We are grouping this discussion with other financial issues because the catalyst was the December 2022 Quarterly Report from the Bank for International Settlements (BIS). These are very broad discussions and could be grouped any number of ways, but the alarm raised by the BIS is a good catalyst for the discussions.
Central Bank Digital Currencies (CBDC)
Central Bank Digital Currencies (CBDC) are a hot topic these days because of Bitcoin and other CRYPTO currencies. In our last installment we noted that since inception there have been 21,844 CRYPTO currencies formed, but that the survival rate, 9,314, is less than half that number. The formation and death of CRYPTO currencies can be explained on several levels, not the least of which is that all new industries have casualties.
CRYPTO currencies continue to have a dubious value proposition because there is no foundational case for value other than the “greater fool” theory. CRYPTO advocates all use fiat currencies, art, collectibles, and other items traded based on perceived value as justification for the existence of and price of CRYPTO. However, these are false equivalencies because they fail some tests of stability, availability, and universal acceptance. Then there is an issue the CRYPTO advocates always avoid, legality.
The United States Constitution limits the ability to coin money to the Federal Government. It is true that makes no reference to paper money, and certainly newer forms of stores of value or transmitting funds. But the Federal Government certainly has the power to regulate the creation of and circulation of all forms of securities and money. The more “money-like” CRYPTO becomes it begins to challenge sovereign currencies, and governments have shown historically that they will not let anything challenge them.
And this brings us to an often-discussed governmental form of CRYPTO. In various articles and forums, it is referred to as the Digital-Dollar, FEDcoin, or Central Bank Digital Currency (CBDC). It often strikes fear in those who understand the power of traceability and loss of privacy this development would bring. With CRYPTO instruments the goal is to transact without government oversight. With CBDC the goal of government is to transact with complete oversight and traceability. In ways they are alike, and at the same time polar opposites. Unregulated CRYPTO and CBDC have at their core security, ease of exchange, and mutually recognized value. They differ in visibility/traceability, government oversight, sovereign backing, and electronic platform.
Conspiracy Theories Abound
For conspiracy theorists this is a gold mine. For CRYPTO advocates they see their platform as the ultimate in freedom. On the CBDC side you see a chance to improve payment processes, curb illegal activities, reduce costs, and speed the payment processes worldwide. But there is a third side to the discussion, you and me. The existing CRYPTO platforms have often proven to be weak not strong in technology, poorly executed, and lack basic consumer protections. Customers and providers are now begging Congress for oversight after failures like FTX. These are the same who were advocating for no oversight just months ago. In our previous article we detailed the $70 million that FTX and SBF spread around to both political parties, so Congressional hearings and oversight need to be taken with a grain of salt. Solutions also need to be examined carefully.
We are not advocates of the heavy hand of government in free enterprise, but financial networks are different because of the fiduciary responsibilities that often attach to the processes. Oversight and regulation will come but it will be late, and many will be hurt before it comes under control. Just this week Congress is starting to ask questions of the FTC, SEC, and CFTC. True to form the bureaucrats are pointing fingers, alibiing, and making all manner of excuses to protect turf and avoid accountability. We should not expect more in a world where Congress and Agencies are years behind in understanding and reacting to modern challenges. While these bureaucrats twiddled their thumbs hundreds of thousands of consumers lost millions of dollars.
A further “out there” conspiracy theory is the fear by many of a one world currency and government. These advocates point to the issues with the European Union (EU) and the BREXIT process. The only way Great Brittan could exit was their decision to keep their Pound while participating in the EU. If they had given up the Pound they could never exit because reestablishing a sovereign currency is nearly impossible. This may have been nothing more than a lucky happenstance, but it was the saving grace and a warning for the United States and anyone who even contemplates a one world currency.
Enter the BIS Once Again
All of this discussion leads us back to the BIS and what they might view their role in this new world of electronic currencies. If countries begin to create and recognize digital currencies to either replace their existing currencies or run in parallel, who will clear and reconcile transactions among countries?
Our review of the BIS December 2022 Quarterly Report led us to their YouTube channel, and several videos related to their warnings, but also their vision of the future. A video surfaced in November 2022 that is technologically interesting, but politically disturbing. The BIS builds a case for the existing payment systems among banks being slow, inefficient, and not providing first-tier access to all countries. All of this may be true, and all may need improvement, but the BIS may not have the desired solution.
The BIS concept is to create an international settlement platform where all payments are immediate, cheap, universally accessible, and secure. They visualize a worldwide, centralized clearinghouse where digital currency transactions are settled instantly. Titled mBridge the platform has all the feel of something good, but this is a high level of risk for America.
As we have noted in other articles, China wants to remove the dollar as the international standard for settlements. The mBridge concept does just that and makes country to country settlement using the native CBDC of each country the settlement standard, ending the need for a common currency standard. Let’s look at the banks and central banks involved in the pilot phase of the project.
- Central Bank of the UAR (Dubai)
- Digital Currency Initiative – People’s Bank of China
- Hong Kong Monetary Authority
- Bank of Thailand
- ICBC (Industrial and Commercial Bank of China) – Asia
- Bank of China – All of Asia
- HSBC (Hongkong and Shanghai Banking Corporation) – Great Britain, China
- FAB (First Abu Dhabi Bank) – Middle East
- Standard Chartered – Asia, Africa, Middle East
- Bank of Communications (China) – Asia
- Agricultural Bank of China – Asia, America, Australia, England, Germany, South Korea
- China Construction Bank – Spain, Germany, Luxembourg, Hong Kong, New York, Australia, Chile, South Korea
- Bangkok Bank – Thailand, Indonesia, China, Malaysia
- Kasikornbank (Thailand) – Thailand, China
- SCB (Shanghai Commercial Bank) – China, United Kingdom, United States
- Krungsri (Bank of Ayudhya) – Thailand, Laos, Japan
All countries having equal access to all transactions in their own central digital currencies is a socialist and communist dream. It eliminates the United States from the process, without regard for the creditworthiness of the issuing country. In the name of “equal access” or “greater good” countries like Venezuela, Lebanon, Sudan, and Argentina would have equal access to markets of countries with healthier economies. Will the digital currency of Argentina then stand with equal footing to the United States or the EU? Who and how will the value and exchange rates between CBDC’s be established? The presentation offered by the BIS implies that they will facilitate these transactions alone, and use multiple CBDC’s in the process.
American Politicians Once Again Asleep at the Switch
Early testing of transactions and settlements were conducted in late 2022 with the rollout of more functionality over the next three years. The U. S. is barely involved but should be as this will potentially replace FOREX and place China at the center of international settlements. My bet is that the FED, Congress, and the Treasury are on the outside looking in as our dollar takes a back seat to this new world order.
Our financial control agencies are awash with aging officials and bureaucrats who know little of technology and almost nothing about CBDC’s.
This article has been co-authored by HawkeEye and freeman.
Glossary of Terms
BREXIT – An acronym for the British exit process from the European Union. It also included a financial exit and set the United Kingdom back on its own financial footing.
BIS – Bank for International Settlements
CBDC – Central Bank Digital Currency
CFTC – Commodity Futures Trading Commission
EME – Emerging Market Economy
FOREX or FX – The markets that facilitate the exchange and settlement of sovereign currencies.
FTC – Federal Trade Commission
FTX – FTX Trading, Ltd. and short for the original name of “Futures Exchange.” The exchange was founded in 2019 and quickly gathered billions in venture capital investments and deposits. Their reach included CRYPTO, hedge funds, and FOREX transactions. They filed for bankruptcy in late 2022.
mBridge – A proposed worldwide settlement platform used to clear digital currency transactions between nations.
mCBDC – Multibank Central Bank Digital Currency
SBF – Sam Bankman-Fried, the MIT graduate and some believe math whiz. He was born in 1992 and was roughly twenty-seven when he founded FTX. After his extradition from the Bahamas in early 2023, he was charged with wire fraud and securities fraud. He is under house arrest awaiting trial in October 2023.
SEC – Securities and Exchange Commission
Research Source Material
$65 Trillion of Derivatives Debt Sparks Concern, YouTube Bloomberg Markets and Finance, December 2022.
A Question for Congress: Why Didn’t the SEC Stop FTX?, By John Gulliver, Wall Street Journal (Opinion Commentary), January 19, 2023.
Benefits and Risk of Trading Forex With Bitcoin, By Nathan Reiff, Investopedia.com, October 10, 2020.
BIS Quarterly Review, by the Monetary and Economic Department of the BIS, December 2022.
BIS Quarterly Review, December 2022 – media briefing, YouTube BIS Channel, December 2022.
Crypto Is Money Without a Purpose, by Todd H. Baker, Wall Street Journal (Opinion Commentary), December 19, 2022.
Dangerous Digital Dollar Warning “Fedcoin” is coming – and it may replace cash and hurt savers as well las allowing gov to track your payments, By Alex Diaz, The U.S. Sun, March 10, 2022
Democrats’ Senate Majority PAC plans to return $3 million in donations from disgraced for FTX executives, By Brian Schwartz, CNBC.com, December 20, 2022.
Dollar Debt in FX Swaps and forwards: huge, missing, and growing, YouTube BIS Channel, December 2022.
How Many Cryptocurrencies are There In 2023?, By Josh Howarth, ExplodingTopics.com, November 25, 2022.
FTX appeared to rent a property just 300 meters from the White House, By Grace Dean, Insider.com, January 11, 2023.
FTX Collapse Puts Auditors in Crosshairs of Clients, Regulators, By Nicola M. White, Bloomberg Tax, November 30, 2022.
FTX Ties to U.S. Banks Point to Regulatory Shortfall: Reports, By Alex Padalka, FinancialAdvisorsOrig.com, December 1, 2023.
Meet the 10 biggest megadonors for the 2022 midterm elections, By Katherine Huggins, MarketWatch.com, October 11, 2022.
No One Will Escape the FTX Fallout, By Joel Khalili, Wired.com, January 6, 2023.
Project mBridge, YouTube BIS Channel, November 2022.
SBF and FTX peddled a crypto fraud that makes scammer Bernie Madoff look like an amateur, By Vitaliy Katsenelson, MarketWatch.com, January 11, 2023.
Size, scope of FTX failure gets clearer as users fear worst, By Ken Sweet and Thalia Beaty, ABCNEWS.com, November 15, 2022.
U. S. Senators Question Independence of FTX Bankruptcy Law Firm, By Jonathan Randles, January 10, 2023.
Why the FTX collapse is turning up the heat on Congress, By Sylvan Lane and Karl Evers-Hillstrom, TheHill.com, November 15, 2022.
By design we do not allow direct comments on articles on our web site. But this is one where we would like to see either opposing or supporting discussions. For something this inconspicuous to have the potential for such an impact on all our lives seems unreal.