Central-Bank-Digital-CurrenciesHello,
Welcome to this analysis about Central-Bank-Digital-Currencies in which I will explore the ongoing process by central banks to generate Digital-Currencies that replicate the individual Fiat-Currency, its characteristics, its possible manifestations, and its differences to the classical cryptocurrencies we all know as Bitcoin or Ethereum created in the beginning.
Since Cryptocurrency was invented by the esteemed Satoshi Nakamoto publishing the open-source white-paper about Bitcoin as a completely decentralized Peer-To-Peer Digital-Currency which supply is limited and is generated through mining and the Proof-Of-Work concept many other decentralized cryptocurrencies emerged such as Ethereum or Litecoin that approved a secure and stable way of payment solutions operating within the determined blockchains. This completely new form of currency and the digital interface was watched by critics as well as supporters and a hype created with cryptocurrency enthusiasts accelerating the innovation process in cryptocurrency. On the other side, banks and governments watched the Cryptocurrency development not always with a non-critical eye, and especially in this process central banks took a greater study into the technology and the idea came into the foreground for digital currencies held and issued by the central banks that should replicate the real fiat-money which is printed by the central banks and distributed through commercial banks. The digital currencies that should be issued by the central banks became the name CBDC (Central-Bank-Digital-Currency) and today many countries' central banks started to work on pilot projects and prototypes to launch the digital replicate of fiat money, in some countries they are already launched and implemented in the economy.
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- Comparing The Classical Concept Of Cryptocurrency To The Central Bank Concept Of Digital-Currency
The main characteristics of the classical cryptocurrency like invented in 2009 are that it is decentralized and that its supply is limited while the bitcoins are generated through the mining process there can be no more than 21 Million Bitcoins at all that defines the value of Bitcoin as miners need to improve the technological alignments to rightly mine the Bitcoins and come up with a mining-revenue to keep the process ongoing. On the other side, there is fiat money which is printed in the central bank printing press and which supply can be multiplied by will especially in times of crisis as it was in the last year the money supply increased exponentially by the central banks, this has an inflationary character and comes up with many other issues as in times of crisis the central banks need to print always more and more money as before. Now the fiat money printed by the central banks is issued to commercial banks with zero interests at this time and from there is supplied to the merchants and persons who taking up credits and which account money is held in a bank account as a "digital back-up" by the printed fiat money, the tendency with this bank account money is also to be multiplied by the banks and moved around in the system to be taken for credits so that one holds money in an account while it is used for the other individual's credit. Now as the central banks working on the digital currencies to substitute the fiat money in circulation the biggest difference is that its supply is not limited like it is in Bitcoin or many other cryptocurrencies, as the central bank fiat money can be printed further this is also the case with the upcoming central-bank-digital-currencies. Besides that the central-bank-digital-currencies are not decentral because they are issued by a central authority like the central bank, the system on which the CBDC is settled can be decentral however on a broader scale it is still centralized by the individual central bank, there is still a difference if the CBDC model is indirect, direct or hybrid nevertheless it is always centralized as the intern blockchain is created by the certain central bank. Another factor is also privacy as the public Bitcoin blockchain does not store any private user information, depending on the model with a CBDC this can be very different as there is indeed the possibility that private user information is stored in the blockchain by the central bank. Taking all these assumptions into consideration it comes to the conclusion that CBDCs aren't the same as the classical cryptocurrencies in common sense, it is rather a system that replaces the fiat money with digital money and gives the central bank much better opportunities to handle, store and track it with a faster network and potential storage of data.
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- Examining Models On How Central-Bank-Digital-Currencies Can Function
With the gained assumptions it is important to note that there are different type models under which CBDCs can operate. Every model has its own characteristics and handles money circulation in an altered cycle. Besides that, the different models can have very different effects on the economy and especially on sectors like the banking industry or payment solution providers. Furthermore, the types on how payment data and information is stored differ within these models. It is highly necessary to recognize these concepts to assume how the CBDC infrastructure affects the economical landscape.
The Indirect CBDC Model
Within this model, the central bank keeps track records of wholesale accounts by the commercial bank as an intermediary between the central bank and the persons or merchants. The consumer as the person or merchant has a claim with the intermediary as the commercial bank and handles payments with the commercial bank. In this case, the intermediary handles all the communication with the consumer as retail clients and its net payment information, sending payment messages and storing the data. It would be a similar model to the actual credit distribution that exists with credits given by the central banks to commercial banks and from these distributed to the persons or merchants.
The Direct CBDC Model
The Direct CBDC Model functions differently from the Indirect one as the payments are handled directly between the central banks and the persons or merchants, in this case, receives, stores, and processes the information given by the consumer. This model is much more functional and practicable for the central bank as the commercial banks as intermediaries aren't necessary for the gateway. A full-scale implementation of this model will cause a higher decrease in commercial banks at all of which the sector already struggles, the model would further this process. The model would also set the central bank as the central authority handling all the payment relevant mechanisms with the consumer as persons or merchants.
The Hybrid CBDC Model
In this model the Persons or Merchants have a direct claim on the CBDC with the central bank while an intermediary, in this case, a PSP (Payment-Service-Provider) keeps track of the payments information and handles direct payments, the PSP in this case does not need to be a bank essentially. It is also integrated within that when technical issues come up with failures in the system that the central bank can handle direct payments with the consumers and restore retail balances. This system offers more flexibility at the cost of a more complex infrastructure to operate for the central bank. Besides that, it has a similar negative effect on the banks like the direct model as banks arent necessarily needed for the payment communication.
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It is not unlikely that the development of Central-Bank-Digital-Currencies will keep going within the upcoming times, therefore it is necessary to elevate how these diverging models can affect the actual economy. As many countries moving on with the projects and prosecution of CBDCs these will be realized in a more fulfilled way with a high possibility and it will be an important question on central banks will govern these CBDCs as they aren't decentralized like the cryptocurrency roots they can not be held as a direct comparison to these and are indeed a fiat money replication in digital terms, it will definitely open new doors for the central-banks money policy however what it has for effects on consumers as peoples or merchants is a serious examination.
Thank you, for watching, it was important for me to scrutinize the significance of Central-Bank-Digital-Currencies and elevate a perception to this omnipresent topic.
In this manner what do you have for an opinion of Central-Bank-Digital-Currencies implementation? Let us know in the comments below.
Information provided is only educational and should not be used to take action in the markets.
CBDC
Thoughts on the current environmentThese are my comments from some conversations I had and I hope you like it :)
It is a weird environment overall, as the market is pretty cheap, the derivatives markets are fairly well balance, on chain data & stablecoins paint a bullish picture for crypto... but in terms of TA and the overall psychology of the market, getting to anywhere between 20-28k & 1300-1700 at some point in 2022 is quite likely. I just have no idea when.
In late Jan around 37.5k and 2600 I turned bullish in the short term as the market showed strength, it was very cheap and sentiment was really bearish. We are at a fairly similar situation now, only that we did have the pump up to 46k. To me that was always the key point we'd have to retest and as that was hit, the next one is 24k. The same way we perfectly filled the 32-33k CME gap and bottomed, we are going for that one too. In the short term however I see similar dynamics as people are scared, the market is cheap and we are bouncing at support. The price action of both crypto and stocks is telling me that yesterday's bottom was at 'do or die' level which means we've either bottomed now or if we go below that we'd go much lower. Who knows, maybe it's just temporary relief and we could go up by another 3-7% before reversing lower.
In terms of the macro picture I think it is very unclear but also pretty clear. The global economy is turning into shit and tensions are rising. People aren't happy, be that inflation or mandates. To me unfortunately we will soon be reliving the period of 194x. Same way 1929 =2008, 1936-1938 = 2020-2022. Poor financial conditions have lead to the rise of authoritarianism, with governments scrambling to gain as much power, while people lose faith in them. There is too much debt and everyone is in a whole that is very hard to get out of. People are losing their minds and tensions then start to manifest internally and externally. Unfortunately history repeats itself and that's what we as traders/investors are doing, we need to learn from it as human beings are the same now as they were 10, 100, 1000, 10000 years ago. Nothing new under the sun.
Like Su Zhu said in a tweet the other day twitter.com . This is one of the best tweets I've ever read and I truly mean it. So if that's the period we are in, what do we do? What could come next?
Bond yields will go down in one way or another, while inflation stays high. For now we are at a point that bond yields are rising and have some room, until they come crashing down. The Fed will be forced to cut and to support the government. The Gov + Fed will have to do a lot of printing that will be met with very little resistance by the public. We'll be united against a common threat. And to be honest this is usually the only way out of this debt hole. Unfortunately a war and insane amount of currency debasement is the only politically viable way to reduce debt and do a reset. I hate the people who want to push for the 'great reset', but a reset is coming. It's a natural cycle, these always happen and they are usually not nice. But it's like the phoenix rising from its ashes. A rebirth.
Now when I say bond yields will have to go down, I think it will be a combination of the Fed trying to keep them low, but also people chasing the safest and most liquid instruments. Most people in such a period won't want to take risks. Low bond yields = not many opportunities anyways. So then we have high inflation + no opportunities + disruptions + tensions + less freedom and so on. So of course we are in the right market. If the physical world is suffering and there could be wars here and there (I have no idea at what scale), then the digital one should be booming. With sanctions and accounts getting frozen, while governments do insane amounts of QE, this is the place to be. Make no mistake, they will come after us to some extend at some point, but as long as we try to preserve some privacy and keep our coins/tokens in our wallets, we might be safe and able to go to locations that we can protect our wealth. Now the issue is, how do we get there? How do interest rates go down again and the bull market resume? Well to be honest I currently feel like we are somewhere in Q4 2019 - Q1 2020 or Q3-Q4 2018. We are close to having a last major leg down, before a major leg up. One catalyst (rate hikes, higher inflation, war), I don't know what... that will lead to the final shakeout which will trigger a huge monetary & fiscal response. This fractal I've mentioned on my previous ideas is what I still expect. twitter.com
This is great, but I completely disagree with one part: 'it is unwise to assume that Central banks will respond with more stimulus if inflation is rising'. At the current environment I am a disinflationist, but at the end of the day I know they will have to print. In the past it was banks that printed, but since 2008 banks aren't creating much money... The worse things get, they more risk averse they become. Now we are in a situation that is nowhere near like 1987, but more like 1940s and it something Lyn Alden has been talking about for quite some time. There are big differences from then to now of course, but the setup in terms of Governments - Central Banks - Banks is very similar.
What people need to understand is that we are getting inflation mostly not because because of issues on the supply side, not so much by Fed & Gov actions. These issues could become worse, in an environment where banks aren't lending, there is too much debt, too much uncertainty, overvalued stock markets, ESG mandates and so on. The yield curve flattening so much is a sign that the Fed might not even be able to raise rates more than a couple of times, and that in 2023 they might be forced to cut.
Think of it like this... Prices are going up and people aren't making enough money to keep up with inflation. The way things are going they won't be making much, so they need someone to give them money. Who are they going to ask for that money? The government. If prices are going up, they will demand more, something that could create an inflationary spiral. Except if, maybe, by creating a CBDC to control everything they will be able to control inflation. They want full control of the banking system and where people spend their money. For example if there is a shortage of milk, they might be like OK with your account you can only buy 1 litre / week. The majority of people think that vaccine passports are about reducing the spread and that them being used as a gateway for a CBDC is a conspiracy theory. Well in my country they already created an app called government wallet that can contain your ID + vaccine certificate. Wouldn't it be nice connect your bank cards + accounts in there and route all transactions through the government directly? It's been extremely clear that that's the goal. It is their belief, and it is possible, that by having total control over the monetary system they will control inflation.
But at this stage, they will be forced to do something. Let's no forget they always printed/borrowed for wars. And let's no forget that in the case of a war, they won't care about inflation. They will shut down the debate about inflation as they have a bigger goal. Markets crashing + Russia going for Ukraine & China for Taiwan, and they will be nah, we'll raise interest rates. Let's not forget that they can't let markets crash completely. The eurodollar & US bond markets are screaming loud and clear : you raise rates a few times at best and then you go back to cutting. So if they have to save markets again and can't fight inflation, then it's time for Universal Basic Income as this is the last time they will only save markets and not ordinary folks. At the end of the day, the situation with passive investing and the whole structure of the system in general has gone too far. They can't do anything to fix it, and they most certainly aren't capable of fixing it. Replacing the old system with a new one won't be easy and there will many shocks along the way, but I have no doubt that crypto and commodities are the best place to be in this environment. End of rand😝
