Why “Digital Fiat Currencies” Need to be Based on Data Value

This article is in response to the announcement that the US is considering creating its own digital fiat currency, or "CBDC" (Central Bank Digital Currency), to improve “financial governance”.

The US interest is not unique: we were recently asked by the Bank of England’s (yes, that BoE) cryptocurrency unit to submit a consultancy paper on this subject that outlined our proposed solution to create a viable and sustainable digital fiat currency in the wake of Brexit and now Covid-19.

But the message doesn’t seem to be getting through. The question that needs to be understood at the outset is:

Q. When is a digital currency not a cryptocurrency?

A. When a central bank issues it.

The BoE is a prime example of a central bank failing to apprehend that the clue to creating a workable digital fiat currency is somehow diminishing the emphasis on the "central" in their title — so we're not holding our breath on the BoE risking that kind of innovation any time soon. And neither should you, regardless of the country you live in (unless the country you live in happens to be a CEE pseudo dictatorship where they seem to be pretty progressive on CBDCs: yep, that is the world we live in, people).

Still, who knows: this article might help the BoE (and other central banks) stop dragging their heels in the wake of a crashing local and global economy, and move to proactively secure monetary sovereignty while at the same time promoting the financial autonomy of individual citizens. (Stop laughing and pick yourself up off the floor; stranger things have happened.)

Banks and governments just need the right motivation; i.e., a motivation that threatens their financial control over the markets and the masses.

It is in part a question of context and definitions. According to a Bitcoinist article:

“… Central bank officials also say private cryptos pose threats to sovereign monetary policies making these CBDC efforts part of the collective Libra countermeasure.”

Exactly. We have been saying that all along, but getting it right on the part of central banks will require these “efforts” are not merely a negative reaction to Libra (and other cryptocurrencies). It will also require a positive, proactive component that accounts for why crytpocurrencies are gaining ever-greater popularity amongst increasingly jaded populations — populations who are currently forced to live “zero sum” lives that are purely based on the acquisition of an ever-greater number of third-party units of exchange (i.e., fiat).

And the context? [As of 18 April 2020] take a look out your front door. Fiat continues to stutter and sputter in the face of yet another looming recession brought on by a spectacularly tanking global economy. Worse, in the background, meddling to exacerbate an already bad situation, (most but not all) banks and (most but not all) governments continue to sit on their hands and carp at — while attempting to legislate against — nascent technologies that could help solve the problem.

Great system, huh? And we keep voting them in only so they can keep getting away with it — and therein lies the real problem.

Think about it: why would banks and governments want a truly decentralised digital fiat currency when by default this would require accountability on their part. Ouch.

Read on to find out how CBDCs can indeed be made to work — if the political will is there to serve the people and not only (most but not all) self-serving politicians and their banking cartel cronies…

…And if it the will is not there? Not a problem. Decentr is in conjunction with our partners stepping in to fill the economic breach — that ever-widening chasm between the type of convenient and user-centric currency and economy people want and the easily manipulated, state-backed fiat-money we are all but forced to use as the only option (…at least for now).

Regulators and CBDCs

An analysis of the sustainability and practicality of issuing CBDCs — which are ostensibly centralised digital fiat currencies — when compared with the advantages of issuing the same currency on our 100% decentralised native platform, Decentr, reveals the theoretical shortcomings of such currencies in practice.

In a letter sent to Federal Reserve Chairman Jerome Powell, two U.S. lawmakers want the Federal Reserve to consider creating a digital dollar, noting:

“With the potential for digital currencies to further take on the characteristics and utility of paper money, it may become increasingly imperative that the Federal Reserve take up the project of developing a U.S. dollar digital currency.”

That statement is as good a place to start as any, as it misses with unswerving accuracy the point and potential of digital currencies — “digital currencies” being what they are explicitly termed (in this letter and elsewhere in the context of CBDCs). And therein lies an important distinction: CBDCs are not referred to as digital fiat “crytpocurrencies” for a good reason.

What is that reason? Over 40 countries have or are looking into creating a national digital fiat currency. This is almost always on the pretext that the digital currency is to be adopted by a federal regulator, essentially under its rules, with the central bank issuing digital fiat money, rather than crytpocurrencies in their most popular, decentralised form.

No real surprise there. As it stands, it is unlikely that any large economic power can or ever will pursue a fully decentralised digital fiat currency — at least they won’t, we predict, independent of the Decentr platform.

They will not because currently they cannot. The issue in the minds of regulators is two-fold:

1. Regulators fear that the success of a digital fiat currency (or many of them), unshackled by the restraints centralised manipulation affords, will lead to hyperinflation that will bankrupt federal reserves, which accounts for;
2. The paternalistic view taken by most state regulators that it is too “dangerous” to give economic autonomy to the population.

This is patently ludicrous logic. Putting aside the fact that cryptocurrencies are deflationary by issuance and design, think it through: if states do not offer a CBDC with superior properties to fiat (which is presumably why they are looking into them in the first place), the public will simply choose an alternative, unconnected to state issuance, which does.

Even the US lawmakers who tabled the letter to the Federal Reserve are aware of the potential loss of economic governance this stance implies: this prompted them to enquire as to whether the central bank is looking into creating its own version. Rep. French Hill (R-Ark.) and Rep. Bill Foster (D-Ill.) outline concerns they have about risks to the US dollar if another country or private company creates a widely used cryptocurrency.

That is where we step in. Our native token, Dec, underpinned by a radically-new heterodox school of economics, called “deconomics” (decentralised economics), is designed to be that widely used cryptocurrency. Convenience and value will ensure the uptake of Dec is swifter than lawmen, working within the snail-paced constraints of state bureaucracies, can predict or respond to. Federal lawmakers need to take affirmative action now in order to be part of the deconomy or very soon risk economic governance shifting away from any semblance of federal influence, irreparably and forever — their choice.

There is no way round it — and state regulators are starting to wake up to that fact.

Widespread crypto adoption is a tidal wave about to break over all our heads and the future will be defined by those who are ready to embrace crytpocurrency and not those who choose to remain as insignificant bit players in the delusional fiat farce — and that includes nation states and their fawning central banks.

State regulators will be required to engage on a level whereby their state banking system cannot wholly dictate the terms and outcome of CDBCs (as that is the nature of true crytpocurrencies): at least they will be required to if fiat is to remain at all relevant.

Whether regulators like it or not is, at this point, immaterial. The world has ceased to march to the beat of only their economic drum: it is cryptocurrency that has changed the rhythm, timbre and tempo of our collective march to a brighter economic future, unhindered by the discordant background humming of fiat.

The Current State of CBDCs

Many governments across the world have, and are, looking into digital currencies with a sort of “keeping up with the Joneses”-type approach: i.e., the P2P crowd is doing it so to “keep their hand in” the powers-that-be had better do something at a federal level as well. Maybe issue their own? Maybe regulate against it? Most governments are, post-Libra, currently in headless chicken-mode as regards their next policy and governance steps.

Not a great place to be. (Imagine the same prevarication on nuclear weapons and the arms race?)

Regardless, some governments have already implemented the idea of digital fiat currencies, some keep researching it, while others — like Germany — have dismissed the idea altogether.

All well and good. Our issue with centralised CBDCs is, as discussed, that, more often than not, they simply create a mirror currency (and economy) to fiat, and hence they are only creating a form of currency that people will still want an alternative to anyway.

At least people will want an alternative when they figure out the digital counterpart is as rigged in the state’s favour — maybe more so — than its fiat counterpart.

The charade gets exhausting: most CBDCs — even the successful ones — are just another example of a smoke-and-mirrors game centralised authorities like to play in order to appear to be acquiescing to the common will while really doing the exact opposite: using people’s interest in exercising basic freedoms as a catalyst to tighten the noose.

Why not circumvent that scenario and start by creating a fully decentralised currency, issued on Decentr, which is part of an alternative (“alt”) economy — the deconomy? The deconomy is uniquely controlled at the level of the individual citizen, and is based on assigning value to the data users generate, exchange and reuse. This means the method of “currency-value” creation is also the means to complete transactions, entirely negating the possibility currency “issuance” can outstrip the demand for said currency, eliminating the possibility of the CBDC causing inflation.

How so? This level of autonomy would ensure a fully decentralised digital fiat currency — a true cryptocurrency — that rises in value due to it being supported by collective engagement as expressed through data and not the collective delusion that keeps the “value” of fiat afloat on a tide of unsustainable debt-based money issuance.

Moreover, such a system offers the tantalising prospect of pegging fiat currency to a state’s cryptocurrency, with each currency maintaining its value from different but interdependent aspects of a country’s socioeconomic output (fiat being supported by industry/economic activity; digital fiat being supported by personal data generation, reuse and exchange).

In this way, with our alt digital economy and the mainstream economy being mutually supportive of each other, it will create hitherto unheard of socioeconomic stability.

Decentr underwrites this stability: our platform offers a way for nations to issue their own CBDC (“dUSD”, “dAUS”, “dGBP”, etc), but in a way that provides a parallel alt economy to the state-run economy. This alt economy is backed by the data its citizens create, and is not issued against spurious debt mountains as part of the Wild West banking practices that are the norm in the fractional reserve banking system so enamoured of the dollar.

It works for governments and their peoples: the digital fiat currency issued on Decentr is still within the purview of the necessary limits of state governance — for legitimate tax purposes, ID verification, etc — but is not bound by the limitations and vagaries endemic to fiat and the fabricated mainstream economy it supports.

There are good signs that this is the direction the world is heading.

Countries That Have Adopted Digital Currency

Senegal and Tunisia are two of the earliest adopters of a national digital fiat currency, which are fully dependent on the central banking system and can only be issued by an authorised financial institution. Citizens can use their smartphones to make instant mobile money transfers, pay for goods and services online and in person, send remittances, pay salaries and bills, and manage official government identification documents.

These are great steps forward; however, these CBDCs, operating under state issuance regulations, are still dependent on the federal banking system and mainstream economy for value: so — broadly speaking — what is the point?

How much more powerful would the concept be if these digital fiat currencies were able to unlock the potential of each and every citizen of these countries?

By creating their CBDC on Decentr, the value of the Senegalese “eCFA” — named after CFA franc — and the Tunisian “BitDinar” would then be based on individual data value generation, reuse and exchange (recorded on Decentr as a user’s Personal Data Value [PDV]). This would usher in a “true” data economy as part of a uniquely stable alt economy that would be democratically controlled at the level of every individual in line with state regulations.

In this scenario, the digital fiat currency is unshackled from the vagaries of its fiat counterpart: hence, “user A’s” Tunisian BitDinar is not the same value as “user B’s” BitDinar due to PDV being relative to each user’s online activity and engagement. Deconomics predicts this would dramatically stimulate supply and demand in the mainstream economy, as well as increasing proactive data generation, reuse and exchange online amongst the populace, all backed by the mainstream glocal economy in conjunction the wider deconomy.

Better yet, when the Decentr-issued CBDC goes up in value, this has a positive effect on the corresponding fiat currency, due to the fact healthy data generation, exchange and reuse underpins the nature of the stable and productive society that directly supports the fiat currency.

The Marshall Islands is a good example of what is purported to be a fully decentralised cryptocurrency — which is made possible in large part by the fact the island has no central bank, meaning there is no one to appease as regards the creation of a truly decentralised digital fiat “cryptocurrency”.

The Marshall Islands — with a population of roughly 53,000 people — being a presidential republic in free association with the United States, has been using the U.S. dollar (USD) as its official currency. However, since March 2018, it has implemented another legal tender: its own cryptocurrency dubbed “sovereign” (SOV), which is genuinely decentralised, and the government cannot control the money supply (after the ICO).

The government has reportedly limited the SOV supply to 24 million tokens in order to avoid inflation; again, issues of inflation/deflation would find their own level if the crypt was anchored to data value and not the mainstream economy. Regardless, this crypt will be an interesting one to watch.

Venezuela’s state-backed digital currency is one of the more famous examples, due to the fact that it is underwritten by the country’s vast oil reserves and other natural resources. It continues to make headlines due to its issuance being in part a reaction to US meddling, and is intended as way to give liquidity to the country’s natural resources, whether they can be exported or not under tough US sanctions.

For this reason, the Venezuelan “Petromoneda” would be an ideal candidate for Decentr issuance.

Why so?

Not only would the Decentr platform allow Venezuela’s natural resources to become liquid, but it would also dramatically increase the value of the Petromoneda, due to the fact the data generated by industry supply chains, inventory, production, etc, would be credited to the national PDV.

Countries That Have Rejected Digital Currency

The folly of centralised CBDCs that are not anchored to data value is best revealed in those cases where digital fiat currency has failed to take off in the way that was expected.

Ecuador is one of the pioneering countries in terms of CBDC adoption. The country announced its own electronic currency (“dinero electrónico”, or “DE”) back in 2014. By February 2015, it was acting as a functional means of payment, allowing qualified users to transfer money via a mobile app.

The currency ultimately failed. On March 26, 2018, local newspaper El Universo reported that the system would be completely deactivated on March 31, closing all the accounts altogether. In December 2017, Ecuador’s National Assembly passed legislation to abolish the central bank electronic money system and outsource e-payment systems to private banks.

As Lawrence H. White, a professor of economics at George Mason University, writes in his article for the Cato Institute, the main reason for the failure of this CBDC was the inability to attract enough users — a total of 402,515 accounts were opened, while only 41,966 of which were ever used to purchase goods or to make payments; 76,105 were used only to upload and download money; and the remaining 286,207 accounts (approximately 71 percent) that were opened remained inactive for the whole time, essentially because people — having become accustomed to US dollars — were reluctant to accept another currency and did not trust the Banco Central del Ecuador (BCE) as an institution.

These are all telling pitfalls that any digital fiat currency might succumb to: however, they can be easily overcome.

On Decentr, “trust” is an issue that 100% decentralisation overcomes by creating a trustless decosytem while “not enough users” is symptomatic of the redundancy of a CBDC that offers little more utility than its fiat counterpart at greater inconvenience.

The bottom line is that people need to be given a reason to own and use and newly created digital fiat currency: Decentr provides this reason by assigning data value to the activity of purchasing and using the CBDC — value which is then accrued by the user as PDV, giving him or her greater spending power for their next trade or purchase ad infinitum.

We are not alone in this observation: the final word on the subject of CBDCs goes to the board director of the Swiss National Bank (SNB), Thomas Moser. Although Switzerland has been named the most crypto and blockchain-friendly country in Europe, it recently shared its reservations regarding the usefulness of state-backed digital currencies.

On June 21, Moser stated that crytpocurrencies and blockchain are not innovative enough to consider issuing a state-backed digital currency. Speaking at the Crypto Valley blockchain conference in Zug — also known as the “Crypto Valley” — Moser compared blockchain in its present condition with the “useless innovation” of CDs, arguing that crytpocurrencies merely imitate already existing products — such as “digital shares, bonds, vouchers”.

Moser has a point. He succinctly sums up his position, as well as ours, while highlighting the reason why Decentr is necessary for global acceptance of digital fiat currencies, concluding that:

“People will only switch to something new if it works better or is cheaper.”

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