The discussion paper published by the US Federal Reserve on January 14, 2022, entitled ‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation’ leaves little doubt that the launch of its CBDC would coincide with the deprecation of Bitcoin (BTC) and other private crypto products as a legal payment method.
The document takes great pains to assert that no decision or plan is in place to launch a US CBDC at this point, but that could change overnight.
In the meantime, the weakness in crypto prices coincident with the general market decline catalyzed by the Fed’s hawkish monetary policies could be said to be worsened by the circulation of this document, which is causing feverish and widespread speculation as to what it really implies for the future of Bitcoin et al.
Before diving into dialectic analysis, we must establish a few realities precedent, which can be categorized into facts versus theories.
The Federal Reserve states that it “does not intend to proceed with the issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”
That statement implies that a CBDC authorizing law would define the legal parameters of a digital version of the U.S. dollar that would similarly disqualify digital payment types that did not fall within such a defined legal parameter. Strike one for cryptos.
The document defines money into Central Bank/Commercial Bank money versus “nonbank” money.
It specifically categorizes bank money as insured, and nonbank money as uninsured, with a much higher degree of liquidity and credit risk.
“Nonbank money lacks the full range of protections of commercial bank money and therefore generally carries more credit and liquidity risk. Central bank money carries neither credit nor liquidity risk, and is therefore considered the safest form of money.”
The irony in this statement is kind of funny. There is certainly no risk of illiquidity from central bank money. But it doesn’t mention the risk of excessive liquidity, which is, one might say, a characteristic fault in the Fed’s view of itself, perhaps intentional.
Excess liquidity is the fundamental flaw in floating fiat currencies that can be fabricated ad infinitum as long as the global financial system agrees to honour its value. The G20’s system of exchanging debt and currencies with one another is the collusive pretext upon which the perceived value of USD, CAD, UK quid, Chines Yuan or Renminbi, and Japanese Yen and the rest are maintained.
So the current ‘bank money’ is no more or less subject to debate over its valuation than cryptographic assets. But the primary difference is, when a country defaults on its foreign debts, there is remainder collateral in the country’s wealth to determine how its currency holders will be diluted, discounted or defaulted, as the case may be.
And that is the base reason why government-issued fiat currencies, though subject to debasement/hyperinflation and devaluation, are at least backstopped by the governments who issue them.
Cryptos have no such backstop, nor can they, as per their existential requirement to remain ‘decentralized’.
But the real deal-wrecking language in the white paper insinuates the drastic changes that Bitcoin and its ilk would have to adopt if they had any chance of a future as a form of currency are in the demands for transparency that the Fed stipulates.
“Financial institutions in the United States are subject to robust rules that are designed to combat money laundering and the financing of terrorism. A CBDC would need to be designed to comply with these rules. In practice, this would mean that a CBDC intermediary would
need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.”
So the privacy and anonymity as promised by Bitcoin et al. – or of any digital currency – will not be allowed.
This is despite the President’s Working Group on Financial Markets (PWG) separate report on ‘stablecoins’ (digital assets whose value is pegged directly or indirectly to that of a sovereign currency), which includes additional warning language clearly aimed at crypto platforms.
The most glaring statement in the report is this one: “To address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation, at the depository institution and the holding company level.”
In other words, banks.
These two documents, when read as the direction of regulatory thinking as it pertains to private cryptographic payment systems like Bitcoin, make it abundantly clear to anyone who is without bias, that only stablecoins held and managed by banks will be permitted. I.e. Central Bank Digital Currencies.
Any other conclusion is wishful thinking.
The emergence of these two reports so close to one another (The Fed’s report coming three months after the PWG’s report, or which the Fed is one of the members) also suggests the timeline to total outlawing private crypto payments money has now become compressed.
We believe that 2022 is the final year for Bitcoin’s wildly overpriced valuation and that as the writing on the wall becomes more concrete and less allusory, investors will rightfully conclude that crypto is a modern phenomenon that will come and go, ultimately consigned to history’s overflowing bin of misshapen ideas.
At this point, there have been well over $14 billion in losses by crypto investors in 2021 alone. The ongoing weaknesses and flaws in the crypto, combined with its wild west absence of regulation, will ultimately accelerate the public’s pressure on governments to regulate the crypto scams and bring them under control. I.e. get rid of them completely.
©2022 Midas Letter. All Rights Reserved.
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