal and Cashapp.
Such a system would require the kind of availability that we currently see with payment systems like Visa and Mastercard. Think about how often basic digital government services fail and go offline. Have you ever had a tax year where IRS payment portals didn’t get overloaded and crash? Does anyone remember the massive Obamacare website debacle and constant crashes and failures? Do you really think the federal government could handle building and maintaining a system independently to facilitate the kinds of payment volumes needed to provide a digital alternative to cash without massive failures? What happens when users experience loss of funds? Lose their phones? Things break? Massive companies such as PayPal and major banking institutions that have taken years, even decades in some cases, to set up customer support systems to handle such failures and issues regularly drop the ball, take forever to respond. to people and drags the whole process into a long, frustrating ordeal before you actually fix the problem. Do you think the federal government could perform such a task? No. Even considering a realistic possibility is frankly laughable in my mind.
Let us now examine the financial effects of such a CBDC system that eats away at the current financial system. The idea is apparently to have a system run by the Federal Reserve (or potentially the Treasury?) that provides financial services and capabilities directly to consumers. This is the role that private banks and financial service providers currently fulfill in the economy. The Federal Reserve does not offer tools or services directly to consumers, it provides accounts to financial institutions that do so that they can hold reserve money with the Federal Reserve and settle transactions between them using the Fedwire system. Introducing a direct-to-consumer CBDC would lead to an inevitable disintermediation of these private entities in the financial services market, and given that financial services represent approximately 7.4% of US GDP, this process would have a huge implication. for the US economy. depending on how deep the CBDC has penetrated this market. How many people would choose to use a CBDC over Cashapp or PayPal? On their bank at JP Morgan? If it were a significant number of people, it would have a huge negative effect on the financial sector. Anyone who chooses to withdraw their money from these institutions and instead hold a CBDC would be someone who withdraws their deposits from the bank and leaves them with fewer reserves to do business with.
What about cross-border payments? How would it work mechanically? Connections to legacy systems such as SWIFT? Just send the CBDC token directly to someone in a foreign jurisdiction? If you’re just going to use SWIFT or other international transfer systems, how does a CBDC in any way improve the speed of cross-border payments? If you are going to directly facilitate the transfer of the CBDC itself internationally, how do you apply KYC and AML? Doesn’t this require directly identifying the foreign citizens who use the system? This would result in the expansion of data collection and direct US government financial controls into foreign territories.
So let’s recap: the technical effort to set up such a system is immense, and well beyond the capacity of the government to manage itself. Deploying such a system would directly eat away at the bottom line of private financial firms and deal a major blow to the US economy if successful. Attempting to deploy it as a cross-border payment tool would make no difference or have massive policy implications. So what is the reality? An American CBDC as it is mostly envisioned will never happen. It is completely technologically unfeasible and would result in a very destructive restructuring of the US financial services industry if adopted at a serious level.
What could really happen? More of the same. There is no way for the US government to handle building a CBDC system for consumers, but companies like PayPal, JP Morgan, Amazon, etc., could very well handle such a system. They have decades of experience building backbone infrastructure for digital systems with a massive user base on the order of the US population, experience managing consumer interface design for such systems and, as mediocre as it usually is, have experience managing the kinds of support infrastructure needed to help consumers resolve issues when the system isn’t working as it should.
There will be no Federal Reserve CBDC app that will interface directly with their main database. There may be a redesign or expansion of Fedwire to allow companies like PayPal or Chase to create private apps and siled databases connected to Fedwire accounts to easily transfer CBDC tokens. In reality, probably not even that, an account with Fedwire as it currently exists will be sufficient for private companies. Why even go so far as to implement any type of cryptography or token either? If you’re only talking about a database entry in a PayPal system, what good are signatures authorizing transactions, keeping your own keys, etc. What benefit does this add? Absolutely nothing. You don’t keep anything yourself, it’s just an entry that PayPal can freeze, delete, or refuse to update, just as it is now. What is the big fundamental change? QR codes. Just a new UI/UX wrapper around many of the same existing fintech payment apps that have been around for almost 20 years now.
There is literally no benefit in such a system to implementing any of the key primitives of a system like Bitcoin or other cryptocurrencies. Decentralized databases are not scalable, this is something every bitcoiner should fundamentally understand when aware of bitcoin scaling challenges. Why introduce such primitives in a “CBDC”? So, people can lose access to their funds more easily? To have a compelling narrative that you can push on unsuspecting audiences? It’s irrelevant, just adding a QR code you can scan to send money is fancy and new and fresh for normal people, that’s all you need for your “story convincing”.
The whole CBDC narrative is nothing but a gigantic misnomer that is slowly being pushed into the public consciousness to standardize existing digital payment mechanisms as the new normal in place of cash. . Nothing is going to change, there won’t be any new mind-blowing apps or possibilities made possible by “blockchain”, there will just be flashier, simpler user interfaces and more flexible banking/payment app APIs. There is no fundamental technological breakthrough possible or coming with a “CBDC”, it is purely a marketing campaign and nothing else.
Really, the question is the money itself – can they push the narrative that we don’t need it anymore? Can they find ways to get such payment apps into the hands of people who currently don’t have access to them, especially the elderly. Can they convince people that money is not necessary with such systems available as an option in the modern world?
A central bank digital currency is nothing but a meme at the heart of one of the biggest gaslighting campaigns that governments and financial institutions have ever attempted to pull on the general public. Bitcoiners shouldn’t have the least bit of fun with this campaign by acting like a CBDC has something in common with Bitcoin, or any other cryptocurrency, by engaging in these pushes and stories using their language. . It powers the handling, the gaslighting, and the inevitable switcheroo that comes at the end of it all.
There’s no CBDC, just a shiny new wrapper for fintech apps like PayPal and tighter integration between them and systems like Fedwire.
This is a guest post from Shinobi. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.