Apr 8, 2022 3 min read cryptocurrency

Central Bank Digital Currency as National Defense

The Russian war, which is at play in Eastern Europe, is laying clear the need for the US to develop a global next-generation financial system. Advocates for the current system managed by central banks often saw little need for change in the financial markets in the US or abroad. And neither did the Federal Reserve.

But, after a long gestation period, an alternative to cryptocurrency has exploded on the scene in the US, a public sector cryptocurrency, Central Bank Digital Currency (CBDC). It is quickly emerging, in part, because of the concern that cryptocurrencies could destabilize or obviate the dollar. And with it, ordinary financial commerce.

The growing adoption of cryptocurrencies, especially by businesses, combined with the European war, has finally driven the US Government to move toward adopting a cryptocurrency, however reluctantly. The adoption of CBDC would come with risks, especially the risk of losing individual privacy because presumably, it would be on a blockchain transparent to Federal authorities. And preserving privacy is getting legislative support in this dynamic fiscal environment.

A CBDC changes the fiscal landscape

CBDC represents the foundation of a new financial system and is much more than merely another variation of money. It is public money headed to the blockchain. The government supports public money. Cryptocurrencies, like Tether, are private money and do not have the credit support of a government.

In the future, money used in the economy does not need to be one or the other. Both public and private money can exist together and have in the past. But the government will set the rules for both public and private money.

Government rules can govern most of our use of money because there is nothing sacrosanct about money or what it does. Money is always described as a medium of exchange, a unit of account, and a store of value. Money is supposed to facilitate the exchange of goods, measure the value of the exchange, and preserve the value of an exchange for money. And this is expected to be the role of CBDC too. Public money, however, will serve public purposes.

Public money for defense

One public purpose is defense. Public money on the blockchain is emerging in a difficult period of growing military conflicts. Public money has always been a key component of military conflicts. War needs to be paid for and the flow of money itself can be the subject of a war. Efforts to restrict the flow of money and goods, which are economic wars, have become common for the US in the 21^st century. The war with Russia has a large economic war as one component.

The trade war with Russia may well exacerbate the trade war with China. A full-blown trade war with China would surely be the largest trade war ever by a wide margin. And both the US and China are acutely aware of the risk.

Public money in an economic war

The economic wars we are engaged in will necessarily involve multi-national agreements on money. So, we need to add one item to the list of uses for CBDC—monetary network. What the country needs is a network not a union. A monetary union is much stronger than a monetary network and a powerful binding force on countries but a rare one.[1]

Formal monetary unions resulting from CBDC would not be expected to emerge quickly, if at all. But both public and private monetary networks, far short of a monetary union, have become important levers in the fight against Russia and China. Monetary networks ranging from central bank lines of credit to the SWIFT network have become contentious items.

So, it is with one eye to international networks that CBDC is being developed by the US. This is essential because China has long intended to develop a multinational blockchain CBDC network and came into 2022 with a clear lead. Of course, there are vested interests disagreeing with the urgency from the cryptocurrency space. But the biggest drag on CBDC is likely to be privacy.

Congress will deal with privacy

The military threat laid bare by Ukraine will pressure Congress to approve a CBDC. One measure of this is the debate in Congress on both the CBDC and privacy issues related to it. Sen. Warren has endorsed a US CBDC while other Senators introduced legislation to restrict CBDC on privacy grounds. Investors and institutions should pay close attention to the CBDC evolution. It is coming to their portfolio soon as international conflicts heat up.