CBDC’s will kill crypto. And worse.

The jury is in, (always has been), digital fiat currencies are coming.

Cue a cacophony of ‘muh bullish for crypto’ across my timeline.

But is it tho (sic).

For purposes of discussion let’s concentrate on the US/Fed as the lead indicators of what to expect across the developed world.

Central banks have been interested in crypto for a long time, we’ve seen some occasional stern language from governments, vague threats of regulatory action and indeed some ICO wrists have been slapped but in context they have largely left us to get on with it. But at the same time more formal plans for the regulation of all aspects of this space are inexorably being drafted by governments and central banks across the globe and now being acted upon. What’s odd is that very few people in crypto seem to have taken on-board the enormity of this when coupled with the ongoing parallel grind towards CBDC’s, the two things are very related.

Maybe it’s because crypto seems like a such big deal now, indeed at time of writing the total crypto market cap is a whopping $354 billion, that’s a lot. And our feeds are filled with news of billion dollar crypto funds with every day bringing a multiplicity of project launches and positive building news, crypto is everywhere it seems, all of our friends are in it, number go up, crypto is huge.

Until you consider $354 billion is $50billion less than the 10th ranked pension scheme in the US. Just one pension scheme. Let that sink in.

But.. but.. microstrategy and square are buying, institutional money is here! Except they’re not, not really, not in any way that could be described as a meaningful. Square didn’t invest 15% of their balance sheet or even 5%, it was 1%. Like other ‘institutional investors’ all they have done is taken up a micro-hedge position on bitcoin that amounts to nothing more than a bit of diversified exposure at a time of unknown unknowns. As far as microstrategy, galaxy and other outlier hedge funds are concerned, they have taken very large bets on a single instrument and boy are they shilling their bags. Institutions don’t behave like this. And it’s not like we’ve not seen bets like this go pear-shaped before.

But back to the Fed’s interest in crypto, or should i say Blockchain, because the technology is the only thing they’re truly interested in and we open-sourced it for them. As far as i can tell the primary reason the Fed/US government has largely left crypto alone is because they have viewed it as one huge, privately funded testnet; a free incubator of innovation from which they can cherry pick the parts of most interest, explore what can be bent to their will and as a bonus they get to study all the projects and code that might be used to try and hide from them, devise strategic counter-measures and if that’s not possible then scheme regulatory devices to make the use of those projects so onerous that they would never achieve anything approaching meaningful adoption. And from a fiscal pov they’ve let us have our fun because our market cap is such a nothing-burger in their world that the benefits to them always far outweighed the costs. They are comfy af with where this is all at and well aware that if anything changed to where they were not they could always just pull the plug. Perhaps they could get Arthur to do it as part of his plea bargain.

Don’t think so? Not going to be able to police your VPN + anon wallet eh? Ok, forgetting the enormous advances in geo-fencing yet to come online consider this; what % of people would you say are law-abiding? I think very few would agree to a figure less than 90% and then consider what % of even the staunchest non-conformers do you think would be prepared to go down with the ship, to lose everything they had in crypto? Now extrapolate those numbers into what happens when you wake up one morning to find the US govt has announced a ban on the holding/trading of all non-regulated digital assets, that all US based exchanges must immediately cease and desist and that US citizens will have 30 days to sell said assets (or perhaps even exchange directly to fed-coin) and leave the system. Furthermore, that the holding/trading of any non-regulated digital assets after this date will be deemed a criminal offence. Whatever variation on this theme you prefer it doesn’t really matter, in all instances we arrive at the same place; the first domino is hit with such force as to set off a cascade event to end all cascade events, one which will effectively end the crypto-currency space as we know it. Crypto would survive but it would lurch from crisis to crisis, server to server, return to outlier status in greatly shrivelled form.

This of course is the nuclear option, I imagine it may will play out differently and they will simply stair-step up regulation to the point that the same ends are achieved. We’re already seeing this. (And if you don’t believe that take a trip to this excellent starter thread by the ever excellent @jchervinsky where he pulls together the very real tide of regulatory progress and planning that has taken place over the last 18months and that has gained real traction with lawmakers around the world — this is coming, be in no doubt). Jake Chervinsky on Twitter: “1/ There’s been so much regulatory & enforcement news in crypto lately, it’s impossible to keep up. So instead of getting lost in the details, let’s step back & consider the big picture. What’s really going on here? In short: an ideological war over self-custody & privacy. 👇” / Twitter

But to answer the question as to why would they do this, the initial & most simplistic answer is to be found in a better rhetoric question, why wouldn’t they do it. It’s what all powerful incumbents do when they move into a new space, whether they do it all at once or incrementally the motivation to do it remains the same and this is the US govt and the fed we’re talking about, do they strike you as sharers? of the money supply, it’s control and all of the domestic and geo-political power contained therein. Competing forms of digital currency? I think not. A world currency as competitor to USD, lol, not unless they and their pals are at the helm. Digital store of value, maybe but not without some ahem, changes.

Also, and it is an enormous also, it’s a matter of record how much national governments loathe cash, the grey economy, all those notes exchanged for goods and services they can’t tax, and what are those people even up to anyway, kek. They have been grinding against this for decades, first with banks and cheques and then plastic — so a central government issued digital currency would represent the holiest of holy grails in this fight. Hundreds of billions of additional tax revenue in a cashless society where the issuer of the only show in town knows at all times exactly who has how much, where it’s at and where it came from. All that juicy data written into their fully permissioned blockchain, their bespoke smart contracts, everyone fully KYC’d, every transaction requiring base AML, gotcha, thanks for the tech nerds, oh the irony, the thing which was meant to set us free fashioned to an infinitely more unpleasant prison.

Another enormous lure for governments and central bankers to roll out CBDC’s is the terrifying amount of control it would give them over intervening directly into the fiscal/monetary system. For instance quantitive easing in its current form just does not work, the economy is never stimulated and inflation never triggered because the money never reaches its intended targets. This is due to the nature of the system used to deploy it — the banks — as well as the fractious relationship with and caprice of, the banks themselves. Imagine if the fed could helicopter fiscal stimulus straight to your phone, wouldn’t that be something! Now imagine if the Fed told you on what and where it had to be redeemed, and how quickly, wouldn’t err that be something!

The possibilities for direct interference in the economy and in people’s lives are limitless through CBDC’s. The inimitable Raoul Pal touches on a lot of these points and others in this superbly informative thread, which i like to imagine he knocked out in about ten minutes flat whilst getting a footrub, meanwhile i’ve legit slaved over this for hours Raoul Pal on Twitter: “Important Thread: If you don’t think Central Bank Digital Currencies are coming, you are missing the big and important picture. This is going to be the biggest overhaul of the global financial system since Bretton Woods.” / Twitter

Additionally imagine when (not if) the fed needs to perform a currency devaluation, well how about you deposit one thousand of those stinky old paper greenbacks with us (no really you have ninety days or just use it as kindling) and we’ll credit your app or digital bank with nine-hundred and fifty shiny new digi-bucks, wow it’s magic!! Don’t forget to download your free sticker pack.

So, just a few of the reasons why this thing’s happening and there are more, there are so many more.

Where does this leave Bitcoin? Well thankfully for Raoul and his enormous bags, in a better position than most other coins. Bitcoin stands a racing chance of getting away with keeping, even fully realising, its status as digital gold. Hilariously it may well be the fact that it’s been so universally rubbish as a widely adopted payments system which helps save it, because those competing currency/payment coins aren’t going to fly in fed-land 2.0. But there’s going to have to be some changes. I’m deadly serious. You think the unrecorded storage of bitcoin in anonymous off-line ledgers is going to be sanctioned in this coming revolution? Well you might be able to keep them there, you just won’t ever be able to spend them within the sealed system. Which brings us back to the tidal wave of regulation gathering unseen far out at sea.

The only way bitcoin survives, indeed any current crypto-currency project survives in this brave new world is with the adoption of legacy market levels of transparency and regulation, period. Complete disclosure of all holdings/transactions to offset any inherent anonymity of the chain or personal custody devices. And it will be your exchanges and new wave of digital custodians that will be the gatekeepers. It will be law, they will have no choice but to comply. It may happen in stages with ever more regulation on KYC and AML and tax reporting and further aggressive attacks on exchanges domiciled in non-US territories and more aggressive prosecutions by the IRS and SEC but the end game is clear and it’s inevitable. I’m not sure many people picked up on what a big piece of news Kraken getting a US state banking licence was, that is to say of course people picked up on it but again it was universally read and reported as muh bullish for crypto. In my opinion it was anything but, what I saw was a crucial piece of evidence that a US based exchange having already seen the writing on the wall was hedging their future position to be an early provider of legacy regulation and structure for digital assets. Crypto will be making way for legacy much more than legacy will be making way for crypto — they have the numbers, they have all the numbers.

And take a look around, look at the players involved with bitcoin these days, the growing amounts of billions invested, it looks more and more like the corporate space every day, you think any of these entities will care about having to adopt the regulatory framework they know so well from the markets they themselves originated from? You think any of them are going to the wall on the principle of preserving your right to fiscal anonymity? There will be some pained wringing of hands for public consumption and talk of ‘this difficult period of transition’ but they will get on board in a heartbeat, they already are and let’s face it, it will be great for them as they already hold so much of the supply. And so bitcoin becomes a fully regulated and transparent legacy asset able to be prime-broked, ETFs granted. And it’s a decent bet someone like Kraken may become a big deal as a national digital bank of the future and a partner to the Fed, just like jp morgan did all the way back in the day. In short it’s full legacy rules lads or back to the dark web you go.

And to finish with where all this will start, regulation; If there’s one thing in crypto that has drawn central governments ire and regulatory focus more than (the threat they see presented by) stablecoins to national currencies it’s the existential threat they accord to privacy coins and frankly all privacy aspects of current crypto-currencies, boy do they not like this. Make no mistake privacy coins and monero in particular will be to this coming regulatory war what WMD’s were to desert storm; so when the rhetoric starts ramping up on those with examples of X paying Y in XMR to carry out Z atrocity or to hide millions of dollars from the IRS it’s time to pay attention. It will most likely start with something like this DOJ says use of privacy coins is ‘indicative of possible criminal conduct’ lol and keep ramping up. Using the worst case examples they can find or speculate about they will attempt to paint the entire space with a very stinky brush and the settlement price, if as per above — there is to be one, will be that those coins are immediately de-listed from centralised exchanges and all data handed over, with full and ongoing access/transparency to all wallet activity.

Welcome to the terrordome.