A few weeks ago I saw the headline “IRS would track all bank transactions over $600 under Biden plan” and my eyebrows went up in surprise. Source. Why would the IRS need (or even want) to track all bank transactions over $600 dollars?
Well it turns out, the official answer is billionaire tax evasion…?
As IRS Commissioner Chuck Rettig told a Senate panel in April…
“I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year.” Source.
And when asked about the IRS plan to track all transactions over $600 dollars, Treasury Secretary Janet Yellen offered an example to help the puzzled interviewer understand the reasoning behind it.
“If someone reports an income of $10,000, and they had $3 million go out of their checking account, that tells the IRS that’s an individual that you might audit.” Source.
Really groundbreaking stuff there. I too think that might be someone you audit, Janet. So what does that have to do with tracking $600 dollar transactions?
There are a lot of potential answers, so I’ll borrow a quote from Clive Humby, a British mathematician and data scientist.
“Data is the new oil.”
US CBDC?
Before he abruptly stepped down amidst insider trading allegations just a few weeks ago, Former Boston Fed President Eric Rosengren shed some light on a project being conducted by the Boston Fed and MIT to research and detail what a US based Central Bank Digital Currency (CBDC) might look like.
According to Rosengren…
“...[it is] less likely that we are going to be designing a digital currency for the blockchain or for a particular blockchain.”
So to be clear, he’s discussing creating a CBDC that is not blockchain based, and he goes on to explain why.
“...in part because we want to have sufficient throughput and speed of transactions that the distributed ledger is not as effective a mechanism for meeting kind of the operational needs that we think we will need.”
So Rosengren is saying that a distributed ledger - blockchain - can’t keep up with the throughput and speed of transactions that they anticipate.
I’m not sold, so let’s dive into the two metrics he noted. Throughput and transaction speed.
Throughput
I’m a numbers guy, so lets talk numbers.
Visa processes about 1,700 transactions per second.
Mastercard processes about 5,000 transactions per second.
I think we all agree that Visa and Mastercard have mature, defined, and very functional products that we rely on daily.
The Bitcoin Lightning network - the crazy cool and speedy layer 2 product that is built on top of Bitcoin to allow people to transact instantly anywhere in the world for next to no fees - can process about 25,000,000 transactions per second. Source.
Yes, that’s 25 million transactions per second. And that number is expected to increase as the capacity of the network increases.
So throughput isn’t a valid reason. What about transaction speed?
Transaction Speed
It currently takes anywhere from 3-5 business days for a free ACH transfer to settle.
It can take 30+ minutes for a $30 wire transfer to settle.
It takes 0 time (well, not actually zero, but as close to it as really possible) for a Lightning network transaction to process and settle. And it typically costs a fraction of a cent.
Last week I was alerted to an interesting Bitcoin transaction. Someone moved $1 billion dollars worth of Bitcoin for $1.75 transaction fee and it settled in minutes. I think that beats a $30 dollar bank wire or an ACH that takes a week to settle by a country mile.
And whoever it was didn’t have to ask permission from a Government or financial institution to do it.
So it’s not throughput and it’s not transaction speed. What reason could Rosengren have for not wanting to base a US CBDC on blockchain?
Blockchain is Transparent. The Dollar is Not.
Back to the data.
One of the defining features of blockchain is that every single person can see every single transaction that has ever taken place on it. Accounts are of course not named, but if you know who controls an account, you can look it up.
The US Dollar is anything but transparent. And it serves former Fed Presidents who like to (allegedly) insider trade like Rosengren a massive advantage over the people they claim to be serving.
If a US CBDC was based on the blockchain, it is conceivable that one could possibly discern what wallet address Mr. Rosengren was tied to, and actually follow his transactions. Maybe they too would have the ability to (allegedly) insider trade! At the very least, it would make it so suspiciously large transactions that are timed suspiciously perfect would have further scrutiny.
Rather than disclose their trades months after the fact, politicians and Fed Chairs would likely have to disclose in real time… Something it appears they do not wish to do.
Having a US CBDC on the blockchain would truly make the dollar transparent, rather than the veiled and vague system we have now. For example, how many Americans can honestly answer the question how the Federal Reserve works? Or how fractional reserve banking works? Or what the implications of not just inflation, but the Fed raising rates to combat inflation are?
A US CBDC on a blockchain would level the playing field. It would allow everyone access to the new age oil that is data, but central bankers just want the data (and the power) for themselves.
For The Public Interest?
A few weeks ago, on October 7th, 2021, The Head of the Bank of International Settlement Innovation Hub, Benoît Cœuré, gave a speech at the 23rd Geneva Conference on the World Economy.
The speech was discussing how finance is being disrupted by technology, and Cœuré spent time discussing CBDC’s and their impacts. There are a few passages that I think are important to hear in Cœuré’s own words, so please excuse the length of the quotes I have included below.
Cœuré first puts non government issued stablecoins at odds with CBDC’s.
“The history of private money initiatives is not a happy read. Whenever faced with the conflict of interest between making their money stable no matter what and making a profit, private issuers have always chosen profits.
This is where central banks come in.
Money is ultimately a public good whose stability and use needs to be protected by the public sector. This is why so many central banks around the world are working on central bank digital currency, or CBDC – essentially, to ensure that the next generation of money continues to serve the public interest.”
Cœuré starts off with two assertions. First, that private issuers always choose profits over stability, and that central banks always serve the public interest.
Both assertions could not be further from the truth.
Central banks have a few primary goals, three of which I have listed below.
Maintain full employment
Maintain a stable currency
Maintain a stable rate of inflation
If this were a multiple choice test, we would select option D, none of the above because we, in the United States, have none of the above. Unemployment is more than 5% officially, and ~40% of all US dollars that have ever been printed were printed in the last 24 months.
Additionally, inflation numbers are greater than 5% officially, and unofficially closer to 15%. This has left the bottom 45% of Americans that own no equities and anyone that lives anywhere near paycheck to paycheck considerably worse off than they were before.
Not only are they failing to meet all of their primary objectives, but officials like Rosengren have enriched themselves through (allegedly) illegally insider trading, and he’s not alone. Dallas Fed Chair Robert Kaplan also suddenly stepped down amid similar accusations. And these are just two that we are aware of.
As legendary hedge fund manager Stanley Druckenmiller put it on CNBC in April 2021, “There’s been no greater engine of inequality than the Fed.” Source.
Did the Fed officials choose public good over enriching themselves? I don’t think so. Seems like the public issuers chose profits this time, Cœuré.
Data is Oil
Back to Cœuré’s speech once more, as he advocates for further financial surveillance…
They [financial firms] collect enormous amounts of data about our preferences, spending habits and payment history – and those of our peers, who may be similar to us - even before we ask for a service or apply for a loan. By using artificial intelligence and machine learning to study a treasure trove of data – typically more than 1,000 data points – they can determine how much we can borrow and repay. And they do it in part by using information that until recently did not have much financial value, like the model of smart phone someone has, or their browsing habits…..
…..Technology can change this game, by giving supervisors access to a lot more data, structured, unstructured, with better quality and granularity than ever before. It can also give them effective means to extract, query and analyze data. To perform the same cross-check review that I just mentioned, a digitally native supervisor could build integrated platforms to avoid using spreadsheets and PDFs. She could use artificial intelligence tools to crunch the data and apply natural language processing and machine learning algorithms to real-time, typically unstructured data from news and market developments.
The BIS Innovation Hub is doing exactly that. The BISIH Singapore Centre is working with the Monetary Authority of Singapore, the Bank of England and the International Swaps and Derivatives Association on project Ellipse, a prototype which investigates the feasibility of an integrated regulatory data and analytics platform. Tools based on project Ellipse would enable supervisors to digitally extract, query and analyze in real time large and diverse sources of structured and unstructured data that are relevant to the residential mortgage market, and anticipate supervisory action. Looking ahead, we will also investigate ways to use the suptech toolbox to support the green and sustainable finance agenda.”
Cœuré wants more data. He argues that more data is the key to serving the people better. But no matter how much data they have, it seems the predictions are wrong, the economists are off the mark, and the policies enacted end up hurting the very people they are meant to benefit.
And all it leads to is further financial surveillance and erosion of privacy. And really for what?
Well, Cœuré believes that with a CBDC they could enact stimulus measures in real time! Exciting!
I believe in fact that CBDC could have a greater impact on fiscal policy. Think of the extraordinary support that some governments provided to the population during the pandemic. Some countries showed great ingenuity in using digital technology to reach those most in need. Others mailed cheques to people while bank branches were closed because of lockdowns and people were told to stay home. Imagine how much easier it would have been to transfer digital money to people's e-wallets in real time.”
While he’s not wrong about this use case, Cœuré is glossing over (whether intentionally or unintentionally) some of the unintended (or intended) potential caveats of a CBDC that everyone should be wondering about.
“Every action has an equal an opposite reaction.” -Sir Isaac Newton’s Third Law of Motion
The potential implications of handing central bankers genuine control over the finances of every single person are frightening. Gone are the days of paying in cash and leaving no breadcrumb trail behind.
Here are a few questions that immediately popped into my head.
Why should we trust the central banks to process all of this data? Have they proven themselves worthy of our trust?
With that, is there any guarantee from central banks that they will use our data in a responsible manner?
Will central banks commit to never creating a social credit system?
Will central banks agree to never enact “personal” fiscal policies, such as a higher rate of inflation for someone with a lower social credit score?
Will central banks agree to not create money that expires?
And who will hold these central banks accountable to act in the public interest?
Of course, not a single central banker has made any such assurances since that would eliminate potential avenues in the future. It is precisely for this reason that caution flags should be waving high and fast when men like Cœuré bring speeches like these to the podium.
To echo Pomp, the more someone wants to control something, the more skeptical I become. But you be the judge and decide for yourself.
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