CENTRAL BANK DIGITAL CURRENCIES & THE “MIXED PAYMENTS ECONOMY” SMOKESCREEN

Like many countries, the United Kingdom is planning to launch a central bank digital currency in the coming years. Indeed, according to a 116-page paper released yesterday by the Bank of England (BoE) and UK Treasury, the planned CBDC, will be part of a “mixed payments economy”, co-existing alongside other forms of money like stablecoins and cash. But, is this realistic? Is such a mixed payments economy really viable? Or, as many suspect, is this approach simply a smokescreen to cover the introduction of what will become the only form of money?

Keep it simple, stupid

I say this because of a fundamental trait of complex systems - they tend to break down. This can be described in the context of natural entropy - the measure of disorder, in which energy disperses and systems devolve into chaos over time. In nature, the most straightforward solutions to problems tend to be the ones that stick around. This can also be seen in Occam’s razor - the principle that the explanation for anything is most likely to be the one with the smallest number of elements. Or, in KISS (keep it simple, stupid), the design principle noted by the US Navy in 1960.

Of course, money is a critical part of modern society. But, despite the protestations of some fintech evangelists, is simply a widely accepted form of payment for goods, services, debts, taxes, etc. For the most part, people rarely think about the method they use to pay for everyday needs - they just use what they normally do; whether that’s a debit card or cash. Sure, for small purchases, you might check your pockets or wallet to see if you have the exact change, but as a rule, you don’t see people standing at a checkout agonizing for minutes about whether to use cash, their bank debit card, their credit card, their Revolut card or app, their PayPal app, or a crypto app. The same goes when paying online - most people will just use the payment method they already have set up or use normally.

The point is, we already live in a complicated "mixed payments economy" and people will need a very compelling reason to embrace a CBDC. Simple systems work best and over-complexity is not sustainable. The BoE and Treasury know this and will engineer a reality in which the CBDC becomes the simplest solution for most use cases. At first, this doesn't seem so bad, but let's look at the wider implications.

The death of the current account and cash

In the UK paper, it is noted that the introduction of what has already been dubbed “Britcoin” may cause fewer deposits to be made to commercial banks - something known as “bank disintermediation.” This, it must be said, seems fairly obvious. If people have the opportunity to get Britcoin paid directly into their digital wallets (government-approved only, of course), then why would they bother paying anything into a bank? And, this is against the backdrop of what is already something of a retail banking crisis, in the UK at least - which is seeing mass bank closures and cost-cutting, as the commercial viability of retail banking wanes. It seems perfectly logical that the introduction of a CBDC could actually cause banks to pull some products and services completely, or at least refocus on other business areas. Of course, this isn’t necessarily bad for the general population, but it does seem to torpedo the idea, put forth by the BoE and HM Treasury, that a CBDC can happily co-exist in the current paradigm.

And, as for cash? Well, it seems inconceivable that old-fashioned physical cash will be able to co-exist with a CBDC for more than a few years. Firstly, as long as physical cash exists as legal tender, it gives a way for people to completely bypass the CBDC, thus depriving the authorities of their longed-for control. Secondly, it's hard to see how the infrastructural costs of keeping cash in circulation could be justified at a time when few people used it. By this, I mean the costs associated with physically printing and distributing cash, maintaining ATMs, policing cash use (forgeries, money laundering, etc), processing deposits and withdrawals, and even for shops and businesses to maintain things like cash registers and safes.

Of course, the government and BoE are well aware of this. So, I strongly suspect that the entire “mixed payments economy” angle is a cynical ploy to allow the establishment of a CBDC beachhead. Once that beachhead is secured, the authorities will pile in reinforcements in the form of arguments about cash being a vector for viruses (remember what happened to cash use in the pandemic), enabling crime, and being totally uncool in general. Then, the CBDC will attempt to break out and capture the country in a lightning war that overwhelms opposition before any effective defense can be mounted. With cash quickly overwhelmed, and commercial banks pulling services and thus gaining plenty of negative press coverage, the government will sell their CBDC as a savior, and adoption will hit a critical mass. Simply put, after the highly symbolic defeat of physical cash, nothing will be able to stop it. As I said in a previous post, CBDCs really are wolves in sheep’s clothing.

CBDCs, stablecoins, and crypto

Finally, that brings us to the idea that CBDCs will be able to co-exist with stablecoins and true cryptos like Bitcoin. Here, it gets more complicated, in large part due to the user base the government will be confronted with. When it comes to cryptocurrency users, particularly Bitcoiners, a large chunk of the community is very much aware of censorship and privacy issues. Thus, any move to force a CBDC upon them is likely to be actively resisted. And, the very decentralized nature of BTC and other true cryptos, means it will be impossible for any one government to directly manipulate their usage in the same way as they can do with fiat currencies. As for stablecoins, like Tether or USDC, the question is, will large financial institutions feel the need to use them if CBDCs remove the benefits? Say, for example, that international transactions using the various CBDCs become just as cheap and quick as using a stablecoin (and institutions using them get brownie points from the various governments involved), then why bother using a stablecoin? And, if liquidity in the various stablecoins dries up, can they survive anyway?

So, how do I see the state of money in the UK five years from now? I suspect that most people will be using the CBDC, aka “Britcoin”, and their government-approved wallets, for virtually every transaction. People will still have retail bank accounts and debit cards, but they will be used far less frequently, and banks will be slowly withdrawing many services, instead concentrating on loans and mortgages (that will be paid chiefly using the CBDC). Cash will still technically be legal tender, but using it in practice will be difficult. ATMs will go the same way as phone boxes and bank branches will have all but disappeared - so people simply won’t be able to get their hands on cash. Of course, the government will be running a COVID-style propaganda campaign sentimentalizing cash, but emphasizing how inefficient, unclean, and environmentally unfriendly it is. Cash, no doubt, will be the biggest contributor to global warming, after cow farts.

And, for a while, no one save for die-hard “conspiracy theorists” will complain. Everything will seem fine - people will use their digital wallets and linked cards just like they did their debit cards a few years previously. Only when there is another black swan crisis will the true magnitude of the disaster become apparent. When people realize that they can’t strike or protest anymore because the government can simply freeze or debit their accounts. When people realize they’ve sleepwalked into a totalitarian nightmare in which freedom of speech is meaningless because if you say the wrong thing, you’re quickly financially canceled. Or, maybe when, in the name of “saving the planet” you’re not allowed to buy plane tickets or fuel/charge your car. Heck, they’ll even be able to keep you corralled into a small locality without fences or police - simply by stopping you from buying food or drink further afield.

In this bleak dystopia, there may be some who have an advantage; those holding real crypto. But, I suspect that considering the complete control a CBDC will give any government over its entire society, holding crypto won’t really be of much use unless you relocate to a freer location. I mean, in a completely CBDC-centric society, anyone not using it will stick out like a sore thumb. And, the ability to use crypto for day-to-day purchases relies on the retailers and services in your location accepting it - something that can easily be stopped by any government. In such a case, still having the theoretical ability to send and receive crypto funds to individuals all over the world becomes academic.

Basically, don’t believe the “mixed payments economy” BS coming from the BoE, HM Treasury, and any other country’s governments. It makes no sense that any government would go to the expense and trouble of introducing a CBDC and still allow other alternatives to be viable. And, because of the very nature of reality (i.e. entropy and KISS), once a CBDC is introduced, the masses will, almost inevitably accept it and use it. At that point, it's too late to stop it. Just like with a virus, or a seaborne invasion, CBDCs need to be confronted and defeated before they can gain any kind of foothold.