X

CBDCs Are Bitcoin’s Evil Twin

“We’re at the beginning of a massive shift in what money is and how we use it”…

That’s how I (Chris Lowe) put it back in October 2020.

I was reacting to news that China’s central bank was piloting a new, digital-only version of its national currency, the renminbi, in the city of Shenzhen.

The country plans for this brand-new kind of money – known as a central bank digital currency (CBDC) – to ultimately replace its physical cash.

At the time, I also warned that China’s program was “part of a worldwide race among central bankers to issue digital-only currencies.”

Now, this race is heating up. We just heard news that another major economy is rolling out its own CBDC.

Nigeria has just launched the eNaira. It’s a CBDC version of the African nation’s existing currency, the naira.

That’s a big deal… Nigeria has 213 million citizens, making it Africa’s most populous nation. It’s also home to the continent’s largest economy.

So today, we’ll look at what CBDCs are… and why they threaten your financial freedom.

Then tomorrow, we’ll dive into what the rollout of CBDCs around the world means for bitcoin (BTC) and other cryptocurrencies.

And I’ll show you how to prepare for the rollout of a U.S. CBDC – what we’ve been calling “FedCoin” here at the Cut.

CBDCs are bitcoin’s evil twin…

They’re purely digital, like bitcoin. You also send and receive them from a wallet app on your smartphone, as you do with bitcoin.

But bitcoin takes power away from central banks. CBDCs instead help consolidate central banks’ power over the financial system.

As you’re probably aware, decentralization is a core principle behind bitcoin.

You don’t need central banks, or even commercial banks, to run the bitcoin network. Instead, folks called “miners” verify transactions. Meanwhile, tamperproof computer code limits new supply.

By contrast, CBDCs are highly centralized.

Our tech and digital assets expert, Jeff Brown, has been closely tracking what’s going on for his readers. Here he is with how this new money works…

CBDCs will use a form of blockchain technology. They’ll come with cryptographic “keys” to verify ownership. This is the same as most decentralized cryptocurrencies, such as bitcoin.

But because CBDCs are motivated by absolute power and control, they’ll run on centralized, not decentralized, blockchains. This will allow central banks and other government agencies to track and automatically tax every transaction.

You may think that doesn’t concern you…

Maybe you think you have nothing to hide. But if the government takes away your financial privacy… all our purchases will be visible – even our most sensitive ones.

That could expose you to significant risks. Jeff again…

Imagine you have a health issue – maybe an embarrassing one. When you buy drugs to treat it, the government will immediately know about it. That could lead to increased insurance costs… even dropped coverage.

My view on this is simple. It’s wrong to force law-abiding, taxpaying citizens to register their transactions with the government. Many believe this is a violation of the Fourth Amendment, which says the government must get a warrant before conducting a search. In this case, it would be searching through your financial records without a warrant.

That brings us to the next most radical thing about this new type of money.

CBDCs will allow central banks to issue money directly to the public…

To keep things simple, let’s use the U.S. as an example.

Right now, the Fed – America’s central bank – is limited to issuing new dollars to commercial banks.

A handful of commercial banks have special accounts with the Fed. These are known as reserve accounts. When the Fed wants to create money, it credits these accounts with newly minted dollars.

But you or I can’t hold a reserve account with the Fed. We can bank only with commercial banks.

With CBDCs, that all changes.

For the first time, central banks will be able to issue cash directly to individuals. This means they won’t just be responsible for creating new money… they’ll also decide how – and to whom – to allocate money.

The mainstream press keeps floating the idea that CBDCs are all about convenience because you won’t have to carry around paper or metal currency.

But they’re a raw power grab by central bankers.

Jeff says Americans will be forced to use a CBDC instead of physical dollars…

Jeff is best known as a tech investor. But he’s also a member of the Chamber of Digital Commerce. And he’s been on Capitol Hill to speak to a group of U.S. senators on CBDCs.

He’s also traveled to Israel on a U.S. Certified Trade Mission on blockchain and digital payments.

That’s given him a unique insight into what’s going on. And he says CBDCs are a real concern.

Here’s how he recently explained the situation to a worried reader…

About 80 countries – including China – have been working on rolling out these digital-only versions of cash. And the U.S. Fed has been working hard to make sure it isn’t left behind.

Jerome Powell, the chairman of the Fed, has said developing a digital-only dollar is a top priority. The Federal Reserve Bank of Boston and MIT have been working to develop a prototype.

As a result, discussion about this topic is increasing in the mainstream financial media. The Wall Street Journal, for instance, reported on “Why the Fed Is Considering a Digital Dollar.”

The answer to that article’s title is easy, says Jeff…

A digital-only dollar is too tempting for Washington to pass up. Again, it would allow the feds to track and automatically tax every transaction we make. They could also “airdrop” stimulus checks immediately into our digital wallets.

This would have the added “advantage” – in the Fed’s eyes, at least – of making negative interest rates possible. You can’t slap a negative interest rate on physical cash. But with a CBDC, the Fed could simply deduct interest from our digital wallets each month to stimulate spending.

That’s a worrying outlook…

It’s one of the reasons we’ve been recommending you put some of your wealth into bitcoin and other decentralized cryptos.

You don’t want to have all your wealth trapped in U.S. dollars when the Fed rolls out its version of a CBDC.

But here’s the thing…

So far, China and Nigeria are the two biggest economies to roll out pilot programs for CBDCs.

Both nations have also banned decentralized cryptocurrencies such as bitcoin.

So a natural question arises: Will the U.S. do the same when it launches its own CBDC?

I’ll answer that in tomorrow’s dispatch. I’ll draw on insights from colleague and world-renowned crypto expert Teeka Tiwari.

Regards,

Chris Lowe
November 17, 2021
Barcelona, Spain