Central Bank Digital Coin (CBDC) Conundrum: A governmental power grab that risks unintentionally driving hyperbitcoinization

With the U.S. Federal Reserve’s publication of it’s CBDC whitepaper the other day, this is a good time to discuss the growing demand and impending implementation of CBDCs. In this article, I will highlight the key characteristics and qualities of a CBDC according to the Fed as well as describe how the Fed’s version of a CBDC may unintentionally drive hyperbitcoinization. Hyperbitcoinization is described as “the process of rapid and irreversible adoption of bitcoin as the primary global monetary reserve” (source 2 below).

Note: the Fed is exploring options of issuing a CBDC, and its main objective is to obtain information from the public with regards to benefits, risks, policy consideration, and design.

According to the white paper, the key characteristics of a CBDC are as follows:

1. Benefit the Economy (Provide benefits to households, businesses, and the overall economy that exceed any costs and risks)
2. Competitive to Alternatives (Yield such benefits more effectively than alternative methods)
3. Complement Current Money (Complement, rather than replace, current forms of money and methods for providing financial services)
4. Protect Privacy (Protect consumer privacy)
5. Minimize Criminal Activity (Protect against criminal activity); and
6. Support from Users (Have broad support from key stakeholders)

The CBDC will best serve the United States by exhibiting the following qualities:

1. Privacy-Protected (balance consumer privacy rights & transparency to prevent criminal activity)
2. Intermediated (remove some of Fed’s power / responsibility by enabling private sector to manage & facilitate payments)
3. Transferable (easily transfer to consumers of different intermediaries)
4. Identity-Verified (verify identity similarly to existing banks)

Next, we will look at the key characteristics and qualities above and correlate them to hyperbitcoinization scenarios. According to Fulgar Ventures & Alexandre Bussutil in their two part ‘Roads to Hyperbitcoinization’ series, hyperbitcoinization may occur due to a top-down scenario (think macro: central bank / government), bottom-up scenario (think individuals or companies), or a combination of both scenarios.

The triggering events of the top down scenarios include:

Central Bank

1. Inflation devalues currencies Fed CBDC will continue down this road
2. CBDCs restrict shadow economy (this includes any income not reported like mowing a neighbor’s lawn) Fed CBDC may continue down this road assuming CBDC replaces cash, which does not seem to be the case (yet)
3. CBDCs infringe of freedom & privacy rights Fed CBDC will enable transaction surveillance

Government

1. Countries accumulate Bitcoin and generate FOMO Not applicable
2. Countries trade in Bitcoin to avoid sanctions Not applicable
3. Countries accept Bitcoin as legal tender Not applicable
4. Bitcoin adoption increases in the U.S but hashrate is controlled by developing countries Not applicable

Summary: 2 to 3 of 7 scenarios may be amplified by the adoption of a Fed CBDC

Private Sphere

1. Businesses Hoard Bitcoins Fed CBDC may lead to more businesses hoarding Bitcoin if they see risk in government removing a % of business reserves as a form of taxes
2. Private Coin (e.g. Meta) Fed CBDC may empower consumers to venture into and be more comfortable with the cryptocurrency space
3. Bitcoin Provides Better Alternative Fed CBDC would not compete with Bitcoin for multiple use cases
4. Companies Accept Bitcoins Fed CBDC may lead to more businesses accepting Bitcoin in order to reduce government transaction monitoring
5. Increase in Bitcoin Financial Products Not applicable

Bitcoin Community

1. Community promotes using Bitcoin as an alternative to CBDC Fed CBDC would amplify the need for a cryptocurrency like Bitcoin (anti censorship & borderless)

Summary: 5 out of 6 scenarios may be amplified by the adoption of a Fed CBDC

To conclude, 7 to 8 of 13 hyperbitcoinization scenarios may play out sooner than expected with the adoption of a Fed CBDC. Hyperbitcoinization may be amplified even further if less democratic countries adopt CBDCs first.

Sources

1. Money and Payments: The U.S. Dollar in the Age of Digital Transformation
2. THE ROADS TO HYPERBITCOINIZATION (part 1)
3. THE ROADS TO HYPERBITCOINIZATION: DESCRIBING THE ‘TRANSITION AGENTS’ BRINGING US FINANCIAL FREEDOM (part 2)