Thecrowdfundinglawyers.com founder Paul H. Jossey will discuss the future of stablecoins with former Commodity and Futures Trade Commission Chairman Timothy Massad.
This webinar explores the potential of stablecoins as a payment instrument, the inefficiencies of the current payment system, and the appropriate level of regulation that allows for beneficial innovation in this sector.
Rep. Tom Emmer (R-MN) joined Competitive Enterprise Institute Vice President Iain Murray and Adjunct Fellow Paul H. Jossey for a discussion the pitfalls of Central Bank Digital Currencies.
The Crowdfunding Lawyers founder Paul H Jossey publised a major paper on Central Bank Digital Currencies (CBDCs) for the Competitive Enterprise Institute. In it he argues CBDCs will not live up to the promise government proponents suggest.
Many CBDC promoters have sat at the pinnacle of financial power for decades. The post-World War II global order endowed domestic and international financial regulators with immense power, with mixed results. But private competition is exposing flaws that become exacerbated in times of high inflation and pandemics. Citizens have seen mismanaged currencies and incompetence or abuse by civil servants, and doubt that any benefits would outweigh the potential costs. Private cryptocurrencies, especially stablecoins, are solving problems, innovating, and creating opportunities in a way that central bankers cannot.
Western nations should scrap CBDC plans and promote stablecoins as the answer to perceived threats to global financial stability posed by authoritarian regimes and big technology companies.
“A CBDC could fundamentally change the structure of the U.S. financial system.” The Federal Reserve’s recent paper on whether to adopt a central bank digital currency (CBDC) included candid assessments on its macro-economic risks but less on individual citizens.
The proffered benefits of this gamble involve hazy feel-good sentiments about inclusivity, aiding entrepreneurs, propping up the dollar internationally, and smoothing cross-border transactions. But design choices, governmental priorities, and prevailing attitudes erase these benefits whilst leaving the risks. Instead of entering the digital currency race, the government should encourage private innovation already afoot via stablecoins (digital assets pegged mostly but not exclusively to the U.S. dollar).
As I detail in a new paper ‘Central Bank Digital Currencies Threaten Global Stability and Financial Privacy,’ CBDCs provide little value for mature financial systems like the U.S. where banks, payment providers, and stablecoin issuers provide consumer options. Conversely, they invite huge risks through digital bank runs, distorted monetary policy, transaction monitoring, involvement in contentious social issues, and international strife. The paper admits these risks are real and inadvertently agrees design choices make them likely.
CBDCs don’t live up to the hype
The most prominent supposed CBDC benefit is financial inclusion, providing the unbanked access to central bank money. Currently around 5 percent of the U.S. population lacks a bank account, and more “underbanked” use expensive options like money orders. But a CBDC alone would help little. As the paper admits, CBDC accounts would be “intermediated”—administered through the existing fee-charging financial system. Thus, it would not quell major reasons people forgo bank accounts: lack of minimum balance requirements, mistrust of banks, and high or unpredictable fees.
The paper also asserts smoothing the archaic cross-border payment system as a potential CBDC benefit. This also has little merit. First, the paper admits it would require “significant international coordination.” Yet even accomplishing this Herculean task would only provide limited benefits because, as the Bank Policy Institute states, the real culprit is insistence on Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT) reporting.
The paper’s other proffered benefits of helping entrepreneurs and maintaining the dollar’s global status carry even less purchase. Dollar-pegged stablecoins with their functionality and flexibility already fill this role. At least before the latest crackdown they were very popular in authoritarian China and the rest of East Asia, as well as providing needed purchasing power in socialist-torn countries like Venezuela. A U.S. CBDC requiring tedious international agreements will never achieve this global utility.
CBDC risks are off the charts
But where benefits shrink risks explode. CBDCs would be liabilities of the Fed not commercial banks. This means banks could administer CBDC accounts but not lend them out like ordinary deposits. Thus the $10 trillion in currently outstanding loans would fall, raising rates on what’s left. This would affect the economy in good times. Economic stress would invite the further issue of digital runs—panicked conversions into CBDC from other money for its perceived safety. The paper counters it could temporarily limit access to CBDC, which would invite political outrage and quick reversal. If foreigners convert in large numbers, international tensions will follow.
Problems would not end there. CBDCs would require enlarged Fed balance sheets with possibly riskier assets, distorting credit markets and monetary policy. It may also force the Fed into contentious political issues if CBDC purchases include unpopular products like firearms or donations to disdained political groups or causes.
None of this necessary.
But the biggest downside would be privacy infringement. The ability to surveil is the ability to control. China make no secrets its CBDC will help enforce party discipline. The paper avers “consumer privacy is critical,” yet immediately follows with the need for AML/CFT monitoring. The government would have access to every CBDC-conducted transaction. Appropriate protections would supposedly ensure limited bureaucratic access. But after repeated leaks of sensitive information and oppressive behavior toward everyone from blue-collar Tea Party activists to the President, should anyone trust them? CBDCs solve no problem stablecoins don’t already address but they invite intervention and abuse on an unprecedented scale. The Fed roundaboutly admits this. The CBDC conversation should stop there.
A version of this piece originally ran in the Washington Times, https://www.washingtontimes.com/news/2022/feb/10/fed-discussion-should-end-central-bank-digital-cur/
The Russia-Ukraine conflict is the first crypto war. The digital asset front follows only actual fighting in coverage and importance. From the Ukrainian government’s requests for Bitcoin and Ether, to Ukrainian DAO, to stablecoins as financial refuge on both sides, to the angst European and U.S. bureaucrats express at crypto bypassing sanctions, crypto has dominated events.
However the conflict ends, it is undeniable crypto will play a central role in world affairs and global conflict henceforth. And the individual autonomy it brings could mean a more peaceful world provided governments and global standard-setting bodies don’t kill this promise through controlling regulations or forced public alternatives.
Crypto could give citizens of aggressor countries an informal ‘citizens veto’ on war. If people flock to stablecoins amid host-country aggression or international sanctions it could crush a nation’s ability to wage war. This is now happening as Russians ditch the ruble for stablecoins. This may thwart Russia’s ability to finance hostile operations.
First crypto war may return us to more limited wars of the past
In a way this would augur a return to the more limited conflicts of the pre-World War I, gold standard era. As Saifedean Ammous explains in The Bitcoin Standard, before the Great War gold-standard countries were limited by popular sentiment (and their own treasuries) to wage war. Once national reserves sunk governments had to raise to taxes or sell bonds to continue fighting. By leaving the gold standard, countries just printed money until, through inflation, its whole population’s wealth was squandered before winning or capitulating. This had devastating 20th Century results. Returning a ‘citizen’s veto’ via people ditching a nation’s fiat currency would lessen or preempt conflicts all together.
But governments could thwart this more peaceful future in two ways. First is forcing all crypto into a global Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime. The second even worse option is to require everyone to use multi-jurisdictional central bank digital currencies (m-CBDCs), with alternatives banned.
It is no understatement that AML/CFT is the primary concern of global and national financial regulators. The UN estimates criminals and terrorist launder up to $2 trillion each year.
This may appeal to criminals. But it would be strange to think ne’er-do-wells would rely on traceable, public ledgers as transaction facilitators. The benefit of removing cash’s physical limitations seems far outweighed by the risks of permanent and public recordation. Some have discovered this the hard way, like the New York City couple allegedly sitting on billions but unable to spend it. And even the famous 2016 DAO hacker that almost brought down Ethereum and forced a hard fork has allegedly been unmasked.
Of course, criminals will create new ways to shield transactions that may temporarily succeed. But the public, through democratic means not unelected central bankers and global financial bureaucrats should decide how much of this we are willing to tolerate in return for our privacy.
Further, as the Canadian Freedom Trucker Convey showed, who governments label terrorists expand with political expediency. (Indeed, the Canadian government now admits the protests were not rife with money launderers and terrorists). Regardless, this should be unacceptable in a Western democracy.
First crypto war may catalyze government control through CBDCs
An m-CBDC would be even worse. For example, the coming Chinese model forces every citizen to use the digital yuan and every transaction is monitored, recorded, and factored into people’s social-credit score. Western governments would likely imbue the softer veneer of Environment, Social, Governance (ESG). This could limit a person’s ability to transact with companies deemed insufficient environmental stewards, or with inadequate corporate-board diversity etc. If this sounds outlandish, terrorist designations for peaceful blue-collar protestors would have had a similar ring twelve-months ago.
Neither of these models—granular AML/CFT or m-CBDC allow for citizen vetoes in times of peace or war. We may be, as commentator Vivek Ramaswamy suggests, already fighting a different war. The battle between the Great Reset imposed top down and the Great Uprising from the bottom up. And if so, crypto, with its promise of individual autonomy, control over one’s data and financial transactions, and potential to bypass entrenched institutions will be the main battlefield. If the latter wins, the first crypto war may bring a more peaceful world.
Crypto insiders lauded Gary Gensler’s nomination to chair the Securities and Exchange Commission (SEC) last February. The MIT professor who had taught blockchain classes would bring an enlightened approach to crypto compared to the scattershot, perplexed style of his predecessor Jay Clayton. But a year in the professor gets an F in crypto guidance and leadership. He has encouraged the worst bureaucratic instincts of the federal government, deepened regulatory confusion, and thwarted any hope of progress during his tenure—all whilst claiming the mantle of little-guy defender and public-interest protector.
Not everyone agrees with this assessment. The powerful cabal of Washington and global interests that oppose everything crypto are likely pleased with Gensler’s performance. These include Democratic senators, well-placed financial regulators, and global central banking authorities.
Professor Gensler turns into Bureaucrat Gensler
Cynics contend this cabal comprise his real audience; those that can help the uber ambitious Gensler climb the bureaucratic ladder to Treasury Secretary or beyond. But even without questioning his motives, his tenure related to crypto has been a farce.
Gensler analogizes his role to that of football referees. “Imagine a football game without referees. Without fear of penalties, teams start to break rules. The game isn’t fair and maybe after a few minutes, it isn’t fun to watch.” Yet the dystopian present he has fomented invites a different analogy: The referees are the only ones who know the rules, won’t tell the teams what they are, but still call a penalty on every play—the players discovering ex post facto the play was verboten.
Former acting Comptroller of the Currency, Brian Brooks, described the scene recently in Congressional testimony: “What happens in the United States is you have a new crypto project and you walk into the SEC and you describe it in great detail and you ask for guidance and they say we can’t tell you and you list it at your own peril.”
Crypto doesn’t want Professor Gensler’s protection
This is particularly disheartening when the teams have plays the fans want to see. Although Gensler couches crypto edicts in protecting the populace against scams, many high-profile cases the SEC has prosecuted during his (and his predecessor’s) tenure had active, happy user bases. Kik, Telegram, and ongoing cases against LBRY and XRP/Ripple focused on selling “unregistered” securities via a security type (investment contract) absent in the federal code and defined through a three-part test by the Supreme Court a year after WWII ended.
Lawyer James Burnham opines the current Supreme Court zeitgeist would likely preclude such broad administrative diktat on crypto absent new Congressional mandate. But such agency reprimand would require a company spend gargantuan legal fees and endure years of litigation for even the chance to argue the case. The Commission understands its ability to bleed belligerents dry and force settlements before they obtain meaningful judicial review. As it stated in its 2018 budget request: “[T]he SEC’s litigation efforts also help the SEC obtain strong settlements in other cases by providing a credible trial threat and making it clear that the SEC will go deep into litigation and to trial, if necessary, in order to obtain appropriate relief.”
For his part, Gensler has directed the Enforcement Division to discourage meetings with investigatory targets and eliminate “unnecessary process.”
Thus, the status quo is worst of all worlds: rules that leave seasoned securities lawyers guessing, an agency that refuses any guidance besides lawsuits, or threats thereof, and an agency chair requesting scores more enforcement attorneys and “plenary” authority to protect people who in many cases do not want it.
Professor Gensler is not serving the public interest
Commissioner Hester Peirce described a previous era of “broken windows” theory compliance at the SEC as the “Sanctions” and Exchange Commission. Now it may better be labeled the “Sanctions and Enforcement” Commission.
Under Gensler, the SEC has declared a permanent crypto war. It has refused to approve any Bitcoin spot Exchange Traded Products despite myriad applications, new projects are refused guidance and told to take their chances, and the Chair recently gave a speech one commentator called the “the most aggressive and hostile stance re U.S. crypto regulation to date from the SEC.” An SEC this stroppy to crypto innovation may serve entrenched interests in Washington and other global financial destinations. It does nothing, however, for the American public. Those that think otherwise should go back to school.
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