The world's monetary authorities harbor "digital currency" ambitions even at the cost of restricting individual choice - why Bitcoin matters for "protecting individual freedom"

Six months after it was announced, the report on a central bank digital currency (CBDC) from the U.S. Federal Reserve (Fed) has finally been made public.

Exactly what CBDC means differs greatly depending on which institution is speaking. But there is no disagreement about the forecast that once central banks, in an age when virtual assets are proliferating, issue stable and trustworthy digital currencies, cryptocurrencies such as Bitcoin will be swept away en masse.

Yet in the Fed's report, the words "virtual currency," "distributed ledger," and "blockchain" scarcely appear at all. It is also striking that, unlike the CBDC research and review reports produced so far by various institutions, it offers no adequate explanation of the technical characteristics and architecture of a dollar CBDC.

In other words, this lends weight to the hypothesis that the dollar CBDC is not a response to the emergence of Bitcoin, blockchain, and cryptocurrency, but a project that has been proceeding quite independently of them.

The ambition of the world's monetary authorities

James Rickards, a financial analyst who, drawing on his experience at Long-Term Capital Management (LTCM), has sharply diagnosed the problems of today's global financial elite and of the monetary system, warned in his book "The Road to Ruin" (published in Korea as "The Day the Banks Stop") of the ambition of the world's monetary authorities to do away with paper money.

As he points out, the dollar CBDC may well be part of a long-standing plan to abolish paper money and render all assets electronic. If it is not, it is hard to find any reason a dollar CBDC needs to be created at all. As the report itself acknowledges, the monetary system is already electronic to a considerable degree.

When the Fed issues dollars, the proportion printed as paper and scattered into circulation is not high. A substantial share of base money is credited in electronic form to the accounts of commercial banks. This means a dollar CBDC cannot dramatically improve the convenience of electronic money. On top of that, a CBDC delivers a shock to commercial banks.

The portion of the report given the largest share of space is precisely the concern that the system of cooperation with commercial banks could be damaged. According to the CBDC report issued by Australia's central bank, more than 60 percent of the deposit assets of Australian banks are short-term deposits.

That is, if the central bank issues an electronic currency, a substantial portion of commercial banks' demand deposits will disappear. A banking license can be described as the privilege of exclusively earning the interest-rate spread by lending out long-term the short-term deposits that customers have entrusted to the bank. This rests on the experience that customers do not all withdraw their money at once, and commercial banks have supplied the market with far more liquidity than base money.

But when a credit crisis comes, customers stop trusting banks and line up to withdraw their deposits - a bank run. The central bank was established precisely in order to rescue commercial banks in such a crisis by supplying virtually unlimited credit.

Yet if the central bank issues a CBDC and supplies digital currency to the public, people will not want to deposit at a bank, for the sake of a trifling amount of interest, a dollar CBDC that is already electronic money. In other words, the central bank - established to rescue commercial banks from crisis - ends up facing the self-contradiction of tearing out one of the pillars of commercial banking.

The Fed's CBDC report showed no appetite for using blockchain or cryptographic technology. This is an important enough matter that it must be taken as a premise whenever the dollar CBDC is discussed from now on. The innovation of Bitcoin lies in the fact that it is a trustworthy digital means of payment that does not require verifying the identity of the coin's owner.

The reason outstanding minds gathered so passionately around the small community of the early days was that they marveled at a technology for sending money like e-mail. At that time the internet already had access to a variety of payment methods - not only Visa and Mastercard but online banking, mobile payments, and more. Which is to say that the problem Bitcoin solves was not some "consumer inconvenience."

Until cryptocurrency appeared, the internet could not support micropayments. Micropayment is less a matter of the size of the sum than of whether digital content on the internet can be charged for on a per-item basis. To read a single webtoon or article, one had to sign up as a member, or pay a fee greater than the price of the content, or expose one's personal financial information.

There was no digital cash of the sort that lets a transaction be completed without identity verification - the way simply handing over paper money suffices when you buy a hot dog from a street cart. One reason internet companies such as Google and Naver grew so large is that reusing a platform that already holds all of your information was the simpler way to solve the payment problem.

Bitcoin and cryptocurrency, which demand no personal information while blocking counterfeiting at the root, can be called digital cash. But the dollar CBDC is not an electronic dollar. It is closer to a central bank account for individuals and businesses. Of course, since giving individuals accounts directly at the central bank is illegal under current law, the report leans toward an indirect system with wallet providers in between.

Whatever the design, a dollar CBDC authenticates the person. It can therefore capture every transaction record. Rather than mentioning this characteristic directly, the report emphasizes that it is a solution free of money-laundering problems.

For foreign individuals or businesses to hold America's high-powered money freely and directly would cause many problems under the current system. Yet the report does not even treat this as an issue. While explaining the advantage of lower fees than the current system when money crosses borders, it declines to take up the crucially important threat to the monetary sovereignty of individual countries.

This strongly implies a basic feature of the design: that only approved wallets will be able to send and receive the digital dollar, that is, the dollar CBDC. Foreign individuals and businesses will presumably be able to receive a wallet from the U.S. Fed only after passing a strict screening by their own governments.

Taken as a whole, the architecture of the dollar CBDC fits Rickards' inference about the monetary authorities' intent to abolish cash. So what is the intent behind abolishing cash?

The liquidity trap, and the sacrifice of privacy

According to Rickards, it is because digital assets are easier to control and adjust than cash assets. Rickards explains a sound macroeconomic reason why things cannot help but move in this direction: the liquidity trap.

The liquidity trap is a state in which economic agents lose their outlook on the market, so that even when the central bank supplies an enormous quantity of money they only save it rather than spend it. Since monetary policy does not work, John Maynard Keynes argued that fiscal policy - in which the government, as the largest consumer, directly creates consumption - is the appropriate remedy. But if economic agents hold their money in a digital form that the government can program, the liquidity trap can be overcome quite simply.

If individuals have no real alternative to holding dollar CBDC, then capping the amount and the ceiling they may hold, and applying a negative interest rate, leaves them no choice but to spend. Put simply, money that is not used gradually rots and loses its value.

As it happens, the Fed's CBDC report also mentions holding caps and differential interest rates, albeit in a different context. In any case, once economic agents come to use a digital currency issued by the central bank, the government can easily achieve its macroeconomic policy targets through fine-tuning.

Going a step further, since the places where the money may be spent can also be restricted, a producer deemed problematic could simply be expelled from the market. In other words, the dollar CBDC is useful less for the convenience of individuals than for expanding the government's policy discretion. But the price is the sacrifice of privacy, which may be called the foundation of freedom.

The report does mention the privacy problem as one issue among several, but offers no solution. Perhaps for that reason, politicians in the United States who obtained information about the report before it was released went so far as to propose legislation banning the issuance of a CBDC in order to protect personal privacy.

According to Rickards, ideas that would not be possible in normal times become possible amid upheavals such as the COVID-19 crisis or a financial crisis. In particular, he says, elites interested in expanding their policy discretion never miss the opportunity presented by a crisis in which the public wants a quick solution.

If that is how matters stand, the dollar CBDC premised in the Fed's report will never be able to replace Bitcoin.

On the contrary, the harder central banks push a digital currency designed to restrict individual choice, the more they will awaken us to history's invisible providence - that Bitcoin had to be invented first, in order to protect individual freedom in the coming metaverse era, when the digital sphere of life will occupy an absolutely dominant share.

Oh Tae-min, author of "Bitcoin Was Strong" and "The Genealogy of Bitcoin Wisdom"