This is an opinion editorial from Shinobi, a self-taught Bitcoin space educator and technology-oriented Bitcoin podcast host.
Since the recent White House report on Bitcoin and cryptocurrencies, the discussion about a United States central bank digital currency (CBDC) has gotten weird again. Will they make one? How long will it take? Of course, the government will take advantage of the vast increases in capabilities and surveillance powers that a CBDC will bring. right?
Its own report specifically mentions more efficiency as a payments platform, faster cross-border payments, economic growth and stability (easier control of monetary policy), protection against cyber and operational risks (financial institution security breaches), safeguarding the privacy of sensitive data and minimizing the risk of illicit financial transactions. In other words, they want to have total visibility into all of your financial activity, have the ability to deposit money directly into people’s accounts for stimulus and monetary policy purposes, and be able to arbitrarily block “illicit activity,” which as we know today is a rapidly changing target that means who knows what next year.
In 2017, your average adult made 41 financial transactions per month, of which approximately 12.4 were made with cash. This would mean considering these numbers that approximately 3,192,200,000 cash transactions occur in the United States each month. To compare to Bitcoin with some napkin math ignoring the efficiencies gained through transaction batching and other optimizations, the Bitcoin blockchain processes about 3000 transactions per block on average, reaching the figure of 13 million transactions per month. So just to replace the average volume of cash transactions, a CBDC would need to process 246 times more transactions each month than Bitcoin. And that’s just replacing cash, not consuming debit or credit card payments, or absorbing some of the payment volume from fintech apps like PayPal and Cashapp.
Such a system would require the kind of uptime we currently see with payment systems like Visa and Mastercard. Consider how often core digital government services fail and go offline. Have you ever had a tax year where the IRS payment portals didn’t overload and crash? Does anyone remember the big Obamacare website debacle and the constant crashes and failure? Do you really think the federal government could independently handle building and maintaining a system to facilitate the kinds of payment volumes needed to provide a digital alternative to cash without massive failures? What happens when users experience loss of funds? Lose your phones? Do things break? Massive companies like PayPal and major banking institutions that have had years, decades in some cases, building customer service systems to handle these errors and issues regularly drop the ball, take forever to respond to people, and drag the whole process to a long, long process. frustrating test before actually solving the problem. Do you think the federal government could do such a task? No. Even considering that a realistic possibility is downright laughable in my mind.
Let us now look at the financial effects of this CBDC system impacting the current financial system. The idea, apparently, is to have a system operated by the Federal Reserve (or potentially the Treasury?) that provides financial services and capabilities directly to consumers. This is the role that private banks and financial service providers currently play in the economy. The Federal Reserve does not provide any direct-to-consumer tools or services, it provides accounts to financial institutions that do so that they can hold reserve money with the Federal Reserve and settle transactions with each other through the Fedwire system. Introducing a CBDC that directly faces consumers would begin an inevitable disintermediation of these private entities in the financial services market, and given that financial services represent ~7.4% of US GDP, this process would have a large implication for the US economy. depending on how deep the CBDC went into that market. How many people would choose to use a CBDC over Cashapp or PayPal? About your bank at JP Morgan? If it involved a significant amount of people, this would have a huge negative effect on the financial sector. Every person who chose to withdraw their money from these institutions and instead hold a CBDC would be someone taking their deposits out of the bank and leaving them with fewer reserves to do business with.
What about cross-border payments? How would it work mechanically? Connections to legacy systems like SWIFT? Do you just need to send the CBDC token directly to someone in a foreign jurisdiction? If you’re just going to use SWIFT or other international transfer systems, how does a CBDC in any way improve the speed of cross-border payments? If you are going to directly facilitate the transfer of the CBDC itself internationally, how do you enforce KYC and AML? Doesn’t this require directly identifying the foreign nationals who use the system? This would result in the expansion of both data collection and direct financial controls of the US government into foreign territories.
So, let’s summarize: the technical effort to implement such a system is immense, and far beyond the government’s capabilities to handle. Deploying such a system would directly affect the bottom line of private financial firms and cause a major impact on the US economy if successful. Trying to roll it out as a cross-border payments tool would either make no difference or have massive political implications in doing so. So what is the reality? A US CBDC as primarily envisioned will never happen. It is completely technologically impractical and would be a very destructive restructuring of the US financial services industry if adopted at a serious level.
What could really happen? More of the same. There is no way the US government could actually handle building a consumer-facing CBDC system, but companies like PayPal, JP Morgan, Amazon, etc. could very well handle such a system. They have decades of experience building backend infrastructures for digital systems with a massive user base on the order of the US population, experience handling consumer interface design for these systems and, less often, have experience managing the kind of support infrastructures needed to help consumers deal with problems when the system isn’t working as it should.
There will be no Federal Reserve CBDC application that interfaces directly with its back-end database. There will, perhaps, be an overhaul or expansion of Fedwire to make it easier for companies like PayPal or Chase to build private applications and separate databases connected to Fedwire accounts to easily transfer CBDC “tokens.” Actually, probably not even that, an account on Fedwire as it exists now will be good enough for private companies. Why even go so far as to implement any kind of cryptography or tokens? If you’re just talking about a database entry in a PayPal system, what’s the point of signatures authorizing transactions, guarding your own keys, etc. What benefit does this bring? Absolutely nothing. You’re not keeping anything, it’s just an entry that PayPal can freeze, delete or refuse to update, exactly as it is now. What is the big fundamental change? QR codes. Just a new UI/UX wrapper around more of the same existing fintech payment apps that have been around for almost 20 years.
There is literally zero benefit in this system to implementing any of the key primitives of a system like Bitcoin or other cryptocurrencies. Decentralized databases do not scale, this is something that all Bitcoin users should fundamentally understand when they are aware of Bitcoin’s scaling challenges. Why introduce these primitives into a “CBDC?” So people can lose access to their funds easier? To have a compelling narrative, can you push the audience off guard? That’s irrelevant, just adding a QR code that you can scan to send money is cool and new and cool to normal people, that’s all you need for your “compelling narrative”.
The whole narrative of CBDCs is nothing more than a gigantic misstep that is slowly creeping its way into the public consciousness to normalize existing digital payment mechanisms as the new norm in place of cash. Nothing will change, there won’t be any new apps or amazing possibilities enabled by the “blockchain”, just flashier and simpler user interfaces and more flexible banking and payment app APIs. There is no fundamental technological breakthrough that is possible or that comes with a “CBDC”, it is purely a marketing campaign and nothing more.
In reality, the question is the cash itself: Can they drive the narrative that we no longer need? Can they find the means to get these paid apps into the hands of people who don’t currently have access to them, especially the elderly? Can they convince people that cash is not necessary with these systems available as options in the modern world?
A central bank digital currency is nothing more than a meme at the heart of one of the biggest gas campaigns that governments and financial institutions have ever attempted to attract to the general public. Bitcoin users should not in the slightest act humor this campaign by acting as if a CBDC has anything in common with Bitcoin, or any cryptocurrency, by engaging with these pushes and narratives using their language. It’s fueling the manipulation, the gaslighting, and the inevitable disruption that comes at the end of it all.
There is no such thing as a CBDC, just a shiny new wrapper for fintech applications like PayPal and tighter integration between them and systems like Fedwire.
This is a guest post by Shinobi. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
