Why do governments want digital currency so bad?
The answer is simple.
It’s because it will be easier to manipulate.
Manipulate its value, manipulate its circulation, and to manipulate you.
If I had to put a time frame on when you will see the first major government-backed digital currency, I would say within the next six to eight months.
Or basically, around or before Facebook’s Libra currency supposedly launches in mid-2020.
The French central bank has recently posted a job for someone to lead its digital currency initiative, and the ECB has just picked Benoit Coeure to do a similar thing.
It’s a foot race and it’s all about competition, really.
Libra was a wake-up call for governments, and the backlash in Washington was fierce.
Maxine Waters, the chair of the US House Financial Services Committee, said this of Libra:
‘It’s very important for [Facebook] to stop right now what they’re doing so that we can get a handle on this. We’ve got to protect our consumers. We just can’t allow them to go to Switzerland with all of its associates and begin to compete with the dollar.’
So it’s quite clear that the US sees this as an existential threat to the hegemony of the US dollar.
As one commentator put it, it works like this:
‘Right now, the U.S. dollar has a lot of power, and the U.S. government has a lot of power because oil is priced in U.S. dollars. And, the U.S. government controls which banks can interact with the U.S. dollar, so using that sphere of influence, they’re able to really control the direction of global economics and the global political situation.’
That’s right, oil still runs the show — particularly oil in USD terms.
Government digital currencies will hurt big banks
That being said, perhaps the most interesting thing about government-backed digital currencies or CBDCs, is that it could strip the big banks of their power.
You see, these big banks only really exist because their economies of scale cheapen the price of trust.
Think of it like this.
When you go to pay for your morning coffee with your card, why is it seen as a genuine transaction?
Well that’s because the EFTPOS machine (provided by a big bank) says it’s legit.
But it’s not like the money is backed by something real like gold — President Nixon put an end to that.
Today, money is backed by trust, particularly trust in the US government.
And the cost of this trust is massive.
The academics I work with did a pilot study of the cost of trust in the US economy and found it accounts for about 35% of the whole thing.
Meanwhile in Australia, the big banks and financial services sector as a whole make up about $140 billion of our GDP and employ some 450,000 people.
That’s one in 40 people in Australia who are paid to make sure we can trust the money we live with.
I see this as a criminal waste of resources.
Challenger banks and crypto look good
The advent of CBDCs will be a stepping stone to what my colleague Ryan Dinse calls ‘The Great Bank Un-Bundling’.
With governments spruiking their CBDCs, they will be able to pump money into the system without having to deal with the big bank gatekeepers.
This will likely lead to a proliferation of challenger banks who can flip the digital money pouring out of governments quicker and more efficiently than the big boys.
And the big banks know that change is coming.
I was actually in the ANZ HQ on Collins Street as they began to cull its workforce.
It was chaos.
But from chaos comes opportunity, and I believe there are two great ways to invest in this environment.
First, you can start to bet on the companies providing the services that will flourish when CBDCs are rolled out.
Second, you can invest in the cryptocurrencies that people will likely turn to once they get sick of the manipulation that comes with CBDCs.
While the first one could pay out quicker, the second one strikes me as where the world will ultimately head.
Some mix of the two is probably a good idea.
For Money Morning
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