FedCoin Is Like Bitcoin’s Evil Twin
That’s what I wrote in these pages in October 2020.
I was reacting to news that China’s central bank was giving away millions of dollars’ worth of digital cash.
It was part of 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.”
Now, the race is heating up.
Today, CBDCs are in various stages of development or research in more than 100 countries.
The U.S. is also one of them.
Today, I’ll pull back the curtain on a how two of America’s most elite institutions have teamed up to lay the foundation for a U.S. CBDC… what we’ve been calling FedCoin here at the Cut.
We’ll also look at how this new type of money is different from the dollars in circulation today… why it will obliterate what’s left of your financial privacy… and what you can do about it.
It’s a joint venture between the U.S. Federal Reserve and an MIT group called the Digital Currencies Initiative.
Don’t worry if you’ve never heard of it. Most people haven’t…
You can search it on Google News, like I did this morning. The first mention is about halfway down the second webpage.
But it’s one of the most consequential projects in the U.S. today.
This marks the beginning of the largest change in our money system since Nixon eliminated gold backing for the dollar in 1971.
It will use a digital ledger like bitcoin’s to track transactions.
And you’ll store, exchange, and transact with FedCoin like you do with cryptos today – on a wallet app on your smartphone.
But that’s as far as the similarities go.
Bitcoin is distributed. Bitcoin is decentralized. FedCoin, however, will further centralize the power at the Fed.
Jeff Brown, a coworker, has been watching these developments closely.
He’s best known as our tech expert at Legacy Research. But he’s also a member of the Chamber of Digital Commerce. And he’s been advising lawmakers on Capitol Hill about CBDCs.
Here’s what he reported back to his readers…
CBDCs will look a lot like bitcoin and other cryptocurrency. The Fed will retain control. You can also count on it to keep digital printing presses running.
The Fed may even come up with new ways to conduct monetary policies. It will be able to deposit funds – via “airdrops” – into the digital wallet apps on our phones.
This will replace traditional postal mail, which is cumbersome and slow. As you’ll recall that’s what President Trump had to do during the pandemic. It also delayed his stimulus efforts.
And the powers FedCoin will bestow on Washington bureaucrats don’t stop there. Jeff again…
CBDCs will be programmable using “smart contracts.” This makes negative interest rates possible. The Fed could take interest out of our pockets each month.
The taxman should be frothing at the mouth. FedCoin allows the IRS direct tracking and taxation of every transaction. That’s why the Chinese central bank is also rolling out a CBDC. All transactions must be recorded digitally in an era where everything is digital.
But with FedCoin, all your purchases will be visible – even your most sensitive ones.
You could be exposed to serious risks. Jeff again…
Imagine you have a health issue… maybe an embarrassing one. The government will find out if you have to buy medication to treat it. That could lead to increased insurance costs… even dropped coverage.
It’s wrong to force citizens to register their transactions with the government. It could be illegal to force citizens to register their transactions with the government. This is contrary even to the Fourth Amendment which requires the government get a warrant prior searching the area. This would mean that the government could search your financial records and not need a warrant.
We now reach the most radical part about this new kind of money.
At the moment, only commercial banks can have accounts with Fed. These are called reserve account.
But you or I can’t hold a reserve account with the Fed. We can only bank with commercial banks.
This can be changed by a CBDC.
For the first time, central banks will be able to issue cash directly to the public… and muscle in on commercial banks’ traditional role.
According to central banks, CBDCs are driven by convenience. But they’re really a raw power grab. They give the Fed, and other central banks, a stronger grip on the money system.
Millions of Americans will be happy using FedCoin… regardless of the intrusion on their privacy that involves.
People who convert from physical cash into FedCoin can get incentives from the Fed.
That’s what’s happening in Jamaica. Jamaican government offers $16 for the first 100,000 JamDex users who use the CBDC.
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 Department could stop printing dollar bills and minting coins… slamming the door shut on this escape route.
They offer more privacy than FedCoin. So, they’re attractive alternatives for at least some of your cash needs.
Bitcoin has sky-high volatility… and it still hasn’t gone mainstream. Teeka Tiwari, Legacy’s other crypto expert, believes that CBDCs will accelerate this process.
Some are concerned that CBDCs might replace bitcoin. However, I believe the contrary will be true. They’ll make bitcoin and other cryptocurrencies more attractive… and therefore more valuable.
Cryptocurrencies allow users to be anonymous. You also have scarcity with bitcoin – a hard cap of 21 million coins. You won’t have that with CBDCs. CBDCs won’t be the only way to get rich. There will always be a central banking that can adjust interest rates and pump up the money supply.
Regulators are thinking, “We can kill the market for private cryptos by creating our own digital-only currencies.” But my call is it will expand the crypto market, not shrink it.
This massive shift in money will have profound implications for the economy and for society… just like 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.
Editor, The Daily Cut