CBDCs: The Power and Influence of Currency

The principles of money may appear simple: exchange some fish for bread, give it a value, and maybe you'll no longer need the fish to purchase a shirt. Easy. But the reality we see in the environment is far from straightforward. The American dollar and other currencies have been used not only to drive economic growth—a goal that I and many others fervently support—but also to influence politics and the course of world events. The idea behind money was to be the ultimate equalizer, a means of democratizing wealth and granting everyone easy access to financial resources. Although we seem to have wandered off course, we have come a long way toward our goal. This article delves into how currency, particularly in the context of the U.S. dollar, is being used to push political agendas, as seen in the Ukraine-Russia conflict, and explores what this means for the global economy and our pursuit of true democratization of wealth.

The Roots of Money

One widespread criticism of the US dollar is that it doesn't have a physical foundation to support its value, especially since August 15, 1971 Link, when it was no longer convertible into gold. In most payment systems, money is viewed as a means of trade. Some economists, however, disagree with this restrictive definition. In 1991, Friedman, for instance, examined the function of Fei, a type of stone money from the Pacific Islands, suggesting a more expansive understanding of money. This leads to money simply being a? system of debits and credits that enable transactions without the parties involved giving their previous agreement. This is consistent with Friedman's observations, showing how systems that document and validate transactions enable money to function beyond its physical form.

Payment systems in the past were simple and usually involved in-person transactions. But even prehistoric societies, as Friedman pointed out, used trustworthy record-keeping systems for debits and credits to fulfill monetary functions, doing away with the necessity for actual currency. This emphasizes that the mechanism that permits and guarantees the circulation of money is what gives it its essence.

The foundation for value exchanges between parties—most often money—is provided by payment systems. Fund transfers and the data required to complete transactions, including account numbers and intermediaries, transaction amounts, and party names, make up the two primary components of these systems. These systems handle different flows of information; for example, SWIFT handles funds, while ACH handles both information and funds. The flow of money inside these systems is different from the flow of information.

Moreover, payment systems frequently suffer from network economic effects, in which the value of the system is increased with each new member. Users greatly respect the broad adoption and universal acceptance that this creates. Given the interdependence of the world economy, rivals may benefit from the introduction of new payment methods. Essentially, money does not have to be tied to a particular value or nation-state as long as there is a mechanism in place that allows value to be exchanged and transactions are officially documented.

So how is Money Really “Leveraged” on a global scale

America has always demonstrated its economic might in international financial markets. A notable instance was Egypt's 1956 nationalization of the Suez Canal, which had been under British and French authority. President Eisenhower retaliated by threatening to sell off sizable holdings of pound sterling bonds and forbade the International Monetary Fund from providing assistance to Britain in an effort to avert a wider conflict. This severely damaged the sterling and hindered Britain's capacity to make international payments. This bold economic move compelled France and Britain to leave Egypt.

The United States' efforts against Iran were another clear example of the banking system being used directly for international policy. Under the International Emergency Economic Powers Act, President Carter placed all Iranian government assets in the United States on hold in the wake of the 1979 hostage crisis at the American Embassy in Tehran. Since then, the United States has enacted a number of sanctions, such as the Iran and Libya Sanctions Act of 1996, which restricted bank transactions between American institutions and Iran. As evidence of a calculated use of financial tools to advance political goals, the U.S. implemented targeted financial measures by 2006 to prevent international banks from doing business with Iran.?

The tactics of financial warfare against North Korea were similar. Financial institutions in North Korea were severely hampered in their international financial transactions when they were kicked out of the SWIFT messaging system in 2017 due to escalated provocations. Additionally, the Otto Warmbier North Korea Sanctions Act of 2019 was introduced by the US Congress in response to concerns about human rights breaches and it sanctions any organization that has financial ties to North Korea. This deliberate blocking of access to the international payments system demonstrates just how thoroughly financial systems can be used to impose international law. Link?

These instances, which are frequently seen as having a beneficial impact, actually show the great power a state may have over its economy and currency as well as in influencing how morality is viewed around the world. This effect emphasizes how money, or "documentation," plays a central role in the dynamics of global power, where economic decisions are frequently shaped to serve the objectives of powerful states. This type of leverage shows that money is a powerful tool for influencing national and international politics in addition to serving as a medium of exchange.

So what are CBDCs, and are they the solution?

Cryptocurrencies have serious fundamental weaknesses, despite the fact that many contend that by removing money from governmental control, they offer a solution to the many problems that traditional banking faces. These include high levels of volatility, a lack of regulations, problems with scalability, significant energy use, and accessibility hurdles. These drawbacks imply that although cryptocurrencies help democratize money, they might not be the next advancement in the evolution of money.impact.

?This background lays the groundwork for Central Bank Digital Currencies (CBDCs), which are virtual currencies that are issued and overseen by a nation's central bank. CBDCs provide a digital substitute for conventional banknotes and coins; in contrast to decentralized cryptocurrencies, they are centralized and supported by the government. Their purpose is to lower the expenses related to money generation and distribution while also increasing the effectiveness of payment systems and financial inclusion. With regard to modernizing financial systems, CBDCs may be a more feasible step because they tackle the core problems with cryptocurrencies while preserving stability and regulatory control.

A new era of digital currency has been brought about by cryptocurrencies, which have seen a sharp rise in value and usage. With daily transaction volumes in the tens of billions, the two biggest cryptocurrencies, Ethereum and Bitcoin, have amassed a combined market capitalization of over $800 billion since their launch. Link?

Stablecoins are a type of digital currency that aims to keep its value constant and are frequently based on the US dollar. With a combined market value of over $100 billion, Tether and U.S. DollarCoin, the two biggest stablecoins, are mostly used to ease trades between cryptocurrencies and fiat money or directly between cryptocurrencies. Link? Given their capacity to function on nonbank payment rails, frequently on blockchains, their reliability makes them potentially appropriate for wider payment usage.

Different payment methods, such as digital wallets, trading platforms, and direct electronic exchanges, are made possible by cryptocurrencies. They believe that money need not be issued or supported by a nation-state, and they question established regulatory frameworks by not cleanly fitting into any pre-existing legal categories. The irreversible and transparent distributed ledger technology that cryptocurrencies rely on for record-keeping may allow them to operate as money without the support of a government.

Cryptocurrencies, however, confront a number of important obstacles. Compared to typical payment networks, blockchain technology—especially ones that are lawful and open—usually operates more slowly. For instance, networks like Mastercard and Visa can process hundreds of transactions per second Link , but Bitcoin can only process seven. The fact that all transactions on blockchains are accessible to everybody with access also raises privacy concerns, which have resulted in criminal prosecutions as well as worries from both individuals and companies.

To address these issues, techniques such as "tumblers" or "mixers" have been created to mask transaction data; however, because these techniques can be used to get around sanctions, recent regulatory moves by organizations such as the U.S. Treasury have demonstrated considerable resistance to them. Another obstacle to cryptocurrencies becoming a widely used form of payment is their tax classification as financial assets that are subject to capital gains taxes.

Stablecoins have been designed to address some of the fundamental issues with cryptocurrencies as payment systems and to reduce price volatility in spite of these obstacles. Stablecoins have seen a large increase in market capitalization. Despite this, there are still major obstacles standing in the way of the broad acceptance of cryptocurrencies as reliable forms of payment due to their inherent volatility and regulatory issues. Link

The Objective

The significant sway that nation-states exert over the world economy via the management of their currencies also determines international political dynamics. This fact highlights how urgent it is to reconsider the practice of linking money to national governments. As shown in geopolitical situations like the conflict between Russia and Ukraine, the US dollar is used to apply political pressure, highlighting the strategic manipulation of currency for goals beyond straightforward economic transactions. These actions, which frequently come at the price of global economic democratization, highlight the close connection between monetary policy and national authority.?

But real change will come from the possibility of severing the relationship between money and nation-states, democratizing wealth and removing the unfair power of any group or individual to influence political decisions or establish moral superiority through financial means. The primary function of money should be to enable trade and act as an impartial instrument that does not further any particular political or ideological viewpoint.

Cryptocurrencies and Central Bank Digital Currencies (CBDCs) present viable alternatives by upending established monetary control paradigms. Even while they are not without difficulties, such volatility, scalability, and regulatory concerns, they represent creative steps toward a financial system that is more democratic and inclusive. These digital substitutes, particularly stablecoins, can lessen the friction connected with conventional currency systems while providing stability and efficiency.

By adopting these technologies, financial systems can be made to function as real agents of trade and interaction rather than as tools of geopolitical influence, resulting in a more fair distribution of economic power. It is critical that we support and put into place mechanisms that protect the integrity of money as a vehicle for economic empowerment, independent of the stifling influence of national objectives, as we traverse these revolutionary times. This progression will protect the fundamental principles of democracy and equality in financial dealings while also advancing global economic justice.

Content by: Omer Rahim

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References:?

https://www.brookings.edu/articles/payment-systems-changing-role-from-economic-growth-to-the-new-foreign-policy-lever/

https://www.bostonfed.org/publications/research-department-working-paper/2022/government-banks-and-interventions-in-credit-markets

https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html

https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization? -?

https://www.ft.com/content/39f10121-29ac-4b66-b364-c15bf62e0be9

https://www.wisdomtree.eu/-/media/eu-media-files/other-documents/research/market-insights/market-insight-bitcoin-vs-traditional-payment.pdf

https://blockonomi.com/tethers-usdt-stablecoin-swells-to-100-billion-market-cap/?

https://www.thecollector.com/the-suez-canal-crisis-1956-explained/?

https://www.elibrary.imf.org/view/journals/024/2002/001/article-A001-en.xml