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This is Breaking the Dollar.

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The podcast that dismantles some of the biggest misconceptions about money.

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Hello everyone and welcome back to another episode of Breaking the Dollar.

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As always, I'm your host Everett Milman and today we are tackling a cryptocurrency related

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topic that really strikes at the heart of what this podcast is supposed to be all about.

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The past, present, and future of money as we know it.

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We've covered past money like gold and the gold standard, present money like fiat currencies

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and future money such as cryptocurrencies.

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In this case, I'm talking about central bank digital currencies, better known as CBDCs.

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We'll cover exactly what CBDCs actually are, the latest developments in the space and what

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this innovation is supposed to be used for.

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So in past episodes, I've discussed the supposed death of cash and separately how

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cryptocurrencies work.

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CBDCs occupy somewhere at the intersection of these two topics.

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Central bank digital currencies are the culmination of years of governments and regulators observing

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the crypto space and sort of figuring out how to leverage this technology for their own

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purposes. The idea of a CBDC would be similar to existing stablecoin cryptocurrencies, for example,

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Tether. But they would be centrally controlled by the government.

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Each government that issues a currency could have its own CBDC.

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It would function as a fully digital version of their respective international currencies.

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A central bank digital currency would still be base money.

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In other words, it isn't credit and it isn't the same as the digital balance you see when

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you check your bank account online.

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Such an idea would essentially give every individual their own account at the Federal

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Reserve or whichever country's central bank we're talking about.

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Although there could be a more indirect version where third parties like banks or payment

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processors still serve as intermediaries.

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As of yet, government issued digital currencies may or may not incorporate a blockchain the

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way that most existing cryptocurrencies do.

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Norway is actually building its CBDC directly on the Ethereum network, choosing to use that

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blockchain and building upon its infrastructure rather than creating their own from scratch.

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Brazil's central bank has outlined a plan to do something very similar with a client

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on Ethereum. Again, in these early stages of development for central bank digital currencies, the blockchain

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aspect is apparently still seen as optional.

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Nonetheless, one can easily imagine that CBDCs will be able to implement crypto-like features

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that are monetary innovations.

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So in other words, innovations in the technology of money.

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So for instance, the Nigerian central bank's digital currency, called the E-Naira, is actually

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programmable.

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What that means is that it can function sort of like a virtual token would in a video

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game, except this is real money, in that the central bank, like a computer developer would

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for an in-game currency system, could program rules or characteristics into the digital money

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as they see fit or to achieve some certain ends.

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Some use cases or examples of use cases that have been mentioned by officials in the Nigerian

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government are to restrict what types of purchases or activities are done with social welfare

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payments or government subsidies to farmers.

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That would seem to solve most or perhaps all of the compliance problem in how government

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funds are spent.

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It would almost certainly do so far better than the use of government-issued debit cards

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or vouchers or other things that have been tried in the past, sort of the government coupons

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approach to public spending.

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CBDCs could pretty effectively replace all of them.

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There's a lot to say about the proposed benefits of CBDCs frankly.

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And on the whole, I'm mostly critical of them becoming a thing.

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I'm a critic of their implications or unintended consequences.

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I'll get to my thoughts on that soon.

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But there are some very clear and very cool benefits that the technology of CBDCs offer.

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There's a good reason that basically every government on the planet is studying and exploring

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CBDCs.

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By my most recent count, there was over 80 different countries, including virtually all

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of the G20 nations, the largest and most wealthy nations in the world.

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So we should stop and examine those positive reasons first before I get into the bad news.

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Another major use for CBDCs would be to more easily facilitate cross border money flows.

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That is the movement of capital across international boundaries, whether in trade or foreign

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investment. This is the main focus for the BRICS countries' interest in CBDCs.

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So to clarify, in case you're unfamiliar, BRICS is an acronym for the loose alliance

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between Brazil, Russia, India, China, and South Africa.

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They hold a summit each year where the leaders of those respective countries meet to discuss

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economic policies and align their strategies in trade and other matters.

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Again, it's somewhat loosely coordinated.

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It's not a binding relationship like the European Union or other super national organizations

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like the World Bank.

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BRICS is really more of just a trade bloc or a strategic partnership.

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But the BRICS have been in the news a lot lately because they might add a lot more members

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and they're the biggest competitor to what you might call the US-led international order

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and the US dollar's status as the world reserve currency.

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There's been a lot of discourse around and speculation about the BRICS countries sharing

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a CBDC.

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Some suggesting it would be backed by gold, but that's actually been outright denied by

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officials from several of the member countries.

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This year's BRICS summit is actually coming up in a few days at the time of recording.

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And despite some of the hype, it's exceedingly unlikely that a CBDC will be unveiled at this

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year's meeting. Let alone, a CBDC that is actually backed by gold.

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But the idea of a BRICS currency or a BRICS coin, if you will, does make some sense based

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on another possible capability of digital currencies, as it pertains to trade, which

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is the automatic tracking of data, economic data.

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This could vastly improve the quality and accuracy of all of that economic data, which

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addresses one of the largest problems in the field of economics.

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How do we truly measure all of the activities that people engage in that involve money changing

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hands? Sure, we have aggregate statistics like gross domestic product, GDP, and of course there

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are import and export numbers published by governments.

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But ultimately, these are all estimates or projections based on some raw data and a

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mathematical model.

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If CBDCs can provide a real-time record of all money flows, how the money was spent,

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etc., etc., then perhaps it could go a long way to solving the problem of economic measurement

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and thereby empower policymakers to adjust their policy tools and approaches in a much

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more granular way.

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Theoretically, an artificial intelligence or AI could even be trained to comb through

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the data and identify patterns that might be useful for perhaps supply chain management

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or trade negotiations or something like that.

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It really could revolutionize the way economics and trade work or even the way that money

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works.

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As cool as all of that sounds, it does lead directly to my main critique of CBDCs.

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If you're a skeptic by nature like I am, your mind may have already jumped to what I'm

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about to say.

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If digital currencies can be thoroughly tracked and programmed by the issuing government, then

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that opens the door for central banks and governments to engage in really severe financial

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surveillance and financial censorship.

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You could have all of your funds frozen or have specific transactions denied due to rules

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made by politicians.

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If we take this idea to its logical conclusion, virtually every totalitarian government policy

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you can imagine, at least with respect to money, could be automated into a digital currency.

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By some accounts, this sort of thing is already starting to happen in China, with the government

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either providing benefits or restricting privileges of its citizens based on their quote unquote

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social credit score.

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So on the one hand, there are all these really neat breakthroughs and handy features that

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digital currencies can and I think inevitably will offer.

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It simply seems like a matter of time.

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Now we are probably looking at a 5-7 year time frame for development, even as some countries

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such as Jamaica already have a CBDC in operation.

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Someone that I follow very closely online, John Paul Koning, writes an excellent blog

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about money called Moneyness and his most recent post suggests that CBDC adoption will

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only follow a slow and arduous path and it could come at a major cost of disrupting the

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status quo of the legacy banking system.

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So I don't imagine that government digital currencies will rapidly and easily become

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a thing in the US or Europe in the same way they've done in some smaller countries in

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the Caribbean for instance.

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But as I said, dozens of other countries are exploring CBDCs and it's not just some academic

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exercise. There are very good practical reasons why governments would want to leverage for themselves

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the new technologies and new capabilities that have come out of the crypto space.

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On the other hand, before we get to the point that CBDCs are fully incorporated into our

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monetary systems, we as citizens and consumers need to have this conversation about the potential

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for abuse that will come with central bank digital currencies.

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It brings up very fundamental concerns about privacy and liberty.

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How much control should a government have over its money?

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I don't necessarily mean how much de jure control, how much control it has by the letter

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of the law, but are more interested in how much de facto control a government could have.

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Left unchecked, there is no doubt that a CBDC would eventually be used for increasingly

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arbitrary or increasingly draconian forms of financial censorship, tracking, and just

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general invasions of privacy.

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The key point here is that there is still time for interested members of the public to advocate

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for some red lines to be created that will limit what kind of capabilities CBDCs will

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have, or at least impose limits on how those capabilities are used.

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The United States is a long way off from having its own digital dollar.

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The Treasury Department did recently roll out its FedNow instant payment system though.

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FedNow is supposed to facilitate real-time payments in a manner that's similar to apps

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you might be familiar with like CashApp or Zelle.

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I have to imagine the US government is specifically looking into how it can incorporate web-3

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innovations into future versions of the emerging FedNow platform.

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So that could be the marriage where we see a US CBDC spring from.

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But speaking of services like CashApp, there's also the tricky question about what CBDCs

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will mean for non-government-issued digital tokens.

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Now I'm not just talking about Bitcoin and Ethereum and cryptos more broadly.

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So for instance PayPal recently announced it's coming out with its own stablecoin.

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There are also reports that the website formerly known as Twitter wants to allow financial

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transactions to be settled natively on its app, which does seem to lend itself to the

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idea of a Twitter cryptocurrency or stablecoin.

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I guess I should say X cryptocurrency. For the record I will never get used to calling

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the company X. I'm just going to keep calling it Twitter so you know what I'm talking about.

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But PayPal and Twitter are pretty huge companies.

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So as CBDCs become a reality, could we see private enterprises compete with Uncle Sam

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and other governments for currency dominance?

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I do tend to doubt that, but it's still an open question.

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Obviously we will need more regulatory clarity from the Commodity Futures Trading Commission,

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the CFTC, the Securities and Exchange Commission, the SEC, and especially from the US Congress.

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Right now there is a stablecoin bill being debated in the House of Representatives, as

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well as the more comprehensive Lummis-Gillibrand bill that seeks to tackle the issue of how government

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agencies should treat cryptocurrencies.

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In general, other jurisdictions like the European Union and nations in the Caribbean

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have been more welcoming to crypto innovations thus far than lawmakers in America have.

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And to return to the BRICS alliance for a moment, these countries are much more amenable

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to the idea of ABDCs or asset-backed digital currencies that are actually backed by some

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tangible commodity like gold rather than a fiat currency.

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And again, to return to the Moneyness blog and be JP Koning for a moment, he provides

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some clear evidence that a transition to a CBDC will not be frictionless.

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And simply getting people to want and use it will be a hurdle unless the CBDC offers

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some kick-ass feature that your regular dollar simply doesn't.

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To reach that point, it's going to take time and research and development.

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Of course, like most anything else in the world these days, the central bank digital

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currency question has become inescapably political.

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At least three US presidential candidates have platforms in favor of cryptocurrencies.

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Robert F. Kennedy Jr. on the Democrat side and two candidates from here in Florida on

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the Republican side, Governor Ron DeSantis and Miami Mayor Francis Suarez.

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Now, none of them are really making crypto policy a central focus of their campaigns,

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except for perhaps Suarez because Miami and South Florida have molded themselves into

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the crypto capital of the United States.

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But both DeSantis and RFK Jr. have come out against the development of a CBDC in the United

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States. I believe if I'm not mistaken that DeSantis went as far as saying he would veto any legislation

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that establishes a CBDC and I believe Kennedy made the same promise.

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Again, it's not an issue that's going to sway the 2024 election.

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Maybe the 2028 election by the time we get there.

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But it is interesting that this issue has found its way into becoming a political position.

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So to wrap everything up here, there is obviously a lot happening and happening fairly quickly

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in the development of central bank digital currencies.

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I hope this has been a useful introduction to the topic for you.

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And if there's only one thing you take away from this, it's that we ought to be wary of

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the far-reaching powers a CBDC could afford government bureaucrats to monitor, manage,

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and circumscribe your financial freedoms.

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We still have time to build awareness and influence public opinion because as of now,

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the latest data from the IMF and the Cato Institute show that most people still really

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don't care about CBDCs yet.

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Among those who are even aware of what a CBDC is, more than half of the poll respondents

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expressed indifference about whether it would be a good thing or a bad thing.

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And as much as I think government digital currencies are inevitable, there's still time

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to mobilize public sentiment so that we don't end up with the worst of what CBDCs can do.

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Okay, so now we will reach into our mailbag and take a question from the audience.

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In this case, it is of course a digital mailbag as this comment appeared on the Gainesville

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Coins blog back in May.

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The question comes from Danielle and she says, hello, nice article.

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I found a 1955 wheat penny with a strike on top of the head and a double In God We Trust

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as well. I looked at it with my magnetic magnifying glass, but nothing on Google.

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Thanks. Great question, the most important thing to know about error coins, which is what this

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sounds like, Danielle, is that there are specific dates and varieties of the coin, which have

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been well documented and are pursued vigorously among collectors.

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So in this case, the 1955 Lincoln cent is well known to have a DDO or a double die

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obverse, which is an error where the details of the coin appear to look like they've been

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struck more than once, just slightly out of alignment.

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So the trick with error coins is determining if they're really an error or they simply

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suffered post-mint damage.

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If the mistake on the coin or the damage to the coin happened at the mint, as with the

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coin that has simply been struck incorrectly, then that's a legitimate error and it's highly

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collectible. But if the coin simply endures damage after leaving the mint, that is not considered an

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error coin and it's actually probably worthless.

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So yes, any 1955 penny with doubling should be submitted to a third-party grading service

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for authentication.

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Even in a rather poor condition, a 1955 DDO Lincoln cent is at least $1,000 coin.

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For a penny! So I absolutely recommend getting that coin professionally graded.

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The rest of you are always welcome to email your questions to me directly at everett.millman

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at GainesvilleCoins.com.

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Or like Danielle, you can just comment on an article on our blog and eventually I will

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see it and might feature in an episode.

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So thank you for listening and supporting the podcast and thank you to our sponsors at Gainesville

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Coins.

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Thank you so much for listening to this episode of Breaking the Dollar.

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