Central Bankers Are Still Using Same Criticisms of Bitcoin 13 Years Later

Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Despite an upcoming 13th birthday for Bitcoin in January next year, representatives from central banks across the world continue to show vocal skepticism for the premier cryptocurrency. The digital asset has long disproven its “fad” status and is beginning to attract investors from the traditional finance sector.

Central bank governors around the world appear to have been speaking to the press about their concerns for Bitcoin and are bringing out the same arguments that were made 5 or 6 years ago.

Central Bankers Try to Pour Cold Water on Bitcoin

At a banking conference in Stockholm, Stefan Ingves, the governor of central Swedish bank, Riksbank, compared Bitcoin to trading stamps, warning that Bitcoin could one day collapse:

“And sure, you can get rich by trading in bitcoin, but it’s comparable to trading in stamps.”

Noting that “private money usually collapses sooner rather than later”, Ingves seems to liken Bitcoin to a privately issued commodity. Conspicuously, he omits the key driver that made Bitcoin popular – blockchain. It makes Bitcoin neither private nor governmental.

Instead, cryptocurrency, including Bitcoin, is communal if token issuance is transparent; in a system where there is no central point of failure, there is no need for human trust. Such a system is designed to withstand more pressure than traditional financial systems thanks to its network and nodes across the world that keep it secure.

Ingrvs’ counterpart, the Governor of the Bank of Mexico, Alejandro Diaz de Leon, pointed to crypto volatility as the main reason Mexico will not follow El Salvador’s lead:

“People will not want their purchasing power, their salary to go up or down 10% from one day to another. You don’t want that volatility for purchasing power. In that sense, it is not a good safeguard of value,”

However, while volatility may be an issue for daily payments, without it, there are no gains. In other words, Bitcoin’s volatility is a double-edged sword. It may be volatile, but it has a clear upward trajectory due to its deflationary nature. This leaves us with the bigger picture of why central bankers are really worried.

USD Losing Its Global Appeal

In 2001, El Salvador switched from its El Salvador Colón (SVC) to the United States Dollar. El Salvador’s immigrant community in the US were sending millions of dollars in remittance payments to their relatives back home. This consequently revitalized the Salvdoran economy, so the government decided to make the switch official. 

However, after the Federal Reserve printed more money in one year than in two centuries, USD is beginning to lose its stablecoin appeal. At the end of 2020, the USD had lost 69% of its value compared to Bitcoin.

With the Fed’s target inflation rate of 2% long in the rearview mirror, we are now looking at double that at around 4%

As a result, to cool down the overheated economy, the Fed may resort to tapering. By winding down on large asset purchases, it winds down on Quantitative Easing (QE), which has been responsible for near-zero interest rates. In turn, this itself may cause a Taper Tantrum, such as in  May 2013, when the Fed Chair Bernanke suggested to “take a step down in our pace of purchases”, the resulting Taper Tantrum crashed the market.

Because the stock market thrives when there is low cost to borrow, the opposite to that – higher interest rates – cost companies more to borrow money.

Now that the Fed is between a rock and a hard place, a stock market crash may cause unforeseen consequences.

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What Are the Stakes?

Even before Covid had hit, the top 1% of Americans have taken $50 trillion from the bottom 90%, according to RAND Corporation research accounting for income between 1975 to 2018. Since then, the trend has increased drastically.

Workers around the world: lost $3.7 trillion in the pandemic
Billionaires around the world: gained $3.9 trillion in the pandemic

It’s the biggest one-year wealth transfer in history, yet somehow barely anyone is talking about it.

— Dan Price (@DanPriceSeattle) March 25, 2021

Whether one frames this process as controlled demolition or a happy coincidence, the fact remains that we are in the middle of unprecedented economic centralization. One in which the middle class and small business are hollowed out globally in favor of corporations.

Outside of this new economic realignment lie cryptocurrencies as the only potential well of wealth unassailable by central banking. This is likely the reason why central bankers in unison see Bitcoin as a threat. If you recall, both Janet Yellen (former Fed Chair) and European Central Bank (ECB) President Christine Lagarde been critical of Bitcoin numerous times in the past

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It’s All About the CBDC

Central Bank Digital Currency – CBDC – should not be viewed as electronic money. Electronic money is already here and is used in mobile banking apps and debit cards, making it convenient to pay for anything without ever touching physical banknotes.

Instead, CBDC is programmable money. It is already clear that central banks can create money out of nothing and the resulting inflation rate is then offloaded as a form of taxation to the bottom 90%. Therefore, with a CBDC, central banks could also institute negative interest rates.

Moreover, such a new form of money can be set to expire so it has to be spent in an allotted time window. The ECB has already indicated it will do this with its own CBDC that will cover the third largest world market – the European Union.

Most importantly, CBDCs would allow complete transparency – the starting and ending point of every financial transaction tied to one’s identity. Accordingly, it would be easy to automate taxation without any user input. Down the line, there would be no obstacle to making CBDCs usable for the purchase of certain products over others.  

Lastly, a CBDC would make it exceedingly easy to financially de-platform any individual, business, organization, or even political party. After all, the government would no longer have to go through commercial banks as intermediaries. What is now an arbitrary exercise of power by Coinbase, PayPal, or Twitter, could become a handy tool in the hands of government bureaucrats.

This is where the collision between CBDCs and crypto is potentially heading. Over the next 15 years, those who are over 70-years old will transfer about $34.74 trillion worth of wealth.

Source: Survey of Consumer Finances and Financial Accounts of the United States

If a chunk of that money ends up in cryptos, a new parallel infrastructure is bound to be created, weakening both governments and central banks in the process.

It may take 2-3 years to implement CBDCs. Do you think this window is large enough for greater crypto adoption?

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.

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