Complexities come with an insidious burden and blindness that human nature oddly finds attractive. Complexity is often equated with sophistication, however, erroneously. Complex objects, ideas, and systems tend to elicit awe. Complex problems tend to be treated with complex solutions.
Not surprisingly, such is the state of monetary affairs.
The thing about complexity is that adding more of it on an incremental basis leads to exponential (or multiplicative) results. Before you know it, a complex passageway through a monetary hurdle becomes a labyrinth in which even its creators can easily get trapped.
Fiat on Steroids
Instead of simplifying the process and getting back to the basic principles of a currency’s function, confident leaders and lawmakers seem fixated and enamored by a seemingly “cutting-edge” solution to monetary matters: Central Bank Digital Currencies, aka CBDCs.What Are CBDCs? A Brief Explainer
CBDCs are digital currencies issued by central banks rather than commercial banks. Their values are pegged to that of a domestic fiat currency, in our case, the U.S. dollar.- It’s free of credit and liquidity risk (read: the Fed can always print more money, right?).
- Cross-border payments can be streamlined with greater speed and efficiency.
- It ensures the U.S. dollar’s international dominance, should nations go the CBDC route.
- It promotes financial inclusion, allowing the “unbanked” to finally get “banked.”
- It can increase the speed and efficiency of transactions minus those pesky commercial banking fees.
A SWIFT Death?
SWIFT is an interbank messaging system that’s used by most of the world to make cross-border payments. It facilitates global trade.At this year’s Global Blockchain Business Council symposium (on a panel adjoining the World Economic Forum’s annual Davos summit), Mastercard CEO Michael Miebach made a seemingly tongue-in-cheek comment that elicited a collective gasp in the crowd.
When asked whether SWIFT might still exist in five years’ time, Miebach said “no.” What’s to replace SWIFT? Possibly, CBDCs.
A seemingly efficient “evolution” to the current system, CBDCs add multiple layers of complexity that go far beyond the technological challenges of cross-border trade. As you can imagine, such a monetary paradigm shift would not only disrupt the commercial status quo but penetrate deep into the principles that define monetary function, down to the practical financial activities exercised by every individual citizen.
ABA’s 2-Cent Contribution to Future of Money
The ABA’s comments go straight to the heart of the matter in the opening four paragraphs. The first point, that CBDC implementation could “change the structure of the U.S. financial system,” speaks to the risks that CBDCs pose to the relevance of the commercial banking system. After all, if citizens can bank with the Fed, why use a commercial bank?In the second point, the ABA argues that in a “real economy,” there is a “lack of compelling use cases where CBDC delivers benefits above those available from other existing options.” Besides streamlined process and cost efficiency, perhaps the ABA is right. But again, isn’t the point to make transactions a bit more streamlined, efficient, and cost-effective?
It’s the third point that delivers the blow, depending on the principles you espouse. I'll quote the most relevant part of the paragraph in full:
“In developed economies, public money, which includes cash and accounts held directly at the Federal Reserve, makes up about 5% of money. The other 95% is private money. … Introducing a CBDC would be a deliberate decision to shift this balance to public money.”
Is the ABA warning that CBDC implementation would essentially “Socialize” (with a capital S) every American’s “private” wealth?
There are plenty of other risks to a full CBDC system that exceeds this article’s scope. For instance, what if the Fed decided for some reason or another to implement negative interest rates? This means that the Fed can force you to spend money since the funds in your savings will erode in value.
A Simpler, More ‘Sound’ Solution to Global Money?
In 2021, central bank gold purchases were 82 percent higher than 2020, according to the World Gold Council (WGC). The WGC also expects central banks to be net purchasers of gold in 2022.While there are plenty of articles concerning monetary curiosities and oddities that we can point to, such a discussion would exceed the scope of our point, which is a very narrow one: the monetary system is overcomplicated, and adding even more complexity to it may overburden the foundation of what, essentially, originated as a simple transactional relationship.
Isn’t it time we return to the gold standard? After all, the fiat system seems to have brought nothing other than rapid currency devaluation, ballooning national debt, fiscal overspending, corporate moral hazard, and increased wealth inequality on the social end.
