CBDCs v Crypto — The World is Getting Away from Centralization

The unfortunate, bloody and lingering conflict between Russia and Ukraine has revealed a lot of things in the political and financial…

The unfortunate, bloody and lingering conflict between Russia and Ukraine has revealed a lot of things in the political and financial world, not the least of which is the role and benefits of actual cryptocurrency versus the push for central bank digital currencies (CBDCs).

In a nutshell, central banks, regulators and governments would prefer CBDCs. Cynics in the industry think CBDCs are inevitable and that e-cash is “the best we’re gonna get” or can hope for.

But that doesn’t seem to be inevitable at all. In fact the opposite seems true.

We’ve mentioned before how cryptocurrency is moving into the mainstream, at least as an idea if not a vehicle, as evidenced by the Biden administration’s desire to explore a digital US dollar or those star-studded multimillion-dollar ads targeted at Joe Public in the Super Bowl. Government and corporate institutions want to quickly legitimize crypto in much the same way as stocks and bonds, but they seem to want to push more to a CBDC than actual cryptocurrency.

There is also the rise (and recent decline, looking at you Terra) of interest in “algorithmic stablecoins,” digital currencies that seek to establish and maintain a one-to-one relationship with traditional fiat currency.

We’ve talked about some of the basic benefits of cryptocurrency over CBDCs — decentralization, privacy and use as both currency and asset.

Leading Russian economist Sergey Glazyev, a former Kremlin advisor through the 2010s, and Minister in Charge of Integration and Macroeconomics of the Eurasia Economic Union, recently sat down for a remote Q&A with Unz Review, wherein he laid out what looks like a path away from CBDCs and towards proper cryptocurrency.

This is most notable because as his nation faces Western economic sanctions over the “Special Action” in Ukraine, Russia pivots, ducks and weaves like a professional boxer against an amateur, protecting their own assets and even setting conditions for their traditional currency, the ruble, to not only avoid being negatively impacted, but to emerge stronger than before the war began in February.

In fact it’s at a two-year high, leading to some of the most hilarious coping headlines from mainstream publications like Reuters as “Ruble’s Strength May Be Sign of Russia’s Weakness” and the like.

Russia’s resilience against Western economic sanctions wasn’t something ad hoc. Much of it has been Russia protecting its own assets through use of crypto, as well as more traditional maneuvers like tying the ruble to gas exports, agreements with China and India and so on. And at least part has been the ongoing transition Glazyev and the Astana Economic Forum have proposed to a global economic system based on dismantling the primacy of the dollar-based economic world order.

The first phase of the transition involved countries falling back on “using their national currencies and clearing mechanisms, backed by bilateral currency swaps,” Glazyev said.

This phase is almost over: after Russia’s reserves in dollars, euro, pound, and yen were “frozen,” it is unlikely that any sovereign country will continue accumulating reserves in these currencies. Their immediate replacement is national currencies and gold.

The second phase will involve new pricing mechanisms unmoored from the dollar. The third stage will be that aforementioned creation of a new digital payment currency that, by logical induction, would be unmoored form any central bank digital currency, but rather a cryptocurrency backed by a pool of currency reserves of BRICS (the non-Western bloc of nations primarily led by Brazil, Russia, India, and China), thus avoiding and undercutting a dollar-based CBDC.

The weight of each currency in the basket could be proportional to the GDP of each country (based on purchasing power parity, for example), its share in international trade, as well as the population and territory size of participating countries.

In short, a global, decentralized currency system that couldn’t be juked by politicians and antagonistic nation-states that could be used instead of gold, Glazyev said.

“A lot of effort is put in developing clearing mechanisms for national currency payments. In parallel, there is an ongoing effort to develop a digital non-banking payment system, which would be linked to gold and other exchange-traded commodities — ‘stablecoins.’”

Central banks will not like this. They see a threat from the decentralized character of cryptos based on blockchain technology which central banks cannot regulate and which enables private entities to float cryptos that can function as assets and money.

Cryptos which operate via the net can be banned only if all nations come together, and even then there are end-arounds. Tax haven nations could allow cryptos in defiance of the global agreement. They have been facilitating the flight of capital and general tax avoidance in spite of pressures from powerful nations.

The genie is out of the bottle. The total valuation of cryptos recently was upward of $2 trillion — more than the value of gold held globally.

CBDCs won’t solve this. In fact it becomes questionable who, exactly CBDCs would appeal to. One can imagine them being popular with the crowd who thinks of Facebook as the whole of the Internet.

It is the blockchain which enables crypto’s inherent decentralization. This seems to be core to where Glazyev sees things going. Central banks don’t want this.

Further, they would want a CBDC to be exclusively issued and controlled by them. For the CBDC to be in central control, solving the ‘double spending’ problem and being a crypto (not just a digital version of currency) seems impossible.

With global coordination an impossibility, changes forced by this recent global conflict and a move by most outside the West away from the dollar as the global strategic reserve currency, CBDCs seem to be at best an addendum for the convenience of consumers who don’t understand actual crypto, and at worst a holding or “us too” action for regulators and governments looking to somehow saddle a horse that can’t be broken.