Digital Money Isn’t Money. Perhaps a Tool of Control?

by Gerry Allan | Oct 5, 2022 | Future, Leadership | 0 comments

“The future of money is digital currency.”
— Bill Gates

“Stay away from it. It’s a mirage, basically.”
— Warren Buffet

“You can’t have a functional money without a basic transparency.”
— Steve Forbes

“There are 3 eras of currency: Commodity based, politically based, and now, math based.”
— Chris Dixon

“Money is a collective agreement. If enough people come to the same agreement, what they agree upon becomes secondary, whether it be farm animals, gold, diamonds, paper, or simply a code. History proves all these cases to be true. Who knows what the future is going suggest to us as money, once we see digital currencies as ordinary?”
— S.E. Sever, writer

“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”
— Nassim Taleb

“Bitcoin isn’t tied to any commodity – besides trust.”
— Paul Ford

“It’s not a currency. It does not meet the test of a currency. I wouldn’t be surprised if it’s not around in 10 or 20 years. It is not a durable means of exchange, it’s not a store of value.”
— Warren Buffett

“I have always been afraid of banks.”
— Andrew Jackson, Seventh President

Decentralized cryptocurrencies, like Bitcoin, are being seriously challenged today by rapidly developing, government-controlled, Central Bank Digital Currency (CBDC) technologies. 112 countries, representing over 95 percent of global GDP, are exploring a CBDC. This is a big problem, since any type of digital money is not real money. Real money is very different. Do you know why?

In a prior post, I looked at money as it really is, and has been almost forever. Money is fundamentally a medium of exchange. In this function, it can be gold, precious stones, fiat-based paper (e.g., dollars), chickens, cattle, bitcoins – almost anything that people generally find acceptable in an exchange. But real money is more, vitally more: it is a trusted store of value. From the post:

“Checklist for determining what is money. Not everything that buyers and sellers agree to use in an exchange is money. Money…

Provides a mutually acceptable medium of exchange
Provides a standard unit of value measurement (aka a unit price)
Provides a trusted store of value to enable subsequent exchanges”

“The first two deal with exchange mechanics. It is the last item – trusted store of value – where the big trouble with money begins. This means that all parties using a particular kind of money must trust that the value each unit represents will not disappear or drop significantly over extended periods of time.”

“And just what is this real value that is being stored? It is theoretically reflected in the purchasing power of each value unit (e.g., a dollar). Purchase of what? Most likely, a roughly constant bundle of goods and services. Food. Clothing. Shelter. Supposedly things that our use-value of this bundle doesn’t change appreciably over long periods of time. So, if purchasing power of our money in exchange for these items changes appreciably, then it is the money-value that must have changed since the use-value has not.”

A very simple example might help at this point

Example: Suppose I bought 10 gallons of gasoline today in exchange for $50 in cash. My use-value is being able to drive about 250 miles, assuming my average gas mileage is 25 mpg. But at my last fill-up, I paid $40 for the same amount of gas. Something increased my cost by $10 for the same use-value. For whatever reason or reasons, my money-value here decreased by $10, since I have to spend $50 now to get what $40 bought a short time ago. This is called price inflation, but it is mostly money-value deflation. My cash money is now worth 25% less in the gasoline world. Nothing much likely happened in the gasoline world between these adjacent fill-ups to increase the cost by $10.

Where did the $10 money-value of my cash go? Lots of cost-and-supply-stuff going on behind the curtain, but the effect for me is that my cash has been devalued. If this same process happened for the bulk of my purchases, I just got a whole bunch poorer – 25% poorer in this simple example.

Inflation is the devaluation of money. At the extreme of hyperinflation (price increases over 50% a month), money-value quickly approaches zero.

This means that cash in a highly inflationary environment is no longer a good store of value. If I held my stash in gold coins instead, the gold value would increase by a roughly similar amount, assuming functioning markets. So, I break even in the highly inflationary world.

But gold coins fail the “generally-acceptable” medium of exchange criterion for money. I’d have to sell an increased-value gold coin to some entity in order to get enough decreased-value cash to buy 10 gallons of gas.

So much of what we think of as “money” fails one or more of the real money criteria. Most of the time, market conditions of all sorts are at fault – including the U.S. Fed blasting trillions of newly-printed money (aka dollars) into circulation. As the great economist Milton Friedman stated:

“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Need to spend more? Just print up another stack of money.

Digital currencies like cryptocurrency and CBDC’s aren’t real money

They are in practice promises. IOU’s. The promise of value holds – until it doesn’t. The currency issuer – a private business in the case of cryptocurrency and governments in the case of CBDC’s – has to be widely trusted, and probably trust-tested as well over some extended period. This doesn’t mean that value fluctuations don’t occur. They do, of course, just like gold changes value continually based on market conditions.

But digital currency is virtual in that it lives in digital space and depends on electricity. It has no existence outside of computers and electronic storage devices. No electricity, as is rumored to be happening more and more frequently, no digital currency. Zip. Even less than nada.

Or a digital currency issuer goes bust. Creating digital “coins” is complex and costly. From Investopedia:

“What Is Bitcoin Mining? Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger’s maintenance and development. ‘Mining’ is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again. Cryptocurrency mining is painstaking, costly, and only sporadically rewarding.”

Real money still exists under most of the nastiest circumstances. Your bag of silver and gold coins, your box of precious stones, your warehouse full of copper metal. Also, in many cases, your business – if it produces real products with demand that is driven by Maslow’s two lower levels of human needs: physiological needs – food, water, clothing, sleep, and shelter – and safety needs. And if your materials supply sources are solid and secure.

If you have some “money” in a bank, you actually have a digital currency deposit. You have in effect loaned the bank some cash or other financial asset under the bank’s promise to give it back to you when requested. This works okay until it doesn’t. Best protection here may be to borrow from the bank an amount that is greater than your “money” deposits. This costs interest – you might call it “money-protection insurance”.

Before the creation of the Federal Reserve in 1913, the US used gold coinage for money. “The dollar” was just a name for 1/20th of an ounce of gold. That is what the dollar was. Paper dollars were just receipts for gold on deposit in the Treasury. No longer. Paper dollars are now receipts against Treasury obligations hiding digitally somewhere in the Fed. You have a claim against some bits and bytes stored who-knows-where-or-how.

What could go wrong with real money?

Well, some unkind person could steal it if it is gold, stones, and the like. Money stuff that you can stuff in a bag. Even paper money in non-inflationary times.

Stocks and bonds like those held in 401K retirement savings funds today are digitally recorded, along with your purchase funds. I have not heard of a pension fund that secures its obligations with real money such as gold, stones, etc. Stocks and bonds in past used to be actual paper that you could stuff under the mattress and even sell to some willing buyer. Or put in a bank safety deposit box.

Of course, somebody can steal such tangible assets. Or they can be destroyed by fires and wars and the like. These may well be insured so that you don’t lose anything much apart from insurance premiums.

Storing and protecting real money can be a serious hassle if you have any appreciable quantity. Giving such real money to a bank may well lead to the bank lending some or all of it to a “qualified” borrower under bank deposit rules. Or the real stuff like gold may get handed off to a bullion depository where it will be much safer.

Real money, as noted above, can be quite difficult to use in common transactions. Money surrogates like paper checks, debit and credit cards, and even digital currency are much handier, quicker, and generally safer than being in your bag of real-money stuff. Convenience today is so vitally important. Who has time or patience to transact with real-money stuff?

In practice, almost all financial transactions today are done using digital records of various kinds. Bits and bytes in a database located in some cloud somewhere. Clouds talking to clouds at the speed of light. What could go wrong?

Digital records require electricity to become real and usable

As noted earlier, no electricity – no records. Of course, these records are always backed up on magnetic storage devices, which unfortunately also require electricity. The gamble here is that redundant records will not all be erased, or storage devices destroyed, at the same moment. At least that’s what it says in the (mostly digital) fine print.

Insurance of various kinds and qualities is also used to protect us against loss if the money records holder – banks and such – bites the dust. Or gets hacked, which is quite popular today.

So, we seem to be in pretty good shape these days, financial records-wise. Apart from occasional, mostly localized, glitches in financial systems, things seem to be running smoothly and securely.

Well, not quite – in reality

Pay no attention to current activities involving big banks and governments. Why, just this morning, I squandered a few minutes reading about the liquidity problems of Swiss-based Credit-Suisse, one of the world’s largest banks. You of course know all about liquidity problems, yes?

Just in case no, here is a very simplified explanation from Investopedia:

“Before the global financial crisis (GFC) [2008], liquidity risk was not on everybody’s radar. Financial models routinely omitted liquidity risk. But the GFC prompted a renewal to understand liquidity risk. One reason was a consensus that the crisis included a run on the non-depository, shadow banking system—providers of short-term financing, notably in the repo market—systematically withdrew liquidity. They did this indirectly but undeniably by increasing collateral haircuts.”

Got that? Well, there is more. It turns out that there are two kinds of liquidity risk: trading, and funding. Trading risk comes from not being able to find a buyer within a reasonable time and price range, so you really can’t sell whatever you happen to be holding, money-wise. Funding risk deals with being able, or not, to pay off some of your debts that have or are coming due. Not enough money or cash flow to prevent a default, unless you can renegotiate the obligation. Perhaps even offering to throw in your cat as an enticement.

Even the U.K. government seems to be in a big mess these days as brand-new PM Liz Truss is seeing the pound sterling crash toward U.S. dollar parity. It was worth around US $2.50 in 1971. Bad news for those with long-term assets or debts denominated in pounds. Of course, Liz will surely get all this straightened out shortly. Surely.

Looks like even real money isn’t very good as money anymore.

Okay, so where are we? Oh yes …

It seems that we don’t have much if any real money these days. What we have is digital money of many kinds, flavors, and qualities. So long as electricity is available (pay no attention to Europe where even electricity is disappearing inconveniently, and also in California, so I read), our digital money is secure.

As a practical matter, digital money is probably as safe as any other kind of money – and much more convenient to use. If so, what if anything is wrong with the present efforts globally to turn everything money-wise into digital form?

Goodbye cash. Make gold and other real money surrogates increasingly hard to use. Who needs such inconveniences anyway? Probably nobody except those who occasionally need to buy a government or some of its functionaries.

Even if digital money is just intangible bits and bytes stored who-knows-where, this has become our reality. Money-wise. We have to live with it, like it or not. The real chore these days is ensuring that our digital money in all its forms is reasonably secure and accessible.

If Bill Gates says that “The future of money is digital currency”, we have nothing much to worry about, yes?

"The future of money is digital currency." — Bill Gates — “The future of money is digital currency.” — Bill Gates

Let’s worry instead about the likely misuse of digital money

This seems to be perhaps the greatest worry we have today, apart from hurricanes, fires, floods, droughts, food shortages, and World War III. Digital money has the unfortunate ability to be tracked, analyzed, and recorded almost everywhere and invisibly for the most part. But, unless you are a generic bad-guy of some sort, who cares about this? If the digital money folks want to waste their digital money on tracking, analyzing, and storage of many gazillion bits and bytes each year, it’s their digital money.

Real money like cash can’t be tracked or analyzed for the most part. It offers transactional anonymity, which can be important to some folks doing some things. Getting rid of cash makes such transactions transparent. How inconvenient.

Who might want to track, analyze, and store digital transaction data? Well, the government for one. And political parties. And many businesses. And all kinds of special interest groups. And …

The key to doing all of this costly tracking, analyzing, and storing is in the value inherent in these. Knowing about all of your transactions is truly of great value to some, or even many, parties out there. This is known in reality as surveillance.

Which, as you probably know, requires being able to link your transaction (and activity in general) data to you. Fortunately, they have invented a digital identity (ID) that does exactly this. As you probably suspect, the World Economic Forum (WEF) and good old Klaus Schwab are leading the charge in many respects.

Kind of gives you a warm, fuzzy, feeling – unless you happen to be a sentient human being.

Surveillance is kind of okay if used properly, helpfully

A good example of okay-surveillance is what Amazon does. It tracks all of my purchases, even ones from way back when dirt was new. I find this so helpful in trying to buy replacements for long-ago purchases.

Banks these days typically track your activity at various levels of detail. Also good if you are trying to chase down a payment, or a missing charge or deposit record. Huge improvement over having to call customer non-service, or struggling for days with multiple emails.

The okay-surveillance in general is done by vendors and service providers to assist customers (and reduce service center loads).

The not-okay-surveillance is done by organizations that have a significant potential for activity-and-personal-data misuse. I suppose that this includes almost any organization, but there are some that behave badly as standard behavior. This probably includes most government agencies since they tend to have the most extensive, complete data sets.

My primary flag for potential mischief makers right now is their active support for digital IDs. This tells me that they are trying to link mostly anonymous data, if there is such a critter any more, with actual people. Primary suspect is the WEF, which has long and intensively pushed for digital IDs.

Bill Gates is another suspect in this respect:

“The Bill & Melinda Gates Foundation this month announced $200 million in new funding — part of an overall $1.27 billion commitment in support of ‘global health and development projects’ that include creating a global digital ID system.”

“The Bill & Melinda Gates Foundation (BMGF) this month said it will invest $200 million in digital ID projects, encompassing ‘digital public infrastructure, including civil registry databases and digital ID’ to help meet the 2030 target date for reaching the United Nation’s (UN) Sustainable Development Goals (SDGs).”

“The $200 million in new funding — part of an overall $1.27 billion commitment by the BMGF in support of ‘global health and development projects,’ is closely tied to Goal 16.9 of the SDGs, for which ‘digital identity programs are supposedly needed,’ Reclaim the Net reported.”

I worry about almost anything in which Bill is or was involved. Like an almost unrecoverable, Win10 system crash that I recently experienced.

Digital currencies (aka money) and digital IDs

Wikipedia defines cryptocurrencies (one of several types of digital currency) as:

“Cryptocurrency is a sub-type of digital currency and a digital asset that relies on cryptography to chain together digital signatures of asset transfers, peer-to-peer networking and decentralization. In some cases a proof-of-work or proof-of-stake scheme is used to create and manage the currency.”

“Cryptocurrencies can allow electronic money systems to be decentralized. When implemented with a blockchain, the digital ledger system or record keeping system uses cryptography to edit separate shards of database entries that are distributed across many separate servers. The first and most popular system is bitcoin, a peer-to-peer electronic monetary system based on cryptography.”

Private market cryptocurrencies like Bitcoin, or government-issued Central Bank Digital Currencies (CBDCs). Which one grabs you?

Central Bank Digital Currencies (CBDC). Investopedia defines these as digital tokens, similar to cryptocurrency, but issued by a central bank. They are pegged to the value of that country’s fiat currency. These are supposedly “government-backed”, like the dollar, making them about as trusted as each country’s fiat currency. They are in fact the digital form of a country’s fiat currency. Umm …

Given the typical government’s nearly unblemished record of failure at almost everything of any importance, their ferocious push toward CDBCs is suspect to say the least. Especially since it requires a digital ID to tie all of its data pieces together. But our governments and various political activists wouldn’t intentionally misuse this highly personal and extensive data set, would they? Of course not …

The planned scope of digital ID's. — The planned scope of digital ID’s.

The Electronic Privacy Information Center (EPIC) looks promising

Never heard of these folks that I can recall, but they may be doing some very good things on the digital money privacy front. Check out their website to learn more – “EPIC Urges Federal Reserve to Prioritize Privacy If Designing a Central Bank Digital Currency. May 24, 2022”:

“EPIC argued that a CBDC could improve financial privacy for individuals, but only if the system were designed to facilitate anonymous transactions equivalent to cash. Such a privacy-protective CBDC would require ‘close regulation and testing of the underlying protocols, systems, and devices and should be designed as a cash-like digital currency using a token-based system without a persistent digital ledger.’”

“EPIC regularly advocates for privacy and consumer protection in digital transactions. Recently, EPIC urged the Consumer Financial Protection Bureau to thoroughly investigate privacy invasions by big-tech platforms offering payment services.”

Natural News made the concern about privacy and anonymity in CBDCs quite a bit more explicit: “New digital currencies being pushed by global elite will destroy privacy, allow total surveillance of purchases”:

“As reported by Reclaim The Net, ‘despite privacy being one of the main concerns citizens have about central bank digital currencies (CBDCs), the heads of the United States (US) Federal Reserve and European Central Bank (ECB) have confirmed that their respective CBDCs will not be anonymous.’”

“In an appearance at a Banque de France (Bank of France) event, U.S. Federal Reserve chair Jerome Powell said if the United States were to ever pursue a central bank digital currency, or CBDC, that currency would be ‘identity verified’ and ‘not anonymous.’”

“’We would be looking to balance privacy protection with identity verification, which…has to be done, of course, in today’s traditional banking system as well,’ Powell added, without noting that, at present, financial transactions under certain amounts are not traced or tracked.”

Bottom line:

Digital money is here to stay. It is too convenient and quick ever to go away. A major problem with digital money is that it is not storable by individuals, and it is increasingly not anonymous, like cash is. In the digital money realm, there is a huge battle today between decentralized, privately-managed, cryptocurrencies and centralized, government-managed, Central Bank Digital Currencies (CBDCs).

Ideally, they will end up coexisting. In reality, however, it seems almost inevitable that big global governments will prevail, and individual activities and transactions will be linked to digital IDs, with little to no anonymity. What is the likelihood that governments and associated organizations will be able to resist using this data to influence and even directly control our behavior?