FedCoin is like Bitcoin’s evil twin
That is what I wrote on these pages in October 2020.
I was reacting to the news that China’s central bank was giving away millions of dollars worth of digital cash.
It was part of the pilot program for a digital-only version of China’s currency – the digital renminbi or e-RMB.
This new form of money – known as a central bank digital currency (CBDC) – will eventually replace physical cash.
And I warned that China’s program was “part of a worldwide race among central bankers to issue digital-only currencies.”
Well now that race is heating up.
Today, more than 100 countries have CBDCs in research or development stages.
And the United States is one of them.
Today I want to pull back the curtain on how two of America’s most elite institutions have come together to lay the foundation for an American CBDC… what we’ve dubbed FedCoin here at Cut.
We’ll also look at how this new type of money differs from dollars in circulation today… why it will wipe out what’s left of your financial privacy… and what you can do about it.
It is a joint venture between the US Federal Reserve and an MIT group called the Digital Currencies Initiative.
Don’t worry if you’ve never heard of it. Most people don’t have…
If you search for it on Google News (as I did this morning), the first mention of it is halfway down the other page.
But it is one of the most consequential projects in the US today.
It marks the start of the biggest change in our monetary system since President Nixon ended the gold backing of the dollar in 1971.
It will use a digital ledger like bitcoins to track transactions.
And you’ll store, exchange and trade FedCoin like you do crypto today – on a wallet app on your smartphone.
But that’s as far as the similarities go.
Bitcoin is decentralized. No government or central bank has control over it. FedCoin, on the other hand, will further centralize power at the Fed.
My colleague Jeff Brown has been following this development closely.
He is best known as our technology expert at Legacy Research. But he is also a member of the Chamber of Digital Commerce. And he has advised lawmakers on Capitol Hill about CBDC.
Here’s what he reported back to his readers…
CBDCs will be similar in some superficial ways to bitcoin and other cryptocurrencies. But the Fed will still be in control. So can expect it to keep the digital printing press warm.
The Fed will even invent new ways of conducting monetary policy. It will be able to deposit money – via “airdrops” – into the digital wallet apps on our phones.
This will replace the more cumbersome method of mailing physical checks. As you recall, that’s what President Trump had to do during the pandemic. And that delayed his stimulation efforts.
And the powers FedCoin will give Washington bureaucrats don’t stop there. Jeff again…
CBDCs will be programmable using “smart contracts.” This makes negative interest rates possible. The Fed can deduct interest from our wallet every month.
Plus the tax man must be foaming at the mouth. FedCoin allows the IRS to directly track and tax every transaction you make. That is why the Chinese central bank is also rolling out a CBDC. In a world where all transactions are digital, all transactions leave a digital record.
But with FedCoin, all your purchases will be visible – even the most sensitive ones.
It can expose you to significant risk. Jeff again…
Imagine you have a health problem… maybe an embarrassing one. When you buy medication to treat it, the government will know. It can lead to increased insurance costs…even reduced coverage.
It is wrong to force citizens to register their transactions with the government. It may even be a violation of the Fourth Amendment, which states that the government must obtain a warrant before conducting a search. In this case, it would be searching through your financial records without a warrant.
That brings us to the second most radical thing about this new kind of money.
Right now, only commercial banks have accounts with the Fed. These are called reserve accounts.
But you or I cannot have a reserve account at the Fed. We can only bank with commercial banks.
With a CBDC, that changes.
For the first time, central banks will be able to issue cash directly to the public … strengthening the traditional role of commercial banks.
Central banks say the main driver behind CBDCs is convenience. But they really are a raw power take-off. They give the Fed and other central banks a much stronger lock on the monetary system.
Millions of Americans will be happy to use FedCoin…regardless of the invasion of their privacy.
And the Fed can offer incentives to people who switch from physical money to FedCoin.
That is what is happening in Jamaica. The government there is offering $16 free to the first 100,000 people who use the CBDC, Jam-Dex.
When the Fed rolls out its CBDC, my strong recommendation is to steer clear… unless you want to become part of the Fed’s vast digital dragnet.
Of course the Treasury could stop printing dollar bills and minting coins… slam the door on this escape route.
They both offer a higher level of privacy than FedCoin. So they are attractive options for at least some of your cash needs.
Bitcoin has sky-high volatility… and it still hasn’t gone mainstream. But our other go-to crypto expert here at Legacy, Teeka Tiwari, says the rise of CBDCs could speed up this process.
Some people worry that CBDCs will replace bitcoin. But I think the opposite will be true. They will make bitcoin and other cryptocurrencies more attractive… and therefore more valuable.
Cryptos give users greater anonymity. You also have bitcoin scarcity – a hard cap of 21 million coins. You won’t want that with CBDCs. There will still be a central bank that can fiddle with interest rates and balloon the money supply, inflating your wealth.
Regulators think, “We can kill the private crypto market by creating our own digital currencies.” But my call is that it will expand the crypto market, not shrink it.
This massive shift in money will have profound consequences for the economy and for society…just as the shift from gold-backed money to fiat money did half a century ago.
So expect to hear more from us about what’s going on in future updates.
Greeting
Chris Lowe
Editor, The Daily Cut
