Money Developments (5c) Compulsory Change

The nature of money and banking would change dramatically if the government made it compulsory for people and businesses to use the CBDC for all transactions requiring payment of money. Such a change would be really concerning for everyone, as it would give the government much greater control over the buying and selling of both people and businesses. It would represent a significant loss of freedom.

If people and businesses were forced to use the CBDC for all transactions, the existing retail banks would probably fight hard to prevent it from happening, as it would be a serious constraint on their business. They would lose several very profitable activities. I am not sure how effective these institutions would be in preventing the government from making the change if it was determined.

Implanted Microchips
If a smartphone app is used to initiate CBDC transactions, security will be important. Processes for identification using fingerprints, voice prints, face recognition or iris scanning are already operational. These should provide sufficient security for a CBDC. Some Christians are suggesting that a microchip under the skin on the wrist or forehead will be introduced to increase the security of the CBDC, but this does not seem to be necessary, given that existing methods of security are effective.

The problem with an implanted microchip is that it could be accessed without authorisation. If a microchip can be read by an ATM or a terminal in a retail shop, criminals would be able to develop scanners that would be able to read the information on the microchip. They would also be able to write to the microchip and change the information on it. So having an implanted microchip would be less secure than using a smartphone.

If a person was kidnapped by criminals, the microchip under their skin could easily be removed by force. It is not hard to imagine groups of thugs mugging people and holding them down while they cut out their microchip so they could use it to make transactions.

An implanted microchip is a fairly useless technology. Without a power supply, its computing activity would be very limited, and its hardware would quickly get out of date. A chip under the skin cannot have a display screen or keypad for data entry. It would not be able to link to a mobile or wireless network, so it would be useless for communication or computing activities.

The flood of Christian books warning of the dangers of a microchip under the skin for financial transactions were written back in the days before smartphones when a microchip under the skin seemed like the only realistic way to make digital transactions. Now that most people have smartphones and they are accustomed to keeping them secure, a chip under the skin is unnecessary.

Government Control
Modern governments claim the right to control every aspect of life if they think they can do good. They claim the right to freeze the assets of people, companies and nations if they don’t approve their activities. They also claim the right to prevent people and businesses from buying or selling if they do not approve of their activities. This power is usually enforced through instructions to the banking system. Banks are dependent on the government for their license to operate, so they usually comply with government requirements.

A CBDC would make government control easier to achieve because they would only have to work through one agency. However, they are already able to achieve control through their influence on the banking system as a whole, so their ability to control would not be greatly enhanced if a CBDC was introduced. However, it could make their monitoring and control easier if they enforced the use of the CBDC for all payments.

The limits on government will always be legal, not capability. A CBDC would just make it easier to do things that governments mostly already have the legal authority to do.

Modern governments believe they have a responsibility to manage everyone’s behaviour, and they have a variety of technologies to control people effectively. Whatever their money system, modern governments have the power to prevent people from buying and selling. There are risks to digital transactions, but there are risks with all aspects of life. Holding wads of notes would provide very little protection.

This full series can be read on Substack in an article called Money Developments

Money Developments (5a) Central Bank Digital Currencies

Many central banks are worried that changes in the use of money will make it more difficult for them to control the money supply in their nation. In response to these developments, they are establishing central bank digital currencies (CBDC).

Most CBDCs will be established by allowing people and businesses to open an account at the central bank (for example, the Reserve Bank of New Zealand here, or the Bank of England in the UK). People could get their wages or salary paid into this account. Using a digital wallet of some kind, they can also use the digital currency to make or receive payments when buying or selling, in the same way as they now use debit or credit cards.

The digital wallet could be an electronic card or other portable token, but these would not be very secure. Most people and businesses would be more likely to use an app on a smartphone to make economic transactions with money in their digital account at the central bank of their nation. They mostly know how to keep their phones secure, so this should be safe.

At this stage, it is unclear how great the demand for central bank digital currencies will be. From what I have read, the experts in the central banks developing these currencies are not sure that people and businesses will use the digital currency they create. Many will prefer to continue using the payment services and bank accounts provided by their existing retail bank. There might be a lack of trust in a service provided by the government. (I note from the discussion papers issued by the Reserve Bank of New Zealand that they don’t seem to be very enthusiastic about a CBDC. They seem to be uncertain if there would be widespread take-up).

Some nations are establishing a CBDC to facilitate international transactions for people who are travelling, or businesses trading with businesses in other countries. If a CBDC makes international transactions simpler and cheaper than the service offered by existing banks and credit card companies, they are more likely to switch to using it.

CBDCs are the fastest and easiest way for nations wanting to use their own currencies when conducting international trade to operate currency swaps. These swaps will become more important because they eliminate the need to hold reserves of currencies that a nation uses for trade.

Payment Service Only
Most central banks seem to be planning to limit their CBDC offering to a payments service. They are not planning to provide all the other services that are typically offered by retail banks. The transactions account they are offering will be like a cheque account that does not pay interest, but can be used to make payments to other people and businesses. Most central banks do not intend to get into competition with retail banks by offering to pay interest on deposits. If they offered interest returns that are greater than those offered by retail banks, the flow of money into the CBDC would increase significantly.

Most of the accounts at the central bank will not provide overdrafts, mortgage-based loans, business loans, seasonal finance or insurance services. This means that most people and businesses will have to maintain their relationship with their existing retail bank. That would change dramatically if the central bank offered loans that are cheaper and easier to access than those offered by retail banks.

If there is uncertainty about the stability of a retail bank, causing depositors to fear a bank run, they might believe that their money is safer as a CBDC in their account at the central bank. However, if the government is guaranteeing deposits in the retail banks, then this advantage might not exist.

I will look at the problems with CBDCs in my next post

Money Developments (4) Cryptocurrencies

A big development over the last few decades is the emergency of cryptocurrencies. The main feature of these is that they are created without any involvement of a government, so they cannot be traced or controlled by governments. The best-known cryptocurrency is Bitcoin. It uses a technology called Blockchain to record transactions.

Bitcoin is a digital currency that operates free of any central control or the oversight of banks or governments. Instead, it relies on peer-to-peer software and cryptography. A public ledger records all Bitcoin transactions, and copies of it are held on computers around the world. Anyone with a spare computer can set up one of these servers, known as a node. Every transaction is publicly broadcast to the network. Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank.

In much the same way you would keep traditional coins in a physical wallet, virtual currencies are held in digital wallets and can be accessed from client software or a range of online and hardware tools. A private Bitcoin key is a 64-character string of letters and numbers. It might look something like this: E9873D79C6D87DC0FB6A5778633389F4462313303DA61F20BD67FC233AA. Most of us could not remember a number like that, so would have to record it in some way. Owners of Bitcoin addresses are not explicitly identified, but all transactions are public.

A cryptocurrency like Bitcoin has numerous benefits.

• Financial transfers between two accounts are fast.
• International transfers are a lot cheaper than using banks.
• The Bitcoin ledger is public; anybody can store it on a computer.
• Bitcoin is pseudonymous because funds are not tied to real-world entities but to Bitcoin addresses.
• Bitcoin is decentralized, so it does not have a central controlling authority.
• The Bitcoin network is peer-to-peer, so it does not have central servers that can be hacked.
• Anybody can send a transaction to the network without needing any approval; the network merely confirms that the transaction is legitimate. 
• Buying and selling is as simple as scanning a QR code and sending an email.
• The additions to the ledger are maintained through competition. 
• The issuance of new bitcoins is decentralized via an electronic mining process.

There are some problems with cryptocurrencies.

• Users of a cryptocurrency must keep their address key secret. If they lose it, it cannot be recovered. If someone steals it, they have access to all their victims’ Bitcoin. Tools are available for storing an address key, but the process depends on users being diligent.

• A growing economy needs a growing supply of currency. The electronic process for generating new Bitcoin mimics the process for mining gold. New bitcoins are generated in a process that those who do the most work get the most new bitcoins.

• The process for generating new Bitcoin is very energy intensive.

• The changing relationship between supply and demand for Bitcoin caused the price to increase dramatically when it was first introduced. Many people saw it as an investment that could produce rapid returns. These people did very well in the early days, but more recently, the value of Bitcoin has dropped significantly.

• Many people have invested in companies promising to make cryptocurrency easier to use. Unfortunately, these companies have carried all the usual risks, because they are usually controlled by a few people, eliminating the distributed security provided by the cryptocurrency. Many investors have got into financial trouble and lost their wealth. The best-known example is perhaps FTX, which operated a cryptocurrency exchange and crypto hedge fund. It eventually went bankrupt.

• Price fluctuations can be a problem for some uses. A stablecoin is a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset such as the US dollar. They have been developed to provide stability, long-term purchasing power and the predictability of a fiat currency along with the benefits of cryptocurrencies. Unfortunately, many companies that have developed a product and called it a stablecoin have crashed to zero due to inadequate design, inadequate collateral or bad management. The stablecoin with the highest market capitalization value is Tether, which is pegged to the U.S. dollar as its fiat-backed currency.

If Christians are worried about being persecuted by their government and losing their ability to buy and sell (I am not currently in that situation), cryptocurrency is a practical option. However, they should be careful about a couple of the problems.

• Christians holding a cryptocurrency for security reasons should not expect to make massive returns. If they are holding to ensure they can buy and sell when they want to, this should not matter to them. The value of their account will go up and down, but they will have the benefit of always being able to spend it when they choose. This problem is unavoidable, as notes and coins also lose value with inflation.

• Christians should probably buy the cryptocurrency themselves rather than relying on companies that buy them on their behalf. These companies are only as good as the people who run them, so they cannot provide real security. If Christians purchase a stablecoin to gain the benefit of price stability, they should monitor its financial viability very carefully.

Money Developments (3) Private Payment Methods

In the last few decades, a range of new tools for making payments when buying products have been developed. These have changed the way that we buy and sell. Many of these options allow people to borrow money to pay for their purchases.

• Credit Cards are the best-established and most widely accepted method for making payments by carrying a small plastic card. Many people are content to pay a fee to their credit card company for the benefit of paying for goods and services all over the world. Credit cards allow people to buy on credit, but their interest charges are high.

• PayPal is a multinational financial technology company that operates an online payments system in a large number of countries. It provides an electronic alternative to traditional paper methods such as checks and money orders. The company operates as a payment processor for online vendors, auction sites and many other commercial users, for which it charges a fee.

• Smartphones are already being used for buying and selling using NFC (Near-field Communication) or QR codes in many parts of Asia and Africa. In China, most people don’t have credit cards, so phone payments are more common. WeChat Pay has become a part of daily life.

  With WeChat Pay enabled on a mobile phone, users can make transaction payments anywhere. It is supported almost everywhere, such as in ordering taxis, supermarkets, and hospitals. In the largest cities, residents pay, on average, 80% of their monthly expenditures through mobile payment services, while in smaller cities, residents use these means for 90% of their monthly expenditures.

  In Africa, the use of smartphones for buying and selling is growing rapidly. It is making it easier for people to operate businesses and start new ones. M-PESA is Africa's most successful mobile money service. Making payments with a smartphone is far more secure than carrying around wads of cash, so it is facilitating economic development. For example, Somalia is an impoverished, war-torn country, yet 70% of adult Somalis use mobile money services regularly.

  Most of the mobile payment systems in Africa and Asia are operated by companies. Of course, governments can intervene and prevent people from trading if they choose, regardless of what payment method is used. They can also confiscate cash if they choose.

• GooglePay and ApplePay are payment systems operated by two of the largest multinational information technology companies in the world. People are using them to make payments from their bank accounts or credit card accounts with their phones, often with NFC technology.