Inflation in the West, Energy Crisis and Housing Bubble to the East
When a financial crisis occurs in the U.S., it releases a domino effect that is felt across every nation around the world. In an attempt to battle inflation, the American government recently passed the “Inflation Reduction Act”, with a price tag of $740 billion, that presents no feasible strategy to reduce rising costs at all. Across the Atlantic, while the war between Ukraine and Russia intensifies, European nations will be hit with massive energy bills to stay warm this winter. European leaders are scrambling for solutions as electricity prices surge 300% in 2022, which will wreak havoc on European household incomes for the next 5–10 winters. Lastly, China, the second largest economic powerhouse in the world, is facing troubles of its own. With real estate prices plummeting, hundreds of thousands of Chinese homebuyers are refusing to pay mortgages for pre-sold properties due to housing developers struggling to complete housing projects on time. With global economic leaders struggling to determine a feasible solution to avoid an economic collapse, many governments are exploring the idea of “CBDC”, or Central Bank Digital Currency, that could be used as an alternative to fiat money.
Are CBDCs similar to Crypto, but for the Government?
On the surface, CBDCs appear to be similar to the electronic currency we keep in our bank accounts, or money we spend through payment apps on our smartphones. The difference between the electronic money we’re accustomed to is the absence of a central bank. CBDCs would serve as a direct liability of the government or federal reserve, similar to cash. A CBDC would be a digital equivalent of a country’s existing fiat currency, and essentially functions the same way. A country’s central bank would issue the CBDC supply, and would have complete backing by the federal government. Citizens could use CBDCs to pay for goods and services, and even get their wages paid in CBDC. There are currently over 90 countries developing, researching, or implementing a form of government-backed digital currency. There will most certainly be differences in how these currencies operate (more on that later), but they all follow the same fundamental principles.
Cryptocurrencies, such as Bitcoin, run on an entirely different criteria. Instead of being centrally distributed, the coins are mined or minted through a widespread network of computers, used to solve cryptographic functions. Cryptocurrencies run on distributed ledger technology, which are controlled by different validators spread across networks who verify the accuracy of each transaction on the blockchain. These underlying principles are the exact opposite of what CBDCs accomplish.
Potential Benefits of a CBDC in the U.S
In a study conducted by the Foundation for Economic Education in 1995, economists found that “Since 1933, the U.S dollar has lost 92% of its domestic purchasing power. Even at its ‘moderate’ 1994 inflation rate of 2.7 percent, the dollar will lose another half of its purchasing power by 2022”. To put things in perspective: $20 in 1922 is the equivalent of the purchasing power to about $352.71 today. This produced a cumulative price increase of 1,663.55%
Earlier this year, President Joe Biden signed an executive order to explore the benefits of a CBDC being implemented into the U.S economy. One of the main benefits of distributing CBDC is that the Federal Reserve could easily burn excess digital currency if circulation is too substantial. With fiat currency, once more money is printed and begins circulating, the only method used to battle inflation is by hiking interest rates. CBDCs can also decrease the likelihood of a commercial banking collapse, since the digital currency is distributed directly from the central bank.
Another benefit of having a CBDC in circulation is that it can be easily distributed on mobile devices, making it increasingly accessible to citizens without a bank account, or for those without immediate access to cash. Since the CBDC is natively digital, it would undermine the costly fees and time-consuming movement of funds between citizens and institutions. If the government applied a CBDC to its monetary policy, it has the potential to provide transparency in the movement of currency, and potentially provide a seamless flow of monetary and fiscal policies, depending on the policies that govern the distribution of this digital asset.
Risks Imposed with a Cashless Society and CBDCs
Cryptocurrencies such as Bitcoin (BTC) and Ether (ETH) gained notoriety because they are anonymous, decentralized, secure, and resist censorship. No one can determine their supply, since it is already fixed. For example, there will only ever be 21 million bitcoins mined and distributed.
With CBDCs, there is no place for consensus or governance protocols. CBDCs would follow KYC rules and have complete access into a citizen’s spending history. As we mentioned earlier, these government issued currencies are owned by the government, just like fiat currency. The central government can set rules for their circulation, use, and availability. With a dramatic increase in control of monetary supply, this could lead to a “weaponization of money”, where the government has the power to make restrictions on transactions as a form of social punishment.
This idea may display a dystopian tone, however these events occur more often than we think. We saw a similar scenario unfold in Canada earlier this year, when Prime Minister Justin Trudeau froze over 200 bank accounts (over $8 million in assets) in an attempt to silence the protestors of his policies.
Another threat CBDCs pose to society is a breach of privacy. Similar to how Web2 giants have access to your personal information on the internet, the central bank would have data on every transaction for its CBDC users. We can see this in China, which implemented “social credit systems” that determine their citizen’s access to certain services based on political views, online activity, work history, among other attributes. If a Chinese citizen’s score drops below a certain criteria, they can be denied access to a passport, bank loans, and even certain educational institutions. Pairing this system with CBDCs calls for complete authoritarian control over a nation’s citizens. The Chinese government would have the means to “punish” citizens who are not in allegiance with government expectations by limiting, or even revoking their spending privileges entirely.
Finally, if you reside in the United States, you may have experienced the steady increase in establishments reducing cash transactions due to national coin shortages, and as an attempt to reduce the spread of COVID-19 through handling dollar bills. Traditional cash payments provide consumers with the luxury to spend their money privately, and uphold personal autonomy without being tracked. CBDCs lack the option of privacy and anonymity, something which fiat currency provides.
Take a look at the map we shared earlier; with more than 80% of the world’s central banks considering CBDCs, they may be ingrained sooner than we think. The emergence of CBDCs has resulted in increased interest in decentralized currencies such as Bitcoin, Ether, and many others. CBDCs may not kill crypto, but rather fuel widespread adoption as people continue to seek censorship-resistant currency, free from government control.
Image by JP Valery, via Unsplash
Knowledge is Power
During times of economic hardship and rising inflation, many people seek new ways to diversify their incomes through additional streams of revenue and appreciating assets. Despite the economic damage that occurred from the COVID-19 pandemic, more than five million people across the world became millionaires. Many explored the idea of launching a business, which is proven to outperform the effects of inflation while simultaneously increasing one’s net worth. As CBDC’s slowly become integrated into society, there will be a surge in knowledge and adoption surrounding cryptocurrencies and blockchain technology. As the internet becomes more accessible on a global scale, many will want to explore a decentralized business model, and refrain from having their assets being exploited by a central power. Chain offers the best of both worlds, with access to blockchain software solutions used to scale traditional enterprises, and support teams available at any hour, you can launch your Web3 application without being an experienced blockchain developer. Explore our comprehensive plans that are best suited for your business needs, and follow us to stay updated on the latest developments in the Web3 industry at https://chain.com.
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