Sovereign Digital Currency: Taking the Bankers Out of Banking
Could true monetary freedom be a few lines of code away?
Money
There is nothing quite like money. We use it constantly and often mindlessly. Money is kind of like a frog in science class.
Accept it at face value and it hops along just fine. Take it apart to see how it works and things get messy fast.
As I mentioned in last week’s article, when it comes to money, especially currency, few things cause more alarm than a central bank digital currency (CBDC).
Rightfully so. CBDCs, as most envision them, simply remove cash. Once cash is removed, as the logic goes, then Big Brother can enforce all manner of draconian practices against us.
Social credit scores, carbon scores, monitoring or restriction of certain purchases or transactions, to name just a few. Given the history of governments over the last few thousand years, it’s a reasonable fear.
However, the United States was born out of frustration with the abuses of the so-called “ruling” class. At its core, the United States laid down a set of rules that recognise inalienable rights.
Life, liberty and the pursuit of happiness is the nut-shell version. The more thorough one says government authority is delegated and restrained, with ultimate authority residing within the population writ large.
It’s important we remember that. Especially when it comes to our money.
Sovereignty
The concept of a “sovereign nation” is relatively recent. Prior to the Peace of Westphalia in 1648, there were no “nations” as we think of them today.
Post-agricultural Western European governance essentially evolved from roving bands of thugs creating protection rackets. Big, strong men would band together and pillage their way through the world.
Sometimes these thugs would fight each other over who got to pillage which place. Much like street gangs today, they’d lay claim to an area and defend it with force.
Within their area, they could extort and pillage as much as they wanted. Drift into another gang’s territory and they’d be met with violence.
If they were stronger, they’d claim that territory to increase their ability to extort and pillage. If they were weaker, then the other gang got to expand instead.
On and on it went until a rough equilibrium of force was reached. Smaller gangs got gobbled up into bigger gangs. Hierarchies formed. Territories expanded.
After a thousand years of refinement, what started out as simple thuggery has morphed into our modern concept of the nation state. The sole thing that makes a nation “sovereign” is the authority to coercively use force within their sphere of influence.
Modernly, the use of coercive force absent a “sovereign” designation is universally a crime. Meaning, I can’t legally force you to pay me a tax, nor can I force you to do labor for me.
In all cases, and in all countries, that power is solely reserved for the sovereign ruler, whether they be a king, a queen, or an elected body. What the Treaty of Westphalia did was bring all the gangs together, so they could hash out who “owned” what territory.
Territory, within which they, and only they, could force people to do things against their will.
What’s this have to do with money?
Everything.
Tax
People define “money” all kinds of ways. Unit of account. Store of value. Medium of exchange. All definitions work to some degree.
The trouble is, none of them capture what money is for. Yes, money is used for those things. But, that’s not the reason it’s there.
The reason money exists in the form we use it today is sovereign force through taxation. Put another way, if we trace back to the roving gangs in pre-Medieval Europe, they would simply go into a village and steal what they want.
However, once the “gang” got bigger and bigger, they ran into a storage problem. Everybody in the gang expects to get paid. If it’s just 10 or 15 people, then dividing up the spoils is pretty easy.
But, what happens when there are thousands of gang members? If they go collect their “tax” in chickens, pigs and corn, they’ll have a ton of stuff right now, but what they don’t use immediately will either spoil or go to waste.
How do you get around that?
Money.
As an enterprising gang leader (king), what you do is tell all your “subjects” they have to pay tax with money that you create. Now, instead of coughing up a chicken, your subjects have to figure out how to get money.
Meanwhile, since you have a monopoly on the use of force, you can also make them accept money from all your other subjects. This is a “legal tender” law.
The effect is:
- They have to use your money to pay you; and
- They have to accept your money as payment for everything.
The way they get money is by trading their time, labor, and/or resources in exchange for the money you created. One of the problems with this scheme is counterfeiting.
If your sovereign issued money is easily counterfeited, then the whole racket falls apart. Which is why gold and silver were so commonly used early on.
Gold and silver can be reliably assayed. It is inconvenient to assay a metal, but it is easy enough to tell if someone is tinkering with your money at scale.
Likewise, gold and silver already had a long history of perceived value. Put together, little coins made out of gold and silver became a great way to loot your population without having to store all the stuff you took.
Moreover, it gave you, the sovereign, the ability to get stuff from your population when you need it.
Neat trick, eh?
Once that system was in place, then naturally money was used to exchange goods and services. Likewise, saving, lending and borrowing money starts to make sense.
But, at the end of the day, the purpose money serves is to extract value from a population. The accounting, exchanging, and storing aspect of money all came after the true purpose of money, which is sovereign taxation.
Fiat money
Using gold and silver as money is problematic. While it has an intrinsic value, it can also be faked. It’s hard to carry and store. It’s hard to fraction out.
It is also limited by how much has been extracted and refined from the ground. If you want to increase how much gold or silver you have, you either need to find more and then mine and refine it, or you have to go get some from someone else that already has it.
Sovereigns are universally bad at managing money. The trouble is, people are involved. And, whenever people are involved, they tend to do dumb things, like spend too much money.
Even when silver and gold were money, it didn’t stop the sovereign from spending too much. What they’d do is spend too much and then debase their currency by mixing in pot metals, or by reducing the weight of the coins.
This way, they could make it appear as though they had more money than they really did. It’s counterfeiting if anyone else does it. But, since the sovereign is the only one that can use force, who’s going to stop them?
Nevertheless, their counterfeiting would work for a very short time. At least until everyone figured it out, that is. Then their subjects would save the old, more valuable coins, and use the new crappy ones to pay taxes and buy stuff.
Paper promissory notes became a way for the sovereign to more easily debase their currency. The way the hustle works is, the sovereign says, “Hey subjects, now instead of gold and silver, you have to use these little pieces of paper instead. Each piece of paper is worth X amount in gold or silver. I promise.”
Then, so long as everyone doesn’t try to cash in at once, the sovereign suddenly has the ability to “make” money without having to go through all the trouble of finding, mining, refining, or stealing more gold and silver.
Funny thing was, all the nation-state gangs were doing the same thing. And, they were all trading with each other across borders. Since they’re all thugs at heart, they (of course) all start trying to cheat each other by spending more than they actually have.
The cheating and manipulation of currencies by sovereigns internally and externally eventually made the system break down. Sometimes it was limited to just a couple of countries.
Sometimes it spread much further, often with terrible consequences, like global conflict.
The last vestige of gold backed currency was during the Bretton-Woods era, with the United States serving as the backbone of the system. But, much like their thug predecessors, they spent too much money.
Instead of making it right, they rug-pulled the world in 1970 and went with unbacked paper money instead. It’s been a disaster for us “subjects” ever since.
See:
CBDC vs SDC
Thing is, managing a money supply is hard. There are just too many incentives to cheat, manipulate, over-spend and steal money. Moreover, as mentioned above, the people involved tend to make dumb decisions.
The incentive to maintain fiscal prudence and be a good steward of money is indirect. The benefits of sound monetary policy accrues over generations and demands, at a minimum, delaying gratification.
Politics demands action now. Kicking the can down the road is easy. Explaining why we shouldn’t kick the can down the road is hard.
So, everyone kicks the can down the road.
It’s human nature.
And, that’s precisely why a CBDC is a terrible idea. All a CBDC will do is make it even easier for the same dumb people that have been making dumb decisions all along to cheat, manipulate, over-spend and steal money.
It doesn’t have to be that way.
While we may have forgotten it, here in the United States, We, the People still have ultimate authority over the sovereign. Our sovereign power is voluntarily delegated to politicians, based on an agreement (The Constitution) that tells politicians what they can and cannot do.
That includes monetary policy.
Here’s a great graphic showing the entities involved in administrating the US money market fund ecosystem:
All of those operations are governed by rules. The two hiccups there are right at the root of the chain: The Federal Reserve and The US Treasury.
A group of humans at the Fed and the Treasury hold the levers that dictate monetary policy in the United States. And, they are human. They do dumb things, just like every other human that has tried to wield the levers of sovereign monetary policy.
These two groups are (ostensibly) controlled by another group of humans in Congress and the Senate. Guess what? They too are human and do dumb things, like spend too much money.
But, what if there was a way to set monetary policy in stone? A monetary policy where dumb humans can’t get their greedy, grubby, short-sighted, can-kicking little mitts on the levers to begin with?
A monetary policy where dumb humans in Congress and the Senate can’t make endless promises in exchange for votes to stay in power? One, where the government is truly constrained in what they can do.
One where bureaucrats can’t debase currency for short term gains. One where bankers can’t be bailed out. One where unfunded liabilities can’t exist.
One where taxes are fairly assessed and collected. One where corporations have no financial privacy, but everyday citizens do. One where it requires a warrant to investigate suspected criminal activity and the un-masking of transactions.
A monetary policy that eliminates human decisions in lending and borrowing. A monetary policy that demands fiscal restraint. A monetary policy that can’t be co-opted to bail out insolvents, fund endless wars, pay for nonsense research, or any other waste of taxpayer money.
Imagine a monetary policy that had all the rules hard-coded into the protocol, with legal authority embedded in the US Constitution (via Amendment), and the requirement of a two-thirds majority to change it.
Wouldn’t that be swell?
Sovereign Digital Currency
We have the technology to do that right now.
It’s not a far-fetched, future possibility. It’s something that could be done immediately. Crypto and blockchain technology have already demonstrated the viability of automated financial systems.
For example, FRAX Finance:
All of those operations you see above are governed completely on-chain, autonomously, with no human intervention.
The code is publicly available for anyone to audit. There are no dumb humans making decisions about who gets a bailout and who doesn’t. There are no dumb humans that can magically “print” more FRAX out of thin air.
The entire ecosystem is governed by code. And, FRAX is essentially performing all of the essential operations of a central bank, a commercial bank, and a retail bank autonomously on-chain.
If done well, a Sovereign Digital Currency could do much the same at the national level. Meaning, a SDC could literally take the bankers out of banking.
While “they” push their CBDC, “they” also envision themselves at the centre of that digital universe. But, “they” don’t have the final say in the matter.
We do.
And, we should absolutely demand a SDC that works for us. We don’t have to roll over and accept the status quo. We also must recognise that we live in a world governed by sovereign authority.
Done well, a sovereign is a good thing.
It provides a neutral forum for dispute resolution. It undertakes the national defense. It provides public infrastructure. It provides (or should, anyway) a sound monetary system to facilitate the free exchange of goods and services.
The power to print money is the power to control. A sovereign digital currency could return that control back to the people, where it belongs.
Of course, those who are already in power will do everything they can to stop something like that. They will lie, cheat, obfuscate, threaten, and cajole.
What we have to remember is, it’s not up to “them.” It’s up to us. We decide how monetary policy should be set. And, right now, we can clearly see “they” have been catastrophically failing at setting monetary policy since 1648.
They’ve literally never gotten it right.
For the first time in the history of the world, we have an opportunity to change that. There are thousands of blockchain engineers that could turn that opportunity into a reality right now.
We just have to flex our political will to make sure it happens.
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
