Central bankers are in delusional denial about Bitcoin, CBDCs

Wolfgang Münchau is a columnist for DL News. He is co-founder and director of Eurointelligence, and writes a column on European affairs for the New Statesman. Opinions are his own.

The European Central Bank recently published a blog post that began with a bold assertion: “Bitcoin has failed on the promise to be a global decentralised digital currency, and is still hardly used for legitimate transfers.”

So you have it from the highest source. If you are in any way involved with crypto, you are neither legit nor global.

The assertion is, of course, total nonsense.

Still, it is interesting because it alerts us to the delusions that can lead central bankers to make some serious mistakes. Armed with a refusal to see the world for what it is, central bankers have now taken the ultimate step in their crusade against crypto — the delusional denial of its very existence.

If arrogance is the cause of decline, the vehicle, I think, will be central bank digital currencies, the central bank’s own answer to cryptocurrencies.

You can think of a CBDC as a stablecoin, a digital asset with a constant fiat money denominator. However, this is not how I think about them. Unlike Bitcoin, CBDCs are actual fiat money — under the direct control of a central bank.

Central banks

Superficially, it appears that central banks are finally embracing the world of 21st century technology by replacing cash with electronic wallets. There are some potential real advantages — for the central banks, not for us.

One is the ability to impose negative interest rates on people, which you cannot do with cash. The central bank will remain the boss. A central bank cannot take cash that you hide under your mattress, but it can cancel your electronic wallet.

Some of the wisest central bankers I know are against the CBDC because they fear what I am fearing — that it will serve as a vehicle to destroy the fiat money system as we know it.

Fiat money has a social value. What fiat money does, and what crypto does not, is to act as a unit of account. What crypto also cannot do is to protect the financial system and the economy from collapse during financial crises.

There would be no reason for crypto to displace a conservatively managed fiat currency that people trust. The two can co-exist peacefully. But CBDCs are vehicles for central banks to destroy whatever trust they have left, after the misjudgement on inflation and the massive bailouts of the last decades.

CBDCs would give central banks an extraordinary amount of control. They would allow them to tax, or even cancel, money holders. Again, they cannot take your money from underneath your mattress.

We are already well down this road, even before the launch of CBDCs.

The EU has just endorsed a plan to take the interest on Russian reserves held in depositories in the EU. Considering the crimes Russia committed, we might think of this as justified, but it sets a precedent that empowers the government’s hold on anyone’s savings.

The legal precedent is that governments can cancel your wallet.

By abandoning cash, or reducing its role to micro transactions, Western central banks are putting at risk the one incontrovertible advantage of a fiat money system — the idea of a bearer certificate. When you buy a coffee, nobody ever asks you where you got your money.

House of Lords

This is not a lone-wolf conspiracy theory. The UK’s House of Lords thinks so too.

It came out with a devastating critique of CBDC projects undertaken at almost every central bank in the world. It highlighted four mega-risks: state surveillance of people’s spending choices; financial instability as people convert bank deposits to CBDCs during financial crises; an increase in central bank power without scrutiny, and the creation of a centralised point of failure that foreign states could exploit.

In contrast, crypto systems are decentralised by design. A lot of thought went into the setup of Bitcoin to prevent a hostile actor from taking over the system. Central banks have their name for a reason. They are not called “Decentralised Banks.”

Points one and three in the Lords’ report — state surveillance over spending habits and an increase in the power of central banks — would constitute legitimate reasons for people to switch out of fiat money into crypto assets.

Why would anyone want to use a central bank digital currency that central banks can devalue through negative interest rates, when they can use Bitcoin without restriction and without being taxed?

There was a moment when financial regulators and governments had the opportunity to regulate the crypto industry out of existence, but that did not happen.

It will certainly not happen now in the age of Bitcoin ETFs. There will be a lot more regulation, but the moment to suppress crypto has passed.

Presence of crypto

To maintain central banks’ money monopoly in a digital world would require a lot more than simple regulation. While it is possible to tax and regulate crypto exchanges or crypto-derivative products like stablecoins, I see no way regulators or governments can take control of Bitcoin itself without restricting people’s access to the internet.

Without the presence of crypto, a CBDC would still be as repressive and risky as the Lords have stated. They would be feasible because people would have nowhere else to go. But since the adoption of CBDCs constitutes nothing more than a way for central banks to debase fiat money, we are headed for a fundamental crisis.

Economists, anthropologists and philosophers have come up with various definitions of money. The most useful characterisation for this specific debate is Jean-Jacques Rousseau’s notion of money as a social contract — an unwritten contract between society and the state. Anonymity, in the form of cash, has been an essential part of that contract. If central banks take control, that contract will be broken, and with it the foundations on which fiat money systems rest.

If modern central bankers fool themselves into systematically underestimating the importance of crypto, they might be inclined to take risks an old-school conservative central banker would not.

That is how fiat money would die. Death would come in the form of a wallet nobody wants to use.