Fed Paper on CBDCs Roils All Markets, Not Just Cryptos

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Commentary

Last Thursday afternoon, the Federal Reserve released a long-awaited report on the subject of a so-called “digital dollar.” In particular, those who do not like or trust the burgeoning Wild West of Bitcoin and its many relatives have wanted the Fed to weigh in and—in their view—take back control of the narrative of what is and can be used as money.

What surprised investors was that a Fed report that really came to no hard, fast conclusions nevertheless offered sufficient hints as to where things are heading that the recent selling of cryptocurrencies accelerated. Even more, this all quickly led to the counter-trend rallies in stocks that had been underway being abruptly reversed, with new correction lows for this move logged instead at week’s end.

There are two thoughts/lessons in all this: for the cryptocurrency fad specifically and also—and ominously—for the broader markets.

First, on Bitcoin, et al. While for some 40 years I have been an advocate of many kinds of free-market monetary alternatives (community currencies, barter, time banks, and others that are honest, interest-free, and controlled by the people) I have not warmed up to Bitcoin and the rest. I have generally shunned this whole space simply because these cryptocurrencies are NOT effective money for the masses; and frankly, never could be.

Rather than a practical, widely utilized monetary alternative, these cryptocurrencies have become little more than a game of musical chairs on steroids. All good intentions and, in the end, what will be failed promises aside, the overwhelming majority of people who have taken part in the crypto craze have done so motivated by greed; buying a speculative quasi-asset with the belief that its value will go to the moon.

One of the more comical aspects of the crypto Kool-Aid so many have drunk is that all of these newfangled currencies are denominated in U.S. dollars. None are a new currency in their own right. They are supposedly a new way to use new technologies to transact business in the same currency we will all still be saddled with.

When all is said and done it will be the Fed that oversees what remains of one true “digital currency”: the U.S. dollar. Those who for whatever motivation want to limit if not end all these non-government cryptos will end up with their wishes granted.

A Business Insider report this weekend, speaking of what is most likely coming, said, “A CBDC would serve as a purely digital version of cash that’s backed by the Fed and just as available to the public as physical cash. It wouldn’t require the same deposit insurance that banks need for cash, and it wouldn’t need to be backed by a physical asset.

“A Fed-backed digital dollar would then provide many of the benefits touted by cryptocurrencies without their wild price swings and usage fees. In theory, a CBDC would meld the best aspects of physical and digital currencies for the average American.”

As always, the “house” (the central bank and its protected monopoly) wins. Much like Establishment political parties will co-opt issues from third parties in order to neutralize the latter, so now are the world’s central banks going to co-opt the real/imagined benefits, convenience, etc. of going more fully digital. But we’ll be left with the same dollar… the same fractional reserve system… and the same Fed running things.

Bitcoin (BTC) price from March 2020 to February 2022. Barchart.com

My second point here: Quite possibly helping out the propaganda line to come from cryptocurrencies’ detractors and the Fed alike will be how the renewed plunge in cryptos’ value will infect the markets overall.

Don’t forget that today’s money managers and others commonly use leverage on top of leverage to get the most juice out of their bets. Many who bought cryptos with, in part, borrowed money bought lots of other stuff, too: meme stocks, the Nasdaq darlings, green energy plays, you name them. As chart/price levels give way, the selling automatically feeds on itself; and leads to the need for investors to raise cash/get liquid elsewhere, too.

The late-week market action last week is a shot across the bow to those who remain complacent, believing the Fed has things under control. As we learned in 2008—as well as in that massive, albeit brief, washout at the beginning of the Plannedemic in early 2020—selling begets selling when leverage unwinds.