Crypto currencies have been an enigma to the vast majority of the investing public – the public in general for that matter since their inception a decade plus ago. The meltdown of multiple online cryptocurrency trading exchanges over the last couple of months has added to the confusion. Of course, the FTX meltdown and the political overtones of it have a lot of observers skeptical of the future of cryptocurrency in general. Of course, Bitcoin is the centerpiece of the whole crypto world, and it is holding together for now. Time will tell…
The original competency of Bitcoin has to do with decentralization of it. There was no way that a central power that could control the flow of the “money” or could take control of the accounting of it the way our Federal Reserve does for the U.S. dollar. The idea was that it could transfer purchasing power instantly anywhere without any third-party intermediaries- an attractive proposition indeed…
We have commented from time to time about the prospect of Bitcoin and the other cryptocurrencies as far as taking over the U.S. dollar as the world’s reserve currency. We find that proposal indefensible as we discussed here https://andorracapital.com/currency-experiments/ – and the markets have supported our arguments since we wrote them. The cryptos have really just become another table at the Wall Street casino.
However, something else that we referenced in the above linked article was the central bank involvement in the crypto currency space. The CBDCs or Central Bank Digital Currencies are the flip side of the same coin as the existing cryptos (pun intended.) Rather than being uncontrollable by a central authority as Bitcoin cannot be controlled, they are using the same digital blockchain technologies to be COMPLETELY controllable by the issuing bank.
Right now, you can go to the bank and get a stack of U.S. dollars. You could then go and spend them on any vices you may have and there would be no tracking or control of your spending. Not so with the CBDC. Your money could be 100% tracked, controlled, timed out, erased etc. On top of that the bank could set a negative interest rate on your balance so it would erode with time if not spent. The issuing central bank has the ultimate power in this scenario, and we don’t like it. We don’t think it is irrational to question whether a central authority should have this much control.
One example is simply the performance of CBDC that the Nigerian central bank rolled out. It is a complete failure compared to the widespread use of crypto and the government appears to be desperate. Citizens are NOT inclined to use the bank-controlled currency and the government is going to force them to. The Nigerian government is trying to eliminate all cash usage and crypto usage and they may even make them illegal. The economy is crazy oil rich – but struggling nonetheless – and at least partly due to the mismanagement of their central bank…
That’s in a third world country you say? That could never happen in a place like the United States? According to the Atlantic Council’s CBDC tracker, 114 countries, representing over 95 percent of global GDP, are exploring a CBDC. That’s up from 35 countries in May 2020. Eighteen of the G20 countries are now in the advanced stage of development. Of those, 7 countries, including China and India, the world’s two most populous nations, are already in pilot. Eleven countries have fully launched a digital currency, with the latest being Jamaica, and China’s pilot is set to expand to most of the country in 2023. It sure looks like this is an accelerating trend and recent comments from one of the oldest financial institutions on the planet, the Bank of England put an exclamation point on that statement. John Cunliffe, Deputy Governor for Financial Stability of the Bank of England said:
Our assessment is that on current trends it is likely that a retail, general purpose digital central bank currency — a digital pound — will be needed in the UK.
On top of that, it is the IMF (International Monetary Fund) and the BIS (Bank for International Settlements) that are pushing/supporting these central banks down the path of the CBDCs and you can be sure that they will be instrumental in the development of a transferring mechanism between different country’s currencies.
Backing away from the sea of change that is happening in international currencies, we do want to reiterate what we said a year and a half ago with regard to the U.S. dollar going down this path of CBDC. The Federal Reserve is doing pretty much as they please in monetary policy decision making. They have raised rates forcing other central banks to raise rates and so far they haven’t broken anything in the U.S. economy. As things get dicey around the globe due to tightening credit policies/situations we believe that there will be a continued flow into the U.S. dollar for safety. We have the most sophisticated capital markets in the world and are the predominant reserve currency. The Federal Reserve may start a beta test of a CBDC in the next few years, but they are slow rolling this whole process. Why wouldn’t they? The system as it is has been built to the advantage of America. Let’s take a look at the U.S. dollar value as measured by other currencies – mostly the Euro…
The dollar has given up a portion of the rally that it embarked on when the Fed started raising rates last year. But it has bottomed at least for the short term, and in our estimation will likely stay firm to higher as safe haven status continues to play out. We have mentioned repeatedly over the last few months that, although economic numbers are pulling back quite significantly, the negativity in the financial press got overdone. That has played out in financial markets holding together quite well. There are still serious imbalances in everything monetary and fiscal the whole world over, but we continue to believe that the U.S. will not take the brunt of the pain in the near to medium term. Make sure your portfolio isn’t overly risky in case we are wrong…
So back to the question of the CBDCs – we will reiterate what we wrote almost a year and a half ago. No dismantling of the U.S. dollar as the premier world currency is imminent. But don’t sell your gold and make it a point to FREQUENTLY USE CASH in your day-to-day spending. I know, you wont get your airline miles if you don’t use the credit card, but cash is economic freedom and we don’t want to lose such a precious luxury with regulators worldwide anxious to garner more control of us.
Regards and good investing,
Greyson Geiler