The digital currency medium has a global impact that can be a force for unification but can also be a source of obsessive behaviour, greed, dysfunction, and social disruption. In that sense, cryptocurrencies can undermine confidence in existing currency systems even without displacing them. Their existence has a hallucinogenic effect. Every affected party sees what he wants to see, and no two participants see the effects in quite the same way.
This series of The Daily Reckoning Australia editions, beginning with this article, looks at these new and old forms of money — gold, CBDCs, SDRs, and cryptocurrencies — in the context of today’s global economy. It’s an economy that is itself immersed in the effects of an electronic technological revolution and the third-worst pandemic in 650 years. We’ll look at each form of money separately, including new applications like digital gold and new combinations such as gold-backed SDRs.
Since 2010, the major global economies have been engaged in a currency war involving repeated competitive devaluations of currencies in order to export deflation, import inflation, promote exports, and create export-related jobs. This is a zero- or even negative-sum game that inevitably leads to trade wars, which began in 2018. These also accomplish nothing unless accompanied by internal infrastructure investment and growth-oriented policies.
Now a new phase that could be called ‘money wars’ has begun. It involves non-government cryptocurrencies competing with government money and governments embracing new sovereign digital money called Central Bank Digital Currencies (CBDCs).
CBDCs aren’t really new currencies but are new payment channels for existing currencies. The development of CBDCs enables the true elite agenda — the elimination of cash, confiscation of wealth through negative interest rates (difficult in a system that allows cash), and the perfection of the totalitarian surveillance State.
Cryptocurrencies, which are different from CBDCs, are also gaining wide acceptance. These cannot be analysed generically but must be sorted based on criteria such as anonymity, issuance cap, governance, permissioned versus permissionless systems, transaction speed, and liquidity.
Some cryptocurrencies have better use cases and are safer and more pragmatic than others. Bitcoin [BTC] has no utility because it’s deflationary by design and, therefore, unsuitable for use in bond markets, which is the key to reserve currency status. Bitcoin mining contributes materially to global CO2 emissions through electricity consumption. Bitcoin prices are also highly manipulated through the use of fraudulent stablecoins such as Tether.
The only serious rival to the US dollar as a global reserve currency might be a permissioned blockchain maintained by the International Monetary Fund (IMF) using Special Drawing Rights, or SDRs, as a World CBDC. This challenge to the dollar would be made more potent if the SDR-World CBDC were linked to gold.
Gold is the classic form of money, having performed that role in various ways for more than 3,000 years. The issue for gold is whether it can still perform these roles in an environment of digital money. Gold’s future also points to the possibility of a new kind of monetary trilemma in which any form of money (gold, cryptocurrencies, CBDCs, or SDRs) can perhaps only perform two out of three of the classic three-part definition of money — unit of account, store of value, and medium of exchange — but not all three because of the comparative advantage of rival forms of money in one or more of those functions.
Beyond that, cryptocurrencies and CBDCs must be considered in light of Marshall McLuhan’s thesis that the medium is the message (I will explain that thesis in a future article in this series). Factors such as price, use case, design features, etc., are not the message; they’re content, a medium in a medium, and mostly irrelevant. The message is that cryptocurrencies are an extension of human reach and scale and a cool medium requiring extensive involvement by the user to comprehend a mosaic of information.
China understands CBDCs’ true potential
China already uses facial recognition software, mobile phone GPS tracking, and the purchase of plane or train tickets to track their citizens. This surveillance can be used to detect anti-State activities and to arrest dissidents or anyone who doesn’t strictly follow the orders of Chairman Xi.
China’s lead in producing the first major central bank digital currency is well-known. The Chinese CBDC is already being used in prototype form and may receive a global coming-out party at the 2022 Winter Olympics in Beijing. Recently, China has revealed an even greater ambition; it wants to take its rules for using CBDCs and make them the global standard.
[Editor’s note: The original article this piece was adapted from was written in May of this year.]
Even if the US and Europe don’t agree, it’s likely that many Asian and African countries might agree in exchange for aid from China. That aid can, for example, take the form of access to scarce COVID vaccines. Once China’s totalitarian surveillance software is perfected, they can make it the standard for much of the world and facilitate intrusive 24/7 surveillance by every dictator and autocratic leader in the world. No doubt China would arrange to have access to the same surveillance information it was providing to client States.
While China may be the leader in the race to build CBDCs, the Fed has not been caught napping. The US Federal Reserve System has been working with scientists at the Massachusetts Institute of Technology to develop a dollar form of CBDC. The rollout of this new digital dollar may still be a few years away, but the implications are enormous.
Look out for next Wednesday’s article, which delves into gold and the relationship between the tangible (gold) and the intangible (digital currencies).
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.