Buenos Aires plans to issue blockchain-based identity documents, including birth and marriage certificates, while Brazil aims to make its new blockchain-powered national ID program available across the country. Both initiatives signify a major leap in government services and personal data security.
More than 214 million people in Brazil are about to start using blockchain technology for their digital IDs, according to a recent announcement by the government. The states of Rio de Janeiro, Goiás, and Paraná will be the first to start rolling out these blockchain-based identification documents.
They’re using a special, secure system created by Serpro, Brazil’s national data service. The plan is to have this technology available across the entire country by November 6, 2023.
Alexandre Amorim, the head of Serpro, explained that blockchain was chosen for this project because it’s a secure and decentralised way to manage digital IDs.
Blockchain technology is key in making personal data more secure and in reducing fraud, creating a safer digital environment for people in Brazil.
The use of the b-Cadastros blockchain platform improves the safety and trustworthiness of the National Identity Card project.
According to the government, this project is important for tackling organised crime and encouraging different parts of the government to collaborate. It also makes it easier for people to get government services and helps simplify record-keeping.
In recent years, Brazil has been trying to standardise the way IDs are issued across its nearly 30 states. This new technology will help safely share data between the Federal Revenue Agency and other government departments, as stated in the announcement.
Emissão da Carteira de Identidade Nacional (CIN) conta agora com a segurança do Blockchain. Saiba o que muda no documento e confira todos os detalhes que tornam a nova carteira de identidade dos brasileiros mais segura do que nunca!https://t.co/G2MigNkG1J
Another big change happening in the country is the introduction of a new digital currency by the central bank.
The government recently shared more details about this project in August and has renamed the digital currency to “Drex.”
Past reports suggest that the central bank aims to make it easier for businesses to get funding through a special system linked to Drex. A local developer found that the code for Drex allows a central body to either freeze money or lower account balances.
Notably, Buenos Aires in Argentina has announced a similar plan that lets people get their identity documents through a digital wallet.
Blockchain-based in Buenos Aires, Argentina
Buenos Aires, Argentina’s capital, is also taking a big step to include blockchain technology in its administrative processes.
Starting in October, people living in the city will be able to get their identification documents through a digital wallet, as revealed in a September 28 announcement.
Initially, you’ll be able to get documents like birth and marriage certificates, proof of income, and school records on this blockchain system. The plan also includes adding health records and payment information down the line.
The city aims to have a detailed plan for expanding this blockchain service throughout the country by the end of 2023.
The technology backbone of this project comes from QuarkID, which is a digital identity system created by the Web3 company Extrimian.
QuarkID wallets use zkSync Era, a special feature built on the Ethereum network that helps it run more efficiently. This feature uses something called zero-knowledge rollups, which lets one person show another that something is true without having to share any detailed information about what that ‘something’ is.
¡Hola Buenos Aires! Welcome to the ZK Nation 🇦🇷
Buenos Aires is teaming up with @Quark_ID to issue digital identification services to millions of citizens in the city, with zkSync Era serving as the anchor blockchain for the program.
“This marks a huge leap forward in making government services in Latin America safer and more efficient,” said Guillermo Villanueva, the CEO of Extrimian.
The information in these digital wallets will be controlled by the individual, meaning people can decide how and when to share their credentials, whether it’s with the government, businesses, or other people. zkSync Era will serve as the foundation for QuarkID, making sure everyone’s credentials are accurate and secure.
Diego Fernandez, who leads innovation for Buenos Aires, added, “This makes Buenos Aires the first city in Latin America, and among the first globally, to adopt and champion this new technology. We’re setting an example for how other countries in the region can use blockchain technology for the good of their citizens.”
Officials in Argentina are looking into another digital ID project called Worldcoin. In August, they revealed that they’re examining potential privacy issues tied to how Worldcoin gathers, stores, and uses people’s information. The project is also facing questions in Europe and Africa since it went global in July. Created by Sam Altman, who is also a co-founder of OpenAI, Worldcoin uses eye scans to confirm the identity of its users.
After attempting to acquire FTX Europe to boost its international derivatives business, Coinbase pivoted to offer perpetual futures to qualified customers in and outside the U.S.
Coinbase, a major platform for trading cryptocurrencies, twice considered buying FTX Europe after it went bankrupt in November 2022. Their aim was to expand their services related to financial derivatives abroad.
Despite these efforts, they’ve decided to back out of the acquisition. Coinbase looked into this deal two times: once right after FTX Europe’s financial troubles in November 2022, and again in September 2023.
A Coinbase representative verified this, stating they’re continually exploring ways to grow their business globally.
Other companies like Crypto.com and Trek Labs are also reportedly interested in FTX Europe. FTX initially spent close to $400 million to set up its European division.
FTX Europe was unique in that it was based in Cyprus and was the only company to offer certain trendy financial products like perpetual futures.
A perpetual future is a type of derivative financial instrument often used in cryptocurrency markets. Unlike regular futures that have an expiration date, perpetual futures go on indefinitely until you decide to close the position. They’re designed to mimic the price of an underlying asset, like Bitcoin, without actually requiring you to own it. Traders use perpetual futures for various reasons, such as hedging against price changes or trying to profit from market movements. Traders can benefit from perpetual futures whenever the markets move, regardless of the direction, up or down.
If Coinbase had gone through with buying FTX Europe, they could have made more money from fees, especially since this type of trading is becoming more popular, even when the overall crypto market isn’t doing so well.
In fact, Coinbase made $707 million in the second quarter of 2023, though their earnings from regular trades dropped by 13% from the last quarter.
Meanwhile, globally, the trading of these financial contracts on centralised platforms went up by almost 14% in June to a staggering $2.13 trillion.
Binance led the way in this kind of trading, followed by OKX. Even Bitcoin futures trading saw a boost, especially on the CME exchange.
Coinbase now offers perpetual futures
As for Coinbase, they’ve already dipped their toes into this market in the U.S. and now just got the green light from authorities to offer this type of perpetual futures to non-U.S. qualified customers.
In the U.S., the green light from authorities allows Coinbase to offer Bitcoin and Ether futures contracts via its derivatives platform called FairX, which is overseen by the Commodity Futures Trading Commission. According to what Coinbase said when they announced this, these types of contracts make up nearly three-quarters of all crypto trading globally, making it a key entry point for traders.
Coinbase has announced its next steps in its “Go Broad, Go Deep” strategy, aiming to work closely with global regulators to shape a crypto-friendly framework.
They’ve expanded access to perpetual futures contracts to qualified customers outside the U.S., reinforcing their mission to update the global financial system.
This move comes at a time when other crypto exchanges face increasing regulatory challenges. Perpetual futures are highly sought-after, making up about 75% of global crypto trading. Coinbase sets itself apart by offering these contracts within strict compliance rules. They’ve already seen over $5.5 billion in trading volume from institutions as of the second quarter. Their exchange follows regulations set by the BMA and offers multiple layers of user protection.
What makes Coinbase unique is its emphasis on security and compliance. They guarantee a 1:1 hold on customer assets, and their financials are publicly audited. They’re also backed by a well-funded Insurance and Liquidity Support Program using the stablecoin USDC, rather than risky exchange tokens. Additionally, they have an experienced risk management team and don’t engage in market-making themselves.
As environmental concerns and costs mount, the future of crypto mining is looking increasingly green. Industry leaders are exploring alternative energy solutions for more sustainable and cost-effective operations.
In 2021, when cryptocurrency prices were soaring, big mining companies borrowed a lot of money to buy the gear and set up the systems they needed to mine crypto. But then major crypto platforms like FTX and Celsius went under, leaving many of these companies broke and struggling.
With crypto prices down and competition in Bitcoin mining fiercer than ever, people are questioning whether these mining operations can bounce back from their losses. One thing’s for sure, these companies are now looking at using greener energy options to save money, make some profit, and also be a bit kinder to the planet.
How do you keep crypto mining prices low?
According to Swan Bitcoin, a company focused on Bitcoin financial services, it generally costs around $26,000 to mine one Bitcoin.
However, companies that use renewable energy are finding it much cheaper, with costs ranging between $5,000 and $15,000 per Bitcoin.
A spokesperson from Riot Blockchain, a U.S.-based Bitcoin mining company, explained that thanks to wind and solar energy in Texas, their costs are among the lowest in the crypto mining business. To be exact, it costs Riot $8,389 to mine a single Bitcoin.
Kent Halliburton from Sazmining, a company that hosts Bitcoin mining operations, pointed out that the biggest cost in mining is electricity. He said that miners naturally want to find the cheapest power available, and renewable energy often fits the bill because it sometimes produces excess electricity. He also mentioned that data from the Bitcoin Mining Council indicates that the Bitcoin network is becoming increasingly sustainable, with 59% of mining now carbon-free and growing each year.
Phil Harvey, the CEO of Sabre56, a company providing infrastructure for crypto mining, said that they’re helping several mining companies set up operations at their facilities in Wyoming and Ohio. This move towards renewable energy appears to be a growing trend among miners who are thinking about their long-term success.
Crypto miners have ingenious designs to keep running costs low
Phil Harvey from Sabre56 said their mining center in Gillette, Wyoming, known as “Bonepile,” has around 2,200 mining machines running on a mix of energy sources. Nearly 29% of this energy is renewable, coming from wind, recovered energy, and hydropower. The machines they use are a mix of MicroBT Whatsminer M50s and Bitmain Antminer S19s. The Bonepile site uses a special design to keep the machines cool: they force air into the facility, which helps prevent the machines from overheating and allows for hot air to naturally exit.
This design is different from the usual methods used in the mining industry, where typically additional systems are used to suck hot air out, but there’s no special system to bring fresh air in.
On the other hand, OceanBit is taking a unique approach to renewable energy for mining. Michael Bennett, the co-founder, explained that they are incorporating Bitcoin mining into their ocean thermal energy power plants. This allows them to adjust to fluctuating energy demands, deliver power more quickly to offshore projects, and also make extra money from unused energy.
Ocean thermal energy, according to Bennett, is a massive and largely untapped renewable energy source. It uses the temperature difference in ocean water to generate electricity, similar to how hydro and geothermal energy work. Bennett thinks that Bitcoin could be the key to making this type of energy more widely used because it helps solve some of the commercial challenges associated with ocean thermal energy.
Diagram of OceanBit’s thermodynamic cycle. Source: OceanBit
Nathaniel Harmon, who co-founded OceanBit with Michael Bennett, explained how their system is a win-win. The ocean thermal energy conversion (OTEC) process produces cold water as a byproduct, which is perfect for cooling the specialized computers used in Bitcoin mining, known as ASICs. On the flip side, these ASICs produce low-level heat, which can be recycled back into the OTEC process. This creates a cycle that makes both operations more efficient and cost-effective.
Bennett also mentioned that OceanBit is aiming to reveal its research and development power plant in Hawaii by 2024.
Alternative energy sources
Stronghold Digital Mining, a crypto mining company in Pennsylvania, is taking a different approach by using waste coal to power its mining activities.
This waste of coal, which is left over from the coal mining process and mixed with various impurities, has been a pollution issue in Pennsylvania for years. Greg Beard, the CEO of Stronghold, said they’re working with local environmental agencies to clean up these waste coal piles and use them for energy.
Beard pointed out that the waste coal has been a major source of water pollution and has also caught fire spontaneously over the years, releasing toxic fumes. By converting this waste into energy, Stronghold either powers its own Bitcoin mining or feeds electricity back into the local grid. Beard argues that this makes their operation more efficient than other miners who are just looking for cheap power.
However, this method isn’t without its critics. Using waste coal still means burning hydrocarbons, and some groups claim that these kinds of plants actually pollute more than new coal plants. Stronghold also faced backlash when it planned to burn tire-derived fuel at one of its plants. Russell Zerbo, an activist with the Clean Air Council, said that the plant should be reclassified as a solid waste incinerator, which would subject it to stricter air pollution monitoring. So, while Stronghold’s method does help clean up waste coal, it also raises environmental questions.
The challenges of using renewable energy
While it’s good news that crypto mining companies are moving towards alternative energy, there are hurdles that could slow down this transition.
Kent Halliburton mentioned that people often misunderstand the benefits that Bitcoin mining can bring to local communities, like creating jobs and making use of excess or wasted electricity. Electricity is hard and expensive to store, so if it’s not used or stored right away, it goes to waste.
Phil Harvey pointed out another challenge related to the location of their mining facility in Gillette, Wyoming. Due to the high altitude, the air is thinner, making it harder for their machines to pull in enough air for cooling.
Additionally, the issue of thermal pollution exists, where hot air from mining machines is released into the atmosphere. To counter this, some companies are getting creative. For example, Genesis Digital Assets uses the hot air generated by its mining machines to grow vegetables in colder climates.
So, while the move towards renewable energy in crypto mining is promising, there are still a variety of challenges that need to be addressed.
It looks like renewable energy will play a key role in the future of crypto mining. Bitmain, a top company in crypto mining gear, is now focusing on water-cooling technologies, as the demand for such eco-friendly options will keep rising.
Nearly 25% of all Bitcoin miners are already using water-powered setups. Wind and nuclear energy come in second and third as the most popular sources of power for these miners.
While multiple Ethereum staking services are pledging to limit their market share to 22%, Lido Finance takes a different path, sparking debates on centralisation and community values.
The top five companies that offer ether staking pools for individuals have stated that they won’t control more than 22% of all ETH currently staked.
This is a way to make sure that no single company has too much power over the Ethereum network, keeping it open and fair for everyone.
Companies like Rocket Pool, StakeWise, Stader Labs, and Diva Staking are either already following this rule or planning to do so, says Superphiz, a key Ethereum developer.
Puffer Finance, another such company, has also said they’ll stick to this limit.
Lido doesn’t obey the 22% of ether staked limit
Why 22%?
Superphiz explains that to make any big changes to the Ethereum network, 66% of the participants have to agree.
By setting a limit of 22%, it ensures that at least four big companies would have to work together to push through any major updates. This makes the network safer and more secure.
When talking about blockchain transactions, the finality of a transaction is the moment when transactions are locked in place and can’t be changed.
Superphiz, a leading Ethereum developer, brought up an important question last May:
Would a company that helps people stake Ethereum be willing to put the network’s well-being over its own profits?
Lido voted by a 99.81% majority not to self-limit. They have expressed an intention to control the majority of validators on the beacon chain.https://t.co/T16rTdM3gm
Interestingly, Lido Finance, the biggest company of this kind, decided not to follow the 22% self-limit rule. Almost all of their members (99.81%, to be exact) voted against it back in June.
Superphiz mentioned in a post at the end of August that Lido aims to control most of the deciding power in the Ethereum network.
To give you an idea of how big Lido is, they control 32.4% of all Ethereum that’s currently being staked.
That’s a big deal, especially when you consider that the next largest, Coinbase, only has an 8.7% share, according to data from Dune Analytics.
Well, the Ethereum community has different opinions on that.
One expert named Mippo commented at the end of August that the 22% self-limit rule isn’t really about staying true to Ethereum’s ideals, which are about open access and innovation for everyone.
Mippo thinks that those advocating for the self-limit would probably not stick to it if they were in the dominant position like Lido Finance. In his view, everyone is just acting in their own best interest.
Yeah because they have way less market share than that now… easy to chirp from the cheap seats.
This has nothing to do with “Ethereum alignment.” None of these teams would self limit were they in Lido’s place.
Everyone is doing the economically selfish and rational thing…
Another person argued that user-friendly services shouldn’t be criticised as greedy.
On the flip side, some people are really concerned that a few big companies could end up controlling too much of the Ethereum network. They see Lido’s large market share as a problem, even calling it “selfish and disgusting.”
Honestly really disgusting and selfish
Centralization will lead to greater problems, this is a full 3 steps backward for ethereum
Lido: "We thought real hard about this for 0.2 seconds and decided it is definitely worth risking sending the entire network to zero for a fraction of a percent more yield"
Lido ticks all the boxes when it comes to staking services.
They support multiple types of digital money and make it super easy for anyone to use their platform.
Their fees are fair, and they even offer nice rewards if you refer people to their service. On top of that, they make a lot of different cryptocurrencies more available for trading and are backed by some big names in the decentralised finance world.
What’s cool is that when you stake your digital tokens with Lido, you get back tokens that are tied to the value of what you staked. You can then use these for more ways to earn money in the DeFi world.
Lido has become a top pick for people looking to stake their digital assets thanks to some standout features.
First off, staking is a breeze; you can earn daily rewards by simply staking your tokens, and there’s no minimum amount you need to start.
Want to make even more from your tokens?
Lido allows you to use them for things like loans, yield farming, and other money-making activities. This can give your earnings a nice boost.
They also have their own digital token, called LDO, that you can trade on popular exchanges like SushiSwap, Uniswap, and many more.
When it comes to security, you can rest assured. Lido’s smart contracts have been thoroughly checked by reputable firms like Quantstamp and Sigma Prime.
Although Lido doesn’t offer its own wallet, you can still use popular ones like TrustWallet and MetaMask to manage your assets.
After PayPal’s recent introduction of PYUSD, the market examines the prospective use cases and benefits of this new stablecoin, especially within the U.S., highlighting its potential utility within the existing financial framework.
PayPal, a leading global payments company, is making its debut in the crypto realm with a U.S. dollar-backed stablecoin named PayPal USD (PYUSD). The announcement came on August 7, 2023.
What is PYUSD?
According to PayPal’s official statement, this new crypto called PYUSD is 100% backed by USD:
“PayPal USD is designed to contribute to the opportunity stablecoins offer for payments and is 100% backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents. PayPal USD is redeemable 1:1 for U.S. dollars and is issued by Paxos Trust Company. “
The PYUSD stablecoin, built on the Ethereum platform, will soon roll out to American PayPal customers.
This is the first instance of a premier financial service launching its own stablecoin.
With PYUSD, users have the option to transfer between PayPal and approved external crypto wallets, employ the coin for various transactions, or exchange it with other cryptocurrencies supported on PayPal, like bitcoin (BTC) and ether (ETH).
PayPal emphasized that their stablecoin is poised for adoption by an expansive and evolving network of external developers, digital wallets, and web3 platforms and is also primed for easy integration by crypto trading platforms.
Paxos Trust, a crypto financial services firm located in New York, will oversee the issuance of PYUSD.
The coin is underpinned by U.S. dollar reserves, short-term government securities, and other cash-like assets. Moreover, users can redeem it for U.S. dollars or trade it for other digital currencies available on PayPal’s platform.
At the time of the launch, PayPal’s CEO Dan Schulman remarked, “Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD.”
It is expected that PYUSD to be available later on the Venmo app as well.
How will the PYUSD be monitored?
PayPal’s PYUSD stablecoin reserves will be monitored and verified through a multi-step process to ensure transparency and trustworthiness:
Monthly Reserve Report
Starting from September 2023, Paxos, the firm in charge of issuing PYUSD, will release a public monthly Reserve Report for PayPal USD. This report will detail the specific assets that make up the reserves backing the stablecoin.
Third-party Attestation
In addition to the monthly report, Paxos will also release a public third-party attestation on the value of the PayPal USD reserve assets. This is to double-check and confirm the validity of the reserves.
Independent Accounting Firm
The attestation process will be carried out by an external, independent accounting firm. This ensures that there’s no conflict of interest and that the process is free from potential biases.
Adherence to Established Standards
The attestation will comply with standards set by the American Institute of Certified Public Accountants (AICPA). This means the audit will follow rigorous professional guidelines, ensuring the accuracy and reliability of the information.
PYUSD is a stable issued by a regulated company
PYUSD, launched by fintech leader PayPal, is distinct from other stablecoins due to its robust regulatory framework. PayPal’s PYUSD stands out in the stablecoin landscape due to its unique position of being backed by a trust company that is stringently regulated by the NYDFS.
This sets it apart from major stablecoins like USDT and USDC.
Here’s how PYUSD is regulated:
Issued by a regulated entity
Paxos Trust, the company behind the issuance of PYUSD, operates as a trust company. This status subjects them to direct oversight by a regulatory authority.
Regulatory oversight by NYDFS
Paxos is regulated by the New York Department of Financial Services (NYDFS). This means that the entire process of issuing PYUSD, including the management of its reserves, is under the constant supervision of NYDFS.
Protection by regulator
Walter Hessert, the head of strategy at Paxos Trust, highlighted the importance of having a prudential regulator. With such oversight, every activity linked to PYUSD’s issuance is monitored. For token holders, regardless of their location worldwide, this ensures that they benefit from the protection and guidelines established by New York’s regulatory framework.
Bankruptcy safeguard
One of the significant rules established by the NYDFS concerning PYUSD is the protection against bankruptcy risk. Should Paxos face bankruptcy, the assets of PYUSD token holders are safeguarded. The NYDFS would intervene, ensuring that PYUSD is excluded from the bankruptcy process. Consequently, token holders would not become involuntary creditors during a bankruptcy, and their funds would be promptly returned.
Clear differentiation from other stablecoins
Both USDT (issued by Tether) and USDC (jointly issued by Circle and Coinbase) dominate the stablecoin market. However, as Hessert pointed out, both these coins are unregulated, albeit transparent in their operations. In contrast, PYUSD’s regulatory structure offers an additional layer of security and trust for its users.
Why did PayPal decide to issue a stablecoin?
PayPal’s decision to issue the PYUSD stablecoin is emblematic of its substantial influence and strategic positioning in the financial sector.
While there’s undeniable regulatory uncertainty surrounding cryptocurrencies in the U.S., PayPal’s stature enables it to not only navigate but also potentially influence these regulatory decisions.
Companies like Coinbase and Circle may have paved the way in the crypto regulation space, but major entities like PayPal are sending a clear message: they can effectively handle and even counteract regulatory pressures.
At its core, PayPal’s move is driven by the prospect of profitability. The issuance of PYUSD isn’t a minor endeavor, requiring collaboration across several of PayPal’s departments, from compliance to communications.
However, this decision wasn’t born out of altruism. Instead, it’s a calculated business move, made in response to a rapidly evolving digital financial landscape, reinforcing PayPal’s dominant position and highlighting its confidence in seizing new lucrative opportunities.
What’s the use case for PYUSD?
The use case for PYUSD appears to be in its infancy, and its exact utility for the average consumer remains somewhat ambiguous.
Introduced via Venmo, PYUSD essentially provides another avenue for banked Americans to transact using a digital representation of the U.S. dollar, aligning with how most PayPal products have functioned since the company’s inception.
However, one distinct feature is that PYUSD can potentially be sent outside of PayPal’s proprietary ecosystem using the Ethereum network.
This capability hints at a use case where individuals barred from Venmo or PayPal could potentially transfer their funds via an Ethereum-based PYUSD withdrawal.
Yet, this use case might be limited, given the centralized nature of the stablecoin.
In essence, while the stablecoin could offer a mechanism to navigate around restrictive banking scenarios, its primary use cases might lean more towards backend financial operations that institutions can leverage, rather than direct consumer applications.
NYU law professors Richard Epstein and Max Raskin published a paper to explain the potential hazards of central bank digital currencies, highlighting the risk of overstepping governmental boundaries and the importance of maintaining the ‘separation of money and state’.
Central banks worldwide are swiftly progressing with their explorations in creating digital currencies.
Numerous examples, such as the recent announcement of a successful prototype by the New York Federal Reserve or the Bank of England’s achievement in the subsequent phase of its digital pound trial, indicate that over 130 nations globally are considering the idea of central bank digital currencies (CBDCs).
The reasoning behind this is twofold.
Firstly, central banks can position themselves as protectors of consumers and innovators in cost-saving technologies by eliminating the role of private banking intermediaries.
Secondly, they can acquire an additional mechanism for policymaking.
However, the proposition of excluding these intermediaries raises an important question of who would be responsible for the other end of the financial transactions.
The inevitable answer is a far-reaching and intrusive government capable of monitoring every single expenditure.
Digital cash?
Max Raskin, an adjunct professor of law at New York University and a fellow at the school’s Institute for Judicial Administration, and Richard Epstein, a law professor at New York University, a senior fellow at the Hoover Institution, and a senior lecturer at the University of Chicago, are exploring this topic in a paper called “A Wall of Separation Between Money and State: Policy and Philosophy for the Era of Cryptocurrency,“ published in The Brown Journal of World Affairs.
Their argument suggests that a central bank, for instance, the Bank of England, would issue a “digital pound,” which would be a direct claim on the central bank, much like current cash is.
This process would involve creating the necessary infrastructure for individuals to store digital pounds in digital wallets and facilitate interactions with retailers and other users.
Contrasting current practices where central banks such as the Federal Reserve and the Bank of England do not offer accounts to direct depositors, the proposed model would eliminate the costly private banking system that presently stands between the central bank and the accounts held by businesses and individuals.
At a glance, it seems that CBDCs might cut unnecessary costs.
However, these apparent efficiency benefits can be deceptive and hazardous.
Intermediaries function in thousands of markets, with representatives, aggregators, and monitors in almost every significant business line. These participants can’t be easily deemed obsolete.
Intermediaries often provide value as they are motivated to offer more than the bare minimum to stand out – such as new banking products and services.
The variety of services banks can offer due to competitive pressures that ultimately benefit consumers. Restricting these forces can hamper the market economy.
CBDC implementation can be risky
The implementation of CBDCs is not without risks.
The idea of providing extensive power and confidential information to a faceless government entity can be alarming. The system can use that data against you in numerous ways.
By removing the private banking intermediaries, CBDCs would eliminate a crucial barrier that currently safeguards individuals and firms from government intrusion and overstepping.
The use of cash and bearer instruments is currently untraceable by the central government.
However, the use of digital cash would be.
It’s clear that even those who decide to stick with private bankers will still be scrutinised by the state, which holds control over all transactions.
Moreover, these digital funds would empower central banks to direct personal loans and mortgages to specific private parties with minor competition, raising concerns around state industrial policies. It’s not hard to imagine potential nightmare scenarios, yet they are difficult to avert.
The question remains: can we trust thousands of new banker-bureaucrats to perform any better?
Can we trust banks?
The Bank of England, in its digital pound argument, emphasised the British government’s commitment to fighting climate change, stating that the digital pound would be designed with this objective in mind.
Why should a topic as intricate and contentious as climate change be regulated through the financial system?
Similarly, U.S. financial regulators have started to wade into political issues like climate change.
If such explicit political objectives are considered, it is not a stretch to imagine a government-run bank using its powers to favour certain energy producers and punish others through their bank accounts.
The power to impact credits and debits must be a feature of the central banks’ proposed code, which introduces a covert system of industrial policy.
If CBDCs become a reality, officially favoured energy sources like solar and wind power could witness their bank accounts receiving subsidies without the need to attract private investors or undergo the scrutiny of the private banking system.
Bank accounts could become vulnerable to political manipulations, bureaucracies, or even disenfranchisement overnight with limited recourse.
Furthermore, these CBDC initiatives in the U.S. were originally proposed in the context of directly providing pandemic stimulus to the economy. However, the evidence is overwhelming that this hasty system of government payments was incredibly wasteful.
Moreover, central banks could implement countercyclical monetary policies, such as providing cash boosts to individuals in specific regions or sectors, which again becomes a political football.
Money and new technologies
We should undoubtedly strive to leverage new technologies, but only when implemented correctly. According to the paper in the Brown Journal of World Affairs, “Money should be a neutral unit of measurement, like inches or kilograms.”
This concept, referred to as the “separation of money and state,” aims to stabilise all currencies over time, minimising the need for private parties to design complex and costly mechanisms like adjustable-rate mortgages to handle financial instability.
For instance, Bitcoin has a predetermined supply of no more than 21 million units, not governed by any individual institution but rather by the network’s consensus mechanism.
This feature provides a robust defence against value dilution that no government-centric system could hope to match.
This fixed system could offer additional institutional support for developing countries seeking modernisation.
Countries with a history of mismanaging their monetary systems could benefit from the discipline that comes with certain forms of digital currency.
For instance, a central bank like Zimbabwe‘s or Argentina’s, plagued with mismanagement, could adopt an innovative form of dollarisation using Bitcoin or another form of programmed cryptocurrency.
