The Future of CBDC: Re-introduction of the Gold Standard?

Introduction

The removal of the gold standard in the 1970s had a number of significant impacts on the global economy. One of the most immediate effects was a sharp increase in inflation, as governments were no longer constrained by the need to maintain a fixed exchange rate with gold. This led to a period of economic instability, as businesses and consumers struggled to adapt to the new monetary regime.

In the longer term, the removal of the gold standard has led to a number of changes in the way that the global economy functions. One of the most notable changes has been the rise of central banks as the primary managers of monetary policy. Without any external constraints, central banks have been able to pursue more expansionary monetary policies, which has helped to promote economic growth.

However, the removal of the gold standard has also created some new challenges for the global economy. One of the most pressing challenges is the risk of currency volatility. Without fixed exchange rates, currencies are now free to fluctuate in value, which can make it difficult for businesses to plan for the future.

Another challenge posed by the removal of the gold standard is the risk of financial instability. Without a gold standard to anchor the value of currencies, there is a risk that speculative bubbles could develop, which could lead to financial crises.

Reintroduction of the Gold Standard for CBDCs?

The reintroduction of the gold standard for CBDCs would likely have a number of positive and negative impacts. On the positive side, it could provide a more stable anchor for the value of currencies, which could help to reduce inflation and promote economic growth. Additionally, it could make it more difficult for governments to engage in irresponsible monetary policy, which could help to prevent financial crises.

However, there are also some potential drawbacks to the reintroduction of the gold standard. One of the main concerns is that it would make it more difficult for central banks to respond to economic shocks. Additionally, it could lead to higher interest rates, as governments would need to raise interest rates in order to attract gold into their reserves.

Currency Rebasing to Gold

The introduction of a CBDC Gold Standard would require a rebasing of global currencies. It is likely that rebasing would lead to a short-term period of economic volatility, as businesses and consumers adjust to the new currency values. Additionally, it is possible that rebasing could lead to a long-term period of higher inflation, as governments would have less room to expand the money supply without causing a sharp increase in inflation.

Risks for countries that are underweight in terms of gold holdings:

Countries that are underweight in terms of gold holdings at the time of rebasing could face a number of risks, including:

• Currency devaluation: If the price of gold increases after rebasing, the value of these countries' currencies will decrease in comparison to other currencies that are backed by gold. This could lead to inflation and make it more difficult for these countries to export their goods and services.
• Increased interest rates: In order to attract more gold into their reserves, these countries may need to raise interest rates. This could make it more expensive for businesses to borrow money and could lead to a slowdown in economic growth.
• Financial instability: If the price of gold decreases after rebasing, these countries could experience financial instability. This could lead to a decline in the value of their assets, a decrease in lending, and a slowdown in economic growth.

Mitigating Risks

To mitigate these risks, countries that are underweight in terms of gold could consider:

• Acquiring more gold: This would help to ensure that their currencies are adequately backed by gold and would help to protect them from the risks of currency devaluation and financial instability.
• Investing in other assets that are correlated with gold: This would help to diversify their portfolios and reduce their exposure to the risks of a decline in the price of gold.
• Developing a plan to deal with the risks of currency devaluation and financial instability: This would help to ensure that they are prepared for these risks and that they have a plan to mitigate their impact.

Gold Backed CBDC’s: Western & BRICS Perspectives

The perspectives on Central Bank Digital Currencies (CBDCs) and their potential backing by gold vary significantly between Western sources and BRICS countries.

Western Perspectives:

Privacy and Monetary Policy Concerns: Western discussions around CBDC's often focus on privacy, monetary policy, and programmability. There's a belief that the increasing cross-border usage of CBDCs may lead to greater currency volatility, which could prompt some central banks to build up greater gold reserves.

Skepticism about China's Digital Currency: Western political correspondents view the potential full launch of China's "e-yuan" as a strategic move against Western interests. Concerns are raised about the lack of financial privacy with CBDCs, especially in the context of China's digital currency, where the People's Bank of China can monitor all payment activities.

Criticism of the CBDC Model: Some Western sources are critical of the CBDC model, seeing it as a continuation of the fiat currency system under a new label. There's also mention of the International Monetary Fund's Special Drawing Rights (SDR) potentially replacing the US dollar as the world’s new reserve currency.

Regulatory Oversight: In the West, the fate of CBDCs and stablecoins is seen as being largely influenced by regulatory forces. There's an understanding that while CBDCs will be issued under central banks, stablecoins might face regulatory oversight from multiple agencies.

Skepticism on Gold-Backing: There is skepticism about the likelihood of CBDCs being backed by gold, given the historical context and the complexities involved in such a system.

BRICS Perspectives:

Financial Independence and De-Dollarization: BRICS countries are actively pursuing financial independence from the US dollar, viewing CBDCs as an alternative to traditional fiat currencies. A gold-backed CBDC is seen as a viable option in this context.

Global Shift Towards CBDCs: It is noted that 130 nations are moving toward CBDCs, which is viewed as a threat to the dominance of the US dollar. The BRICS currency, potentially announced in the near future, is seen as a significant step in this direction.

Majority Seeking CBDC Development: A significant portion of countries, especially within the BRICS bloc, are seeking CBDC development to facilitate the move away from the US Dollar.

Exploration of Gold-Backed Currencies: BRICS countries are reportedly planning to introduce a gold-backed currency, which is viewed as a challenge to the dominance of the US dollar and a divergence from the credit-based nature of current major currencies.

In summary, while Western sources express concerns about privacy, regulatory issues, and skepticism about the viability of a gold-backed CBDC, BRICS countries are actively exploring and supporting the idea of gold-backed CBDCs as a way to achieve financial independence and challenge the current global financial system dominated by the US dollar.

Zimbabwe

Zimbabwe has introduced a gold-backed CBDC. This is the first country in the world to do so, and it is still unclear how the new currency will fare.