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

That’s what I wrote in these pages in October 2020.

I was reacting to news that China’s central bank was giving away millions of dollars’ worth of digital cash.

It was part of pilot program for a digital-only version of China’s currency – the digital renminbi or e-RMB.

This new form of money – known as a central bank digital currency (CBDC) – will eventually replace physical cash.

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

Well now, that race is heating up.

Today, more than 100 countries have CBDCs in research or development stages.

And the U.S. is one of them.

Today, I’ll pull back the curtain on a how two of America’s most elite institutions have teamed up to lay the foundation for a U.S. CBDC… what we’ve been calling FedCoin here at the Cut.

We’ll also look at how this new type of money is different from the dollars in circulation today… why it will obliterate what’s left of your financial privacy… and what you can do about it.

The effort to build a FedCoin prototype is codenamed Project Hamilton….

It’s a joint venture between the U.S. Federal Reserve and an MIT group called the Digital Currencies Initiative.

Don’t worry if you’ve never heard of it. Most people haven’t…

If you search for it on Google News (like I did this morning), the first mention of it is halfway down the second page.

But it’s one of the most consequential projects in the U.S. today.

It marks the start of the biggest change to our money system since President Nixon ended gold backing for the dollar in 1971.

Think of FedCoin as bitcoin’s evil twin…

It will use a digital ledger like bitcoin’s to track transactions.

And you’ll store, exchange, and transact with FedCoin like you do with cryptos today – on a wallet app on your smartphone.

But that’s as far as the similarities go.

Bitcoin is decentralized. No government or central bank has control over it. FedCoin, on the other hand, will further centralize power at the Fed.

Colleague Jeff Brown has been keeping a close eye on these developments.

He’s best known as our tech expert at Legacy Research. But he’s also a member of the Chamber of Digital Commerce. And he’s been advising lawmakers on Capitol Hill about CBDCs.

Here’s what he reported back to his readers…

CBDCs will be similar in some superficial ways to bitcoin and other cryptocurrencies. But the Fed will still be in control. So can expect it to keep the digital printing press running hot.

The Fed will even invent new ways to do monetary policy. It will be able to deposit funds – via “airdrops” – into the digital wallet apps on our phones.

This will replace the more cumbersome method of sending out physical checks in the mail. As you’ll recall that’s what President Trump had to do during the pandemic. And it delayed his stimulus effort.

And the powers FedCoin will bestow on Washington bureaucrats don’t stop there. Jeff again…

CBDCs will be programmable using “smart contracts.” This makes negative interest rates possible. The Fed could deduct interest from our wallets each month.

Plus, the taxman must be foaming at the mouth. FedCoin will allow the IRS to directly track and tax every transaction you make. That’s why the Chinese central bank is also rolling out a CBDC. In a world where all transactions are digital, all transactions leave a digital record.

Maybe you think you’ve got nothing to hide…

But with FedCoin, all your purchases will be visible – even your 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 know. That could lead to increased insurance costs… even dropped coverage.

It’s wrong to force citizens to register their transactions with the government. It may even be 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.

Central banks will issue FedCoin directly to the public…

Right now, only commercial banks have accounts with the Fed. These are called reserve accounts.

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

With a CBDC, that changes.

For the first time, central banks will be able to issue cash directly to the public… and muscle in on commercial banks’ traditional role.

Central banks say the main driver behind CBDCs is convenience. But they’re really a raw power grab. They give the Fed and other central banks a much stronger lock on the money system.

What can you do about this?

Millions of Americans will be happy using FedCoin… regardless of the intrusion on their privacy that involves.

And the Fed can offer incentives to folks who switch from physical cash to FedCoin.

That’s what’s happening in Jamaica. The government there is offering $16 free to the first 100,000 people who use its CBDC, the Jam-Dex.

When the Fed rolls out its CBDC, my strong recommendation is to steer clear… unless you want to become part of the Fed’s vast digital dragnet.

Of course, the Treasury Department could stop printing dollar bills and minting coins… slamming the door shut on this escape route.

Then your best alternatives are gold and bitcoin…

They both offer a higher degree of privacy than FedCoin. So, they’re attractive alternatives for at least some of your cash needs.

Bitcoin has sky-high volatility… and it still hasn’t gone mainstream. But our other go-to crypto expert here at Legacy, Teeka Tiwari, says the rise of CBDCs could speed up that process.

Some folks worry that CBDCs will replace bitcoin. But I believe the opposite will be true. They’ll make bitcoin and other cryptocurrencies more attractive… and therefore more valuable.

Cryptos afford users greater anonymity. You also have scarcity with bitcoin – a hard cap of 21 million coins. You won’t have that with CBDCs. There will still be a central bank that can fiddle with interest rates and balloon the money supply, inflating away your wealth.

Regulators are thinking, “We can kill the market for private cryptos by creating our own digital-only currencies.” But my call is it will expand the crypto market, not shrink it.

This massive shift in money will have profound implications for the economy and for society… just like the shift from gold-backed money to fiat money did half a century ago.

So expect to hear more from us about what’s going on in future updates.



Chris Lowe
Editor, The Daily Cut