by Dr. Chris Kacher
Is the metaverse immune to CBDCs?
The decentralized portion of the metaverse is somewhat immune to the dawning of CBDCs (central bank digital currencies) as tokens and NFTs via DAOs and ICOs are the oil in the metaversal engine. Governments may try to limit the gateways between fiat/CBDCs and cryptocurrencies/tokens/NFTs, but such attempts will fall short as Web3 evolves. Peer-to-peer methods of transaction that enable conversion between fiat and cryptocurrencies will always be an option regardless of limits placed by governments. For years now, the Chinese have been sending out well above the $50,000 USD equivalent permitted by the Chinese government. Even in the early days, there was localbitcoins.com that enabled transactions between fiat and Bitcoin.
Decentralized systems offer far greater efficiencies at lower cost thus are far more economic than traditional systems. DeFi, ReFi (regenerative finance), and DeSci (decentralized science) are among a few of the limitless use cases that will revolutionize the legacy landscape. In time should regulations become onerous, crypto may fork away from fiat such that we have a black market of sorts where people transact purely in crypto away from plunging fiat as governments struggle to regain control of fiat.
CBDC Pros
Nevertheless, central banks love CBDCs because it gives them far greater control over conventional fiat. The advantages are numerous. CBDCs:
1) reduce the cost of seigniorage to near zero. At present, for every $1 note that the Federal Reserve produces, the seigniorage is $0.925 cents because it costs $0.075 cents to produce per note. For coins, it at times cost more to produce coins than the denominated value on the coin itself due to rising commodity prices. For example, in 2021, it cost the U.S. Mint $0.021 cents to make a penny.
2) would also enable more people to gain access to banking, especially in developing countries. 1.4 billion remain unbanked but thanks to mobile phones and Bitcoin and eventually CBDCs, a growing number has been and will continue to transact value. All that is needed is a digital wallet app with banking features installed of a user's mobile who can then make transactions directly through their digital wallet. No physical bank or ATM would be required. Gone are the extortionist remittance fees for small amounts from platforms such as Western Union.
3) speed up cross-border fund transfers to just a few hours or less which normally would take two to three days, sometimes more, due to onerous regulations. Banks greatly benefit from not needing physical banks nor ATMs.
4) reduce fraudulent transactions from money laundering to drug trafficking to tax evasion. Governments will have the ability to control and monitor the flow of capital across the blockchain.
5) promote accountability and culpability from government officials. Issues such as misappropriation of funds and illicit budget overspending can be greatly reduced. Bernie Madoff's fund would have been red flagged before he had a chance to misappropriate funds.
6) are programmable though this is a double-edged sword. Governments can make their monetary policies more effective such as with the stimulus checks sent to Americans who were spending as little as possible, thus defeating the purpose of the checks which was to give the economy a needed boost. Certain CBDCs could also be only allowed for certain types of spending if the government wanted to help a certain industry that was lagging or to stimulate the velocity of M2 to spur the economy.
CBDC Cons
But this sort of control can go awry. CBDCs could have an expiration date for certain individuals forcing them to spend the money. For example, if the government's fiscal policy dictated that to stimulate the economy, x% of each person's account would expire worthless by a specific date. In the future, withdrawing to cash would no longer be an option as places stopped taking cash as we have seen in parts of China. Further, with CBDCs, your rate of interest based on your credit and social score could be adjusted.
The government could use CBDCs to determine how much money one can spend, where to spend it, how to spend it, when to spend it, and what to spend it on. The world is no stranger to capital controls. During WWII, the majority of countries exercised some form of capital control. Today, some developing countries such as Nigeria and Lebanon are instituting such measures where citizens are only allowed to withdraw x amount a day.
CBDCs would greatly facilitate these measures of money control. Those who opt out of such a dystopian system would further spur the growth of technologies such as Bitcoin that would operate in parallel which enable peer-to-peer value transfer that is borderless and secure. Despite the bear market, Bitcoin's number of users continues to grow with its hash rate at all-time highs. Lebanon has shown that a fully functional, parallel economy is possible with cryptocurrencies such as Bitcoin. As the number of Bitcoin users continues to grow, the world may reach a tipping point where the majority transacts in Bitcoin as p2p value transfer outside of the control of governments becomes the norm, catalysed by the deployment of CBDCs by world governments as they try to control the freedom to transact enabled by Bitcoin and other cryptocurrencies. Freedom and decentralisation will win because they are more economic. The battle will be revolutionary.