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Cash Only

Updated: Nov 14, 2023

"Whether in wholesale form – as a type of digital central bank reserve – or retail form – as a digital banknote – it is increasingly clear, at least to me, that these new forms of money will sit at the core of the future financial system."

This was said by Agustín Carstens, the general manager of the Bank for International Settlements (the “central bankers’ [and Nazi] bank), about Central Bank Digital Currency (CBDC) at its conference on CBDCs in Basel, Switzerland last Wednesday. And if you want to understand Carstens’ vision of the future, he made it pretty clear at the 2020 IMF event, Cross-Border Payments—A Vision for the Future. His vison is very clear-- and very scary.

“For our analysis on CBDC, in particular for general use, we tend to establish the equivalence with cash, and there is a huge difference there. For example, in cash, we don’t know for example who is using a hundred dollar bill today; we don’t know who is using a one thousand peso bill today. A key difference with a CBDC is that the central bank will have absolute control on the rules and regulations that determine the use of that expression of central bank liability. And also, we will have the technology to enforce that. Those two issues are extremely important, and that makes a huge difference with respect to what cash is.”

No wonder China has been a leader in the digital currency field, rolling out the digital yuan in 2020 and actively encouraging its use.


According to Kristalina Georgieva, the Managing Director of the International Monetary Fund (IMF), “We have a chance to improve cross-border payments with huge benefits, especially for many of the world’s poorest people. And there is a pressing need to do so.”

The problem is that that’s totally false. The case for a CBDC is weakened by the rise of large, global commercial banks. Many of the benefits of centralizing payments are already occurring, as trade between multinational companies is often settled at one of the dozens of truly global banks. These banking services are not free, but they have the potential to deliver many of the efficiencies provided by a CBDC without the baggage of centralized control.

To wit, if government really wanted to stop money laundering, it would have shut down HSBC years ago.


The core difference between a digital currency system and a physical one is how records of ownership are maintained. With physical dollars, ownership records are diffused. The cash that an individual has on deposit with a bank is largely known only to the bank and the depositor. Funds can be transferred completely anonymously, via cash, and even when transferred electronically, records of the movement will be separated: the payer’s bank, for instance, will know which account to debit, but it won’t know any information about the recipient. The receiving bank will credit its customer, yet it will know nothing about the payer. This system is gloriously inefficient, with a single transaction easily requiring four separate institutions to update records and possibly taking days to make the transfer final, but it has also functioned effectively for centuries.

For central bankers, efficiency is the watchword when it comes to digital dollars. Ownership records are fully electronic and consolidated, making movements between accounts simple and instantaneous. In practice, individuals and businesses would probably have accounts held directly at the Fed and when, say, buying gasoline, the transaction would simply involve a customer moving CBDC from its Fed account to the gas station’s.

It’s really nothing new. The U.S. essentially went through the same process in the 1980s when Treasury bond ownership went from being physical securities to book-entry. Conceptually, that move was identical to what’s being contemplated here: we replaced the physical asset-- paper bonds with attached coupon-- with a central database that recorded ownership. Book-entry made transfers simple and coupon payments routine, generating massive efficiency in the Treasury bond market. There really isn’t much difference between CBDCs and book-entry bonds.

Economists in general like efficiency, but the flipside is that efficient systems lack the redundancy that provides stability. Just about anyone would agree that having a single point of failure for dollar payments in a world that uses the dollar for all manner of trade is a just plain terrible idea. In one move, the federal government would create an unparalleled target with virtually unlimited surface area for hackers, thieves, terrorists and geopolitical rival nations.

Even a cursory look at the history of electronic security shows the risks of centralizing data and wealth. Besides generating all kinds of opportunity for bad actors, what about a software update that goes wrong? Just last Thursday, a single day after Carstens’ remarks, trades handled by Industrial & Commercial Bank of China in New York, the world’s largest bank in the world’s biggest market, had to be traversed across Manhattan on a USB stick after a cyberattack rendered it unable to clear giant swathes of US Treasury trades.

That was bad, but a situation where any and all dollarized economic activity in the world couldn’t take place for hours or days or even minutes would be absolutely devastating.


The key difference between a CBDC and Bitcoin is that the source code for Bitcoin is open. Open source means that the instructions that comprise the computer program itself are published to the world openly in their uncompiled source code form which, by the way, is right here.

In contrast, an example of closed source and proprietary software is Microsoft Windows-- or pretty much any Microsoft product. …Another example would be any CBDC. It is no wonder at all that the Chinese Communist Party, upon rolling out its CBDC, effectively eliminated Bitcoin mining, which prior to 2021 had been hugely concentrated in China with 60% – 70% of all mining located there.

The bottom line is that anybody running open source software does so by downloading the copy of the code, compiling it locally and then running it. If there was anything nefarious about the code, we could see it, and nobody would run it. Bitcoin miners certainly wouldn’t be spending hundreds of millions of dollars in order to build out massive server farms to run malware; that’s for sure.

But Bitcoin has its own problems. The Economist and Bloomberg have both reported that 2% of Bitcoin users hold as much as 95% of the entire currency. That’s probably not totally accurate, but if it’s anywhere close, there’s a problem. What happens when a couple of those holders decide to sell?

According to Antoinette Schoar, Professor of Finance and Entrepreneurship at MIT Sloan, “Somebody who can easily spend a hundred million dollars worth of Bitcoin and sell it or buy it can have a massive price impact in the market. That's typically a situation we don't like, because it means as a regular retail investor, you might suddenly find yourself x percent down because of massive volatility, which might be created by a few large investors randomly deciding to sell some of their holdings.”

That definitely doesn’t make for an ideal currency.

As testament to Shoar’s statement, Bitcoin has been clubbed like a baby seal over the last couple of years. It’s off its highs by more than 40%-- and that’s after more than doubling(!) over the last 10 months as speculators have front run a Bitcoin ETF-- while gold and the greenback are trading within 6% of their 20-year highs.

By the way, I think demand for a Bitcoin ETF is being wildly overestimated, especially when one considers the broad availability of the Grayscale Bitcoin Trust (GBTC). GBTC is not an exchange-traded fund (ETF) per se but rather is designed like commodity investment products such as the SPDR Gold Trust (GLD). It’s got a 2% net expense ratio, but it’s easy to buy, and I don’t think 2% is so expensive that holders will sell it (and incur taxes) just to buy a new ETF.


So, I’ll take cash; thanks. At least for now. There’s nothing wrong with speculating with one or two per cent of one’s portfolio, but that’s what buying crypto is right now—raw speculation—and it’s essentially betting against the rollout of Central Bank Digital Currencies, which may not be imminent but may not be all that far off, either.

Scary, but funny:

Click here to invest with Chad.

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