CBDCs are dystopian money

CBDCs are dystopian money

If the recent IRS warning about reporting $600 Venmo transactions warmed your Yuletide spirit, the federal government’s next financial surveillance move will create fuzzies all year long. Right now, officials are preparing to surveil everyone’s financial life in real time with the end goal of transferring more American wealth into its coffers. This intrusion on financial privacy and economic liberty is occurring partially in secret and potentially without Congressional approval.

Welcome to the Brave New World of central bank digital currencies (CBDCs).

Unfortunately, this is not the opening of a dystopian novel. Its prospect grows stronger each day.

CBDCs are dystopian following China’s totalitarian system

CBDCs are direct liabilities on central banks. Traditionally, direct access to central bank balance sheet is the purview of financial institutions as most money is privately created by banks lending out customer deposits.

Authoritarian governments, particularly China, are cutting the middleman for political reasons. The Chinese Communist Party (CCP) boasts their digital yuan (e-CNY) will enable further economic control and party discipline.

This power derives from CBDC surveillance capabilities. In blockchain-based cryptocurrencies, “nodes”—people worldwide with as little as a laptop and internet connection—maintain public digital ledgers based on open-source consensus mechanisms. CBDCs, however, have one node: the central bank, and it identifies, monitors, records, and potentially blocks or reverses each transaction.

When fully implemented, the e-CNY will augment the CCP’s social-credit system, which grants or removes privileges based on party loyalty. They are also testing negative interest rates as an economic-stimulus tool. Spend your e-CNY or watch it disappear in real time.

Don’t think it could happen here? It’s already started.

CBDCs are dystopian surveillance tools

American’s non-cash transactions are already surveilled by banks and those over $10,000 are reported. The government justifies this as a needed bulwark against financial crimes and terrorists under the banner (AML/CFT). Last year, Canadian Prime Minister Justin Trudeau used AML/CFT laws to freeze bank accounts of peaceful truckers protesting COVID lockdowns. Had the truckers had only CBDC holdings, Trudeau could have limited any spending or imposed instant confiscation or fines.

Proponents insist CBDC design will shield Americans from such abuses. The Federal Reserve would likely include protections as Chair Jerome Powell has assured. But context is needed.

As researcher Natalie Smolenski wrote for the Bitcoin Policy Institute, when government functionaries speak of “privacy” in the CBDC context they don’t mean from the state. “Rather, the state is presumed to be an essentially good and trustworthy overseer of markets at every scale, including at the level of individual transactions—and a desire for privacy from the state is implicitly equated to criminal intent.”  

CBDCs cede all control of money to the government

CBDCs place American’s financial sovereignty at the mercy of (at times) partisan bureaucrats at an historically precarious time. Post-COVID, government balance sheets are bleak. Global debt-to-GDP ratio had risen 356 percent by the end of 2021. CBDCs offer a way out.

With real-time access to the total money supply, officials could implement any number of policies deemed in the public interest or necessary for the next crisis. This could include negative interest rates, instant tax collection for every transaction, restrictions on the purchase of disfavored products like firearms, cigarettes, or sugary foods, or carbon-based limits on travel.

The bureaucrat’s mind races.

Equally distressing is the opaque way officials are preparing to dump CBDCs on the public. Whilst academics openly build the technical foundation at the New York Fed and MIT, the legal groundwork remains shrouded.

In January the Fed stated it would not move forward without support from all stakeholders including “ideally” a Congressional enabling law. But in October, Rep. Tom Emmer (R-MN) claimed the Department of Justice had devised a secret CBDC Congressional bypass.

Upcoming House investigations may shed light on this. But it is telling how hard the government is pushing for something Americans do not need. As I’ve written extensively, privately issued, asset-backed stablecoins—digital assets pegged to a monetary value, mostly the U.S. dollar— already provide benefits proponents claim require CBDCs, including financial inclusion and smoother cross-border payments.

CBDCs will kill political dissent

Political dissidents and desperate people in Hong Kong, Argentina, Venezuela, and Ukraine use stablecoins. They have also performed remarkably well during this year’s many crypto crises. They could eventually supply the world’s poor and oppressed a pathway to survival and freedom.

Conversely, CBDCs yield ever more power and control to compromised and cash-starved governments. Let’s make our new world more free and less Brave. Say no to CBDCs.

By Jossey PLLC

A version of this article originally appeared in the Daily Caller on December 12, 2022 https://dailycaller.com/2022/12/12/cbdc-government-overreach-federal-reserve/

Stopping CBDCs starts in Congress

Stopping CBDCs starts in Congress

‘‘No Federal reserve bank, the Board, the Secretary of the Treasury, any other agency, or any entity directed to act on behalf of the Federal reserve bank, the Board, the Secretary, or other agency, may mint or issue a central bank digital currency . . .”

These words in a bill proposed by Senators Mike Lee (R-UT) and Mike Braun (R-IN) is the statutory equivalent to Shakespeare or Goethe. Americans of every political stripe should hear these words like legal poetry and rally around the ‘No Central Bank Digital Currency (CBDC) Act.’ CBDCs would end Americans’ financial freedom and prompt inevitable confiscatory policies by the U.S. Treasury.

Cabining the CBDC authorizing debate in Congress is the first step to stopping this financial Road to Serfdom. This should be obvious. The Constitution’s Article I gives Congress exclusive authority over coining money. A power affirmed by the Supreme Court. Both Federal Reserve Chair Jerome Powell and Vice Chair Lael Powell have ceded in testimony the need for a congressional authorizing act. The Federal Reserve as a body did as well in a January 2022 report: “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.”

Stopping CBDCs means stopping DOJ workarounds

Yet according to Rep. Tom Emmer (R-MN) the Biden Administration has devised a workaround they refuse to share with Congress. This provoked House Republicans to write Attorney General Merrick Garland requesting DOJ’s “assessment of whether legislative changes would be necessary to issue a CBDC” by October 15.

The executive seems to be playing from last year’s playbook for potential stablecoin regulation. There it suggested the Financial Services Oversight Council produce regulations by fiat if Congress did not pass a bill. The go-it-alone strategy may be too tempting for a government seeking ever tighter controls over Americans’ financial lives. For regulators CBDCs are the Holy Grail as expressed by global financial regulator Agustin Carstens in 2020:

We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.

Alternatives may quickly find themselves banned as Mr. Powell has stated: “You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies, if you had a digital U.S. currency . . . I think that’s one of the stronger arguments in its favor.”

Stopping CBDCs means less government power

Why is the administration pushing so hard for CBDCs? Researcher Natalie Smolenski provides the answers in a recent and well-received report published by the Bitcoin Policy Institute. First as stated CBDCs give regulators a complete record of all financial transactions thus eliminating transactional privacy. They claim total surveillance is required to stop terrorists and money launderers even though empirical evidence debunks that claim. Second, once CBDCs become widely used they transform into an instant tool for monetary policy. The U.S. now owes $31 trillion dollars. Congress has already allocated funds for 87,000 new IRS agents to unleash audit-palooza on Americans.  CBDCs would eliminate the middleman by giving Treasury access to all the U.S. stock of digital cash. With this control the Fed could place negative interest rates on all CBDC holdings allowing Treasury to collect money without passing unpopular tax hikes. People would have no choice but to spend their savings or watch it vanish in real time. China is already doing this with its CBDC.

We must stop CBDCs before they gain traction

This is not financial system Americans signed up for. As I wrote in Central Bank Digital Currencies Threaten Global Stability and Financial Privacy, the supposed benefits CBDC proponents proffer will likely never materialize. Yet the threats to individual sovereignty and the invitation for abuse are practically baked in. Two senators have proposed an end to this terrible policy. As Shakespeare might put it, ‘Friends, Americans, Countrymen, lend me your ears, support the No CBDC Act!’

By Jossey PLLC

Paul H. Jossey talks stablecoins, crypto on podcast

thecrowdfundinglawyers.com founder Paul H. Jossey talked stablecoins and the larger crypto environment on a recent podcast. The talk focused on Jossey’s recently published paper: A Market Approach to Regulating Stablecoins, the Future’s Money. The Competitive Enterprise Institute published the paper.

The paper has garnered widespread praise including by journalist JD Alois who wrote in Crowdfund Insider, “Anyone who is interested in the future of money or digital currency should read this paper.”

View the podcast below:

By Jossey PLLC

Crypto has just begun

Crypto has just begun

Hot summer temperatures have done nothing for the current “crypto winter” which has seen a $2 trillion market drop from highs last year. The downswing, including the spectacular failure of the Terra Luna ecosystem and a cascade of exchanges temporarily halting withdrawals, has livened crypto’s critics including governmental bodies and their academic allies.

Whilst the crypto industry should ignore the bluster as it recalibrates, it should also accept legitimate criticisms. The crypto revolution has just begun, and tough battles lay ahead. But ultimately those screaming “Get a horse” at crypto’s teetering auto will be proven wrong.  

The first rejoinder to the crypto collapse is governments bear much responsibility. The trillions printed out of thin air recently had to go somewhere. Crypto with its general positive returns were as good a place as any. Low interests rates meant safer alternatives were not feasible.

As Mati Greenspan, the CEO of crypto research and investment firm Quantum Economics told CNBC. “Central banks were very quick to print gobs of money when it wasn’t needed, which led to excessive risk taking and reckless build up of leverage in the system.” Cheap money meant millions poured into untested concepts and undeserving projects. Existing business models that seemed solid are facing collapse and rethinking. Of course, crypto is not the only victim of government profligacy. The S&P is heading towards its worst first half since 1970 as recession fears loom.

Crypto has just begun to clean up government’s mess

The government-caused monetary bubble will wreak havoc on the industry short term. But afterward exposing weak business models will strengthen the industry. More investment discipline and exacting due diligence will benefit project developers and consumers. Bear markets usually beget stronger design and more solid plans as focus on short term gains wane. Some innovations will focus more on consumer value.

Nonfungible Tokens (NFTs) have a bright future in strengthening the relationship between entertainers and their fans and businesses and their customers through personalized experiences. Nouveau riche indulgences on jpeg art may be less sustainable.

Yet the crypto industry also bears responsibility for the current opening critics have seized. Over exuberance that imbibes any new technology foments overreach. Millions in venture capital poured into Terra Luna despite an untested design clearly unable to sustain a market downturn. Scammers abound and the industry should help push them out—46,000 people have reportedly lost $1 billion since the start of last year.

Hacks and inside-job rug pulls have exposed the general lack of focus on network security.

The future will see bigger battles. Enthusiasts’ zeal for decentralization and censorship resistance will collide with venture capitalists seeking control and return on the investment. Environmental, Social, Governance (ESG) advocates that have so effectively captured public companies have crypto in their sights. They currently direct their ire at crypto’s energy use but social factors are percolating. The crypto industry should not sugarcoat the viscous battles ahead.

Crypto has just begun to improve our lives

Yet crypto’s future is bright. It’s current omnipresence in media and government attention belies how young the industry still is. Ten years ago, the price of Bitcoin was $15.40. Crypto’s current market cap is half that of Apple and less than one-twentieth of U.S. GDP. Current growing pains will not deter the long-term innovations.

At its heart crypto is a way to hold and transfer value outside the prying eyes of the state. The idea of people exchanging value electronically outside the heavily regulated and in some places authoritarian financial systems already benefits the world as people in the direst circumstances have already discovered. Other individual-centered innovations will arise from this core concept in ways not yet imagined, just as mobile phones disrupting the taxi industry at one time seemed farfetched.

Critics including the post-WWII global financial superstructure insists this is all dangerous, unnecessary, or a Ponzi scheme it must protect us from. China and Canada to give just two examples show self-interest is the real aim. The crypto industry must answer legitimate criticisms and gear for the looming battles. But ignore the current naysayers shouting insults from their equine transport.

By Jossey PLLC

This article originally appeared at CrowdfundInsider.com on August 5, 2022, https://www.crowdfundinsider.com/2022/08/194316-the-crypto-revolution-has-just-started/

Paul H Jossey publishes major paper on stablecoins

thecrowdfundinglawyers.com founder Paul H Jossey recently published a major paper on stablecoins through the Competitive Enterprise Institute. The paper is titled Market Approach to Regulating Stablecoins, the Future’s Money.

The paper garnered widespread praise with JD Alois of Crowdfund Insider stating, “Anyone who is interested in the future of money or digital currency should read this paper.” 

Read the full paper here: 

By Jossey PLLC

SEC Kills Crypto Through Enforcement

SEC kills crypto

The crypto world is recoiling under massive headwinds. Regulatory uncertainty and the current market downturn, including the spectacular crash of TerraUSD, has left the industry reeling. But while market corrections can shakeout unworthy projects and redirect capital more efficiently, unclear guidance about the rules is intransigent. Myopic federal guidance, particularly from the Securities and Exchange Commission (SEC) has hamstrung crypto development for years and hopes for a resolution exist but seem dim.  Now the SEC kills crypto.

It didn’t have to be this way.

Four years ago this week, SEC Corporation and Finance Director Bill Hinman spoke at a San Francisco crypto summit and offered a path forward. Recognizing the emerging industry’s potential entanglement with securities laws, Hinman asked, “Can a digital asset that was originally offered in a securities offering ever be later sold in a manner that does not constitute an offering of a security?”

He tentatively said yes, if the project was sufficiently decentralized. “If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract [security].”

Hinman halted the SEC killing crypto

Developers rejoiced dubbing his remarks the “Hinman Test.” Decentralization can be a messy concept that needs further clarity. But Hinman seemed to offer a way forward that captured crypto’s peer-to-peer ethos while prosecuting fraud.  

Four years hence, crypto’s rules are less certain than ever and Hinman’s words are the subject of a vicious legal battle. The hope for a straightforward regulatory pathway for crypto is all but forgotten.

Even amid Hinman’s speech, then-SEC Chair Jay Clayton’s tenure lacked focus. A year after the Hinman Test, the SEC produced further crypto “guidance” so impenetrable Commissioner Hester Peirce likened it to a Jackson Pollock painting. Clayton also greenlit the Ripple/XRP litigation on his last day, which has become the SEC’s most arduous crypto battle.

Current Chair Gary Gensler has replaced Clayton’s vacillation with outright hostility. Gensler has unleashed a torrent of legal actions against crypto project developers like LBRY and doubled down on the Ripple case,projects with happy user bases and no hint of fraud. He’s called for plenary authority over crypto and hired scores more attorneys to evaluate each project under the vague and famously malleable Howey test. And he’s threatened virtual marketplaces like Coinbase, while forcing BlockFi and Celsius into fines and settlements to avoid protracted legal battles.

Gensler’s SEC kills crypto  

Cynics claim Gensler’s “enforcement only” approach and attendant industry ire is worth the trouble to bolster his profile for ever higher government posts. Regardless of motivation, the results have immensely damaged this century’s most promising technology.

Observers inside and outside the Commission have offered alternatives to the Clayton-Gensler quagmire. Commissioner Peirce has suggested a regulatory sandbox. Academics have offered various solutions including a state-led regime. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) proffered a legislative solution. None seem likely to be enacted soon.

For now, the judiciary offers the only refuge from the SEC’s regulatory onslaught. Ripple along with individual defendants Brad Garlinghouse and Christian Larsen have cornered the SEC into unforced errors and shifting justifications as discovery battles intensify before trial.

Ripple case shows SEC crypto hostility

Most prominently, the SEC’s turn from Hinman’s speech and the SEC’s unwillingness to reveal the intra-office machinations surrounding it has begot Amber Heard-like court performances. Magistrate Judge Sarah Netburn has grown increasingly frustrated with the SEC’s obduracy.

At one point during a hearing last week she sarcastically directed the SEC lawyer to pull up the speech and explain which parts were Hinman’s personal opinion and which were SEC policy, as the commission darts to-and-fro to avoid yielding information to opposing counsel.  

Ripple has the resources to fight a protracted battle that may end at the Supreme Court. The Commission rarely faces spirited opposition, as years-long investigations followed by expensive litigation crush adversaries well before a ruling on the merits.

SEC is losing Ripple crypto case

For once the SEC seems to have the losing hand and not just in the Ripple litigation. Mr. Gensler’s reportedly abrasive style has caused a mass exodus of top-level personnel. The Fifth Circuit recently ruled its administrative law judge system of adjudication that denies defendants a federal court venue is unconstitutional in certain circumstances.

For the crypto world building the next generation economy, the SEC’s troubles are its gain. The industry should use the Crypto Winter to exert maximum pressure on Gensler. Reviving the Hinman Test – and actually applying it consistently – would be a start.  

By Jossey PLLC This piece originally appeared in Real Clear Markets on July 29, 2022, https://www.realclearmarkets.com/articles/2022/07/29/the_secs_enforcement_only_approach_existentially_threatens_crypto_844881.html