Central Bank Digital Currencies (Govcoins) and Their Implications

What is a Govcoin?

 A digital currency issued and backed by a central bank. It would likely be declared legal tender, meaning all businesses with the ability to do so must accept and transact in the digital currency. 

If you’re a crypto enthusiast, the thought of a Central Bank Digital Currency (CBDC or Govcoin) probably makes your blood boil. It seems like the government is hijacking a clever financial innovation to further extend its own reach. What if it’s also a threat to crypto asset prices? What if the issue of CBDCs are accompanied with crackdowns on private crypto coins like XRP, ADA, or BTC? All or a substantial portion of the investment portfolios of millions could be wiped out.

But the most likely outcome has good implications for ‘private’ cryptos that many of us hold and are familiar with. The strongest possibility is that the issuance of govcoins will increase adoption of ALL cryptocurrencies and usher in an era of explosions in price for private cryptocurrency, since private cryptocurrencies will hold onto the largest benefits of blockchain tech- decentralization and anonymity. Lastly, the fact that central banks worldwide are researching blockchain technology does nothing but add to the legitimacy of the fact that it’s a game-changer. The less than 1.5% of the world’s population that is currently invested in crypto are invested in a world-changing technology. For me, this is why being invested in crypto is more than just being about money (but I will happily accept some gains to get rid of this MBA student loan debt). We know it will change the world and is already doing so- but not everyone knows it yet. 

A lot of people in the crypto community think that fiat currency is evil. The fact is that central banks and the banking system do have an important role. We’re already seeing how much fraud and scamming exists with cryptocurrencies- if we want global adoption of this technology we need for it to not be so full of shysters, criminals and shitbags- such people continue to hold the asset class back. The people that hate fiat would rather have fiat currencies capitulate and have the likes of Bitcoin and others be the only form of payment. This is not what I would want- most of my, my parents, and friend’s savings & investments are in fiat denominations. I think when a new technology like blockchain emerges, a natural human reaction is fear and doomsday projections, especially since that’s what makes headlines. We saw this with AI and the media depicting that AI will wipe out millions of jobs. While many jobs are being made obsolete by AI, the outcome that is actually happening is different than those doomsday predictions- AI is a productivity booster and something that works in unison alongside with humans, and ultimately makes us a wealthier society. The same will likely be true of private cryptos and govcoins with fiat- they will likely work alongside each other and in unison, each of them having their own benefits. 

Why Governments are Pursuing CBDCs

A recent estimate by The Economist shows that the global financial industry spends about $350 per person on Earth (8 billion) in overhead costs (brick and mortar banks, employees), a cost that blockchain technology could easily cut in half. This simple fact probably means that CBDCs are going to happen, and it’s not something that we private crypto investors can control. But the implications for what will happen to the prices of the popular private cryptocurrencies of today could be excellent. CBDCs are attractive to states because:

  1.  Transaction settlements can occur immediately instead of settlement at the end of the day for banks or even two days in investment banks or brokerages 
  2. They would make it far easier to issue transfer payments (government assistance) to citizens
  3. As already demonstrated, digital currencies are far better at implementing financial inclusion than banks who will not venture into areas or populations that would be unprofitable for them
  4. Nations with limited recognition of their sovereignty like Taiwan, Palestine, The Marshall Islands, etc. could create their own currency and abandon their reliance on another country’s central bank’s policies. Over 66 countries currently have their national currencies pegged to the dollar because they cannot maintain stability on their own- CBDCs could change that.

With all this said, at least 70% of nation states are researching or have at least announced they will “look into” adopting a digital currency. The Bahamas has already issued digital money. China has beta tested the digital Yuan with half a million people in Shenzhen by awarding it through a lottery. Some developing countries are mired in situations where it’s very difficult to obtain, handle, and spend cash- CBDCs could easily fix that. There is a rub though.

CBDCs Defeat Much of the Original Purpose of Blockchain Technology

One of blockchain’s greatest advantages is its anonymous nature. Bitcoin or Cardano don’t give a shit who you are. They don’t require documentation like an ID or birth certificate to open an account- and you don’t even need a smartphone to handle a wallet. When Bitcoin was still a fringe asset, it was an obsession of libertarians and anarchists alike who were attracted to the idea of cutting the umbilical cord from a central government who controls a fiat currency. Imagine how pissed off those people are when they hear about Govcoins! I am one of them. 

The second of blockchain’s greatest advantages is that of decentralization. In sum, decentralization means that the currency is far less likely to be manipulated by bad actors, or anyone for that matter.  A cyber attack on a big firm like JP Morgan is bad and could send a few shocks through financial markets- but an attack bringing down a US digital dollar would be absolutely crippling. Additionally, all kinds of doors are opened up for social control: smart contract features could be used to ban the buying of foreign books, pay for abortions, or pay for firearms. Manipulation of the currency in different districts and could be used for political purposes. History has given us countless examples of the follies of highly centralized power. 

The last of the drawbacks of CBDCs is a particularly strong case for not having them: CBDCs or Govcoins would essentially mean that the government could monitor all transactions everywhere, track crimes, and likely use the blockchain for taxation. Such a surveillance state seems counter to the core ideals of a liberal democracy- which is why I think even the most leftward-leaning of politicians in the US are still hesitant about the potential implications of a CBDC on individual freedoms. Central banks by and large operate separately from the law-making bodies of countries, so they could possibly make the change without unanimous support. 

Virtually all cryptocurrencies have the same challenge- to be globally adopted by billions in order for their biggest advantages to be realized. If a large government like China turned around tomorrow and issued a Digital Yuan as legal tender in Mainland China, we would see incredible adoption rates of digital currency overnight, and much of that would likely spill over into ownership of private cryptos like Bitcoin, XRP, ETH, or Cardano. Even small upticks in adoption of these assets would mean huge increases in their prices. But since govcoins could mean a huge impediment to human rights and privacy and independence, people could truly begin to see the value of an independent, decentralized and anonymous asset/coin like the cryptocurrencies we all know, hold, and love. 

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