The Biden administration issued an Executive Order on Ensuring Responsible Development of Digital Assets on March 9, 2022. What are the implications?
There is a story arc to the evolution of cryptocurrency and the blockchain. The cliff notes version of the move to CBDC begins when Nixon abandoned the Bretton Woods gold standard in 1971 and terminated the dollar as a stable unit of value. The U.S. had been on some form of a gold standard since 1792. The end of Bretton Woods ushered in the global fiat system and the dollar as the world’s reserve currency. The history of all fiat currency is the perpetual trend for inflationary debasement. If money is wealth then more money is more wealth, so malleable minds believe. The shelf life of fiat currency is around 50 years. All fiat currency eventually disappears in hyperinflation combustion. There is no exception. The U.S. dollar has lost 98% of its value since 1971. The 50-year decline in the dollar’s value has been a slow, contained process such that the value loss thus far has remained somewhat subtle and manageable. Since the world is on a fiat system, there were no viable dollar alternatives–until crypto came along.
Cryptocurrency and blockchain evolved from a cypherpunk anarchist response to the fiat system. The merging advances in cryptography, bandwidth, technology, and the internet made possible attempts at digital currency.
In Delineating the Crypto Space, I noted that “The initial attempts at decentralized cryptocurrency originated in the Cypherpunks group and mailing list that formed in the Bay area in the 1990s. The internet combined with public-key cryptography provided a foundation for the creation of peer-to-peer digital currency. Early forerunners of cryptocurrency were E-gold, David Chaum’s DigiCash, Wei Dai’s b-money, and Nick Szabo’s bit gold. Adam Back’s hashcash demonstrated proof of work, PoW, as a cryptographic digital security function. Satoshi built on the early attempts with his creation of Bitcoin.”
Post Bretton Woods fiat dollar instability, inflation, and perpetual monetary disruption led to exploration for a digital currency workaround. The result is Satoshi’s Bitcoin and its thousands of offshoots. How ironic that the anarchist technology Bitcoin unleashed is now evolving into centralized authoritarian CBDC that intensifies government control.
The implications of evolving CBDC are Orwellian. CBDC leads to the end of cash and the freedom to conduct financial transactions anonymously. With CBDC a centralized authority will have total control over every individual’s financial life. The only option for financial independence is a return to barter. That’s economic progress in the 21st century.
CBDC will facilitate China’s social credit score system. Western nations formerly known as “democracies” seem eager to adopt this system. Canada’s Trudeau has publicly praised China. A central bank can withhold your CBDC based on any whim of the controlling entity. CBDC issuing authorities can program their digital currency for a limited use life. Use your issued CBDC for socially approved government purchases or lose it.
Canada gave the world a preview of how this will work with its crude attempt to freeze the bank accounts of anyone who donated to protesting truckers. Under our cash system, Trudeau’s action resulted in potential bank runs, and the Canadian government immediately rescinded the edict. Under CBDC, there are no options for the individual. Either comply or lose access to your financial resources and ability to conduct transactions. In the case of Canada, if the government can attempt to freeze your cash deposits based on a politically incorrect protest, then there is no limit to their control with CBDC.
Enter climate change, sustainability, and ESG as the new manifesto for totalitarian control. Under an all-encompassing political umbrella of saving the planet, an individual’s lifestyle choices can be severely restricted. CBDC is the means. Did you exceed your monthly allocated carbon footprint? Sorry. The central bank has restricted access to your CBDC account until you regain compliance. A central authority can have complete control over every detail of your financial, social, and political life.
The Biden CBDC EO is political cover to justify the eventual implementation and evolution of CBDC. Like every government program, it begins with a kernel of something that sounds good in its initial sales pitch, then metastasizes into a government monstrosity that never ends.
The EO has various timelines for submitting reports, but the primary timeline is within 180 days. CBDC is well on its way, and the EO means that behind the scenes, CBDC is likely technologically well advanced in the U.S. Some countries are already testing trial runs of CBDC.
Previously, environmental concerns were unrelated to financial matters. The monetary and fiscal policy role was limited to stable money and economic growth. Environmental concerns were addressed separately by appropriate agencies on their merit. Biden’s EO makes climate change central to CBDC and thus the financial system. The EO states:
The report should also address the effect of cryptocurrencies’ consensus mechanisms on energy usage, including research into potential mitigating measures and alternative mechanisms of consensus and the design tradeoffs those may entail. The report should specifically address:
(A) potential uses of blockchain that could support monitoring or mitigating technologies to climate impacts, such as exchanging of liabilities for greenhouse gas emissions, water, and other natural or environmental assets; and
(B) implications for energy policy, including as it relates to grid management and reliability, energy efficiency incentives and standards, and sources of energy supply.
While a CBDC would be issued by a country’s central bank, the supporting infrastructure could involve both public and private participants.
Within 180 days of the date of this order, the Secretary of the Treasury, in consultation with the Secretary of State, the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, the Director of National Intelligence, and the heads of other relevant agencies, shall submit to the President a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.
Competition with private crypto
Within 90 days of submission to the Congress of the National Strategy for Combating Terrorist and Other Illicit Financing, the Secretary of the Treasury, the Secretary of State, the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, the Director of National Intelligence, and the heads of other relevant agencies may each submit to the President supplemental annexes, which may be classified or unclassified, to the Strategy offering additional views on illicit finance risks posed by digital assets, including cryptocurrencies, stablecoins, CBDCs, and trends in the use of digital assets by illicit actors.
The future for CBDC
If a gold standard still existed, would Satoshi have reason to create Bitcoin? The Bitcoin White Paper states that Bitcoin is a workaround from trusted third parties who abdicated their trust.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.
It is a lack of trust in the third party Federal Reserve, due to their mismanagement of the fiat dollar after 1971, that led to the creation of Bitcoin. When correctly managed, the gold standard provided unalterable trust in currency. Any currency linked to gold maintained its value. The British pound remained stable in value for 217 years on its gold standard and the U.S. dollar for 179 years. Under a properly maintained gold standard, there is no demand for a parallel currency of any type. You can’t replace a trued wheel with a better wheel. The gold standard is the monetary trued wheel.
Under what policy will the Fed create CBDC? What standard will govern the supply of CBDC? CBDC portends a cashless society. The Fed’s creation of cash and reserves, and countering assets and liabilities, is the fuel that powers the economy. Too much liquidity and the economy floods, inflation. Too little liquidity and the economy stalls, deflation. Despite the abandonment of Bretton Woods 51 years ago, the price of gold continues to signal Fed monetary error. How the Fed will transfer from a transparent system of historical liquidity creation based upon the freedom of cash demand to a digital creation system of forced CBDC acceptance remains a great unknown.
Advances in technology create great leaps in economic productivity and corresponding increases in standards of living. The potential for technological advances is unlimited. Yet, the rapid advancement in AI also enables censorship, the security state, and totalitarian control. Any technological advance can be used for good or evil. CBDC is no different. A CBDC backed gold standard is limited only by intellectual acceptance and political will. Similarly, private cryptocurrency and the blockchain retain the potential to disrupt the global fiat system, usher in a universal decentralized stable currency, and secure the internet–George Gilder’s vision from Life After Google.
The Covid pandemic resulted in universal, coordinated edicts that controlled the global population. This was not a coincidence. The economically and socially destructive lockdowns, social distancing, masks, and coerced vaccinations provided no mitigation for the gain of function laboratory-created virus. The Covid pandemic was the first step toward a new global order. More laboratory-created viruses, cyber-attacks, preventable conflicts and wars, and the old standby of terrorism seem the natural progression for providing the political cover necessary for the coming authoritarian CBDC and climate change edicts.
There is no economic, political, social, or technological justification for ceding individual financial freedom to centralized, controlled CBDC. It will take a lot of trucks to prevent it.
Great post as always Mike, thanks for your insights.
I would love to hear your thoughts on an interview I recently came across “The Grant Williams Podcast: Luke Gromen – FULL EPISODE” (https://ttmygh.podbean.com/e/gwp0029_luke_gromen_free/). I am particularly interested in the potential return to gold backed national reserves (neutral) and the idea that releasing the USD from its role in global trade/petro dollar/etc. is a requirement for reindustrialization of the USA. Any additional thoughts on pros and cons of a bancor-esque migration?
Economics is very simple. Stable money and low taxes result in productive economic growth for any national or global system that enables such a foundational base. There has never been an exception. Economics becomes distorted and seemingly complicated when you remove the foundational pillar of stable money. That happened in 1971 with the end of BW, and the last 51 years of economic chaos is the result.
A gold standard merely requires adjusting the supply of base money to demand to maintain the dollar in parity with a fixed price to gold. BW blew up because the Keynesians were fiddling with dollar devaluation on a gold standard. There was excess base money supply creation beyond what the $35/oz gold parity price required. The result under the terms of BW was that foreign CBs exchanged their excess dollars (losing their value) for U.S. gold (maintaining its value). Nixon closed the gold window in 1968, exchanging treasuries tied to the devaluing dollar instead of gold. BW was essentially dead at that point.
There was no reason for BW to blow up had the Fed merely drained the excess dollar creation. There would have been no gold outflow, and the U.S. would have maintained the stable international monetary system that resulted in the highest sustained growth rates in U.S. history.
I give this as background to the comments in the podcast, which travels down a complicated economic history without observing this simple, explanative frame of reference. From this frame of reference, I could offer counter explanations to all the points made in the podcast. There are too many to go through them all.
Gold remains the monetary Polaris for all the reasons I explain on my website. A bancor-type system is a poor, inefficient substitute for a gold standard. It’s better than the fiat PhD standard in place now, but if you’re going to move away from the chaos of fiat, a gold standard offers the only true stability.