Crypto market has again started raising strong emotions among investors. It is worth noting, however, that ongoing works on the digital currencies implementation into financial system look equally interesting.
What's next with cryptocurrencies?
Previous year brought falling prices among vast majority of cryptocurrencies. The most important of them lost about 80% of their values.
In January, we have seen the bottom of the bear market. Bitcoin was trading just over 3 000 USD, while Ethereum - around 100 USD. Investors' moods were so negative that they were no more willing to sell. In the following weeks, cryptocurrencies began to strengthen. To date, Bitcoin has been up to 11,000 USD, while Ethereum has been up to over 300 USD.
Along with our clients, we have carried out Ethereum purchases - first for 150 USD, then for 256 USD.
Regardless of whether or not cryptocurrencies prices currently rises, we are most interested in their potential use within the financial system. That is why we listen carefully to what the most influential bankers say about this topic.
Recently, we have thoroughly analyzed statements of Agustin Carstens (General Manager of BIS - central bank for central banks) and Christine Lagarde (head of the IMF).
The most conspicuous was the fact that both Carstens and Lagarde raised the subject of CBDC (central bank digital currency), or the cryptocurrency issued by the central bank. How would it work? Carstens gives two options. In the first scenario, CBDC is available only in interbank settlements, through large-scale operations. Second scenario assumes the use of CBDC by ordinary citizens. A cryptocurrency would be widely available to citizens, but "the possibility of cash settling would disappear."
Is the second scenario possible to implement? The fact that this is not a fairy tale is proven by the statements of Victoria Cleland from the Bank of England, who has confirmed several times that the British system of settlements (RTGS - real time gross settlement) has the ability to connect with blockchain. For clarity: blockchain is a technology based on which cryptocurrencies work. In February 2019, Cleland made it clear that although recently RTGS reform was planned for 2020, the real deadline is 2025.
Several questions arise regarding the introduction of the central bank cryptocurrency. Starting with the most obvious ones: In what way such changes could happen? Why should people give up cash? Why should the public choose CBDC, instead of one of the currently popular cryptocurrencies?
The first two questions were answered by Carstens, General Manager of the Bank for International Settlements. In one of his speeches, he mentioned that physical currencies are based solely on the trust of citizens. This trust may be at risk in the event of "currency devaluation, hyperinflation, disruptions in the large-scale payment system or bank insolvency".
Subsequently, Carstens admitted that he wanted to give up cash to look more like decision of the society than change forced by rulers.
From our perspective, it looks like that: central banks over several months have been announcing that the world needs higher inflation. Thereby, fighting for the destruction of currencies on a larger scale, which is already under way, as Carstens mentioned. As for the public to give up the money - special PR campaigns are running for this purpose. In part, they are run by the bankers themselves, (as we write below). However, before we get to that, it is worth answering the latter question: why should the public choose the central bank cryptocurrency?
Christine Lagarde has mentioned that using private payment systems (instead of using CBDC) could mean lowering citizen's credit rating. Are you wondering what individual ratings are? In simple terms, the head of the IMF meant that it is about punishing citizens when necessary, for example, if they do not use the cryptocurrency issued by the central bank.
Cryptocurrency of the central bank and its promotion
As we mentioned before, bankers' plans likely mean one thing: cash abandonment for electronic payments. To make this possible, society should be shaped and led in a proper way. For this purpose, appropriate campaigns are carried out for a while, in which the most influential bankers are involved. We decided to draw some Carstens and Lagarde statements and briefly refer to them. On the one hand, to show how the crowd is manipulated, on the other hand, because a large part of these fragments is simply spoofing the reality.
Lagarde: However, if private digital currencies were too risky and unstable, citizens can call on central banks to create digital forms of legal tender.
Independent Trader Team: Typical way of globalists' acting. Bring a crisis and then exploit it to suit their needs. Lagarde's words clearly show that one way to implement IMF or BIS plans is to trigger strong price drops of cryptocurrencies (of course, after more people will be involved in their purchases). After such situation, frightened citizens would have to ask politicians for help (politicians would ask central banks).
Carstens: It follows on that if deposits shift to the central bank, then perhaps lending would need to shift as well. So, in addition to the deposit business, the central bank would be taking on the lending business, with all the commitments of time and resources that requires. (...)We know from historical experience that, during times of financial stress, money moves away from risk to banks and assets that are regarded as safe. In such scenarios, it is not unrealistic to imagine that a premium would open up, where one euro of deposits in the commercial bank buys less than one euro’s worth of CBDC.
Independent Trader Team: This is an issue that we highlighted already several times. Upcoming changes in the financial system may mean the end of commercial banks. Perhaps, in the event of problems (e.g., strong devaluation of currencies), commercial banks will be blamed for creating inflation by providing cheap loans. Then all their activities will be taken over by central banks.
Lagarde: What role will remain for cash in this digital world? Already signs in store windows read “cash not accepted.” Not just in Scandinavia, the poster child of a cashless world. In various other countries too, demand for cash is decreasing—as shown in recent IMF work. In ten, twenty, thirty years, who will still be exchanging pieces of paper?
Independent Trader Team: Lagarde manipulates public opinion, giving extreme examples from Scandinavia, where the state knows better than citizens what is good for their children. We could also give an example of Germany, the largest EU country, where cash is not losing its popularity.
Lagarde about disadvantages of the central banks' digital currency: Central banks might design digital currency so that users’ identities would be authenticated through customer due diligence procedures and transactions recorded. But identities would not be disclosed to third parties or governments unless required by law. So when I purchase my pizza and beer, the supermarket, its bank, and marketers would not know who I am. The state might not either, at least by default.
Independent Trader Team: Right now in Poland, as many as 13 different agencies have access to all the data, but citizens are told that their private data is safe. Lagarde's words about "maximum anonymity" sound ridiculously.
Carstens: Further, the anonymity of cryptocurrencies offers perfect cover for people who want to avoid capital controls or taxes, launder money or engage in other illegal transactions. One academic study suggests that about a quarter of bitcoin users and about 46% of bitcoin transactions are associated with illegal activity. Meanwhile, money and other assets stored in regulated financial institutions are subject to consumer protection, protection against money laundering and combating terrorism financing.
Independent Trader Team: Statistics thrown at the beginning are crap used only to put paws on transactions using crypto. How do you know that it is 46%, not 16% or 86%? Someone monitored transactions and arbitrarily stated whether it is a lawful payment or not?
The second thing is protection against money laundering. It would be enough to liquidate income tax and there will be no such thing as money laundering.
As for combating financing of terrorism, it has been known for a long time that terrorists are those who do not obey bankers. In turn, these who obey are " fighting for freedom." On this basis, U.S. supports Qatar and Saudi Arabia, despite the fact that Hillary Clinton in her e-mails described these countries as "the largest sponsors of terrorism."
As you can see, in papers of the BIS and the IMF heads, you can sometimes find clues about what "can happen". On the other hand, there are also some tips on how to keep society in fear.
Consequences of CBDC introduction
What will change if central banks actually introduce cryptocurrencies and they will be accepted by the public, and cash will be withdrawn? First of all, anonymity of the transaction will disappear, not to mention the barter exchange. Regardless of politicians and bankers assurances, authorities will have access to citizens' transactions.
Another issue - if cash will be excluded from trading, central banks will be able to introduce deep negative interest rates. In current realities, such a move could mean bank runs (dissatisfied crowd do not want to pay for deposits, so they go to ATMs to withdraw cash). Meanwhile, after banknotes elmination, this problem disappears.
It is difficult to say what would happen with commercial banks in such a situation. One of the possible scenarios we already described - total collapse of commercial banks and central banks taking over their responsibilities. However, one can imagine a situation in which politicians want to create an appearance of competition, and therefore a small group of banks "too big to fail" is maintained on the market. Then these banks would create cryptocurrencies, which would be considered almost as good as the central banks' cryptocurrencies.
Let's remember one more thing - if in case of every transaction it is necessary to have access to the system, you can simply block payments for all uncomfortable people. Aaron Russo (0:40) spoke about a similar pattern (although in the context of chips).
If you can not believe this, we would like to emphasize that in Poland, tax office can block your company's account for up to three months based only on suspicion.
A scenario in which central banks create their own cryptocurrencies, and cash disappears, we consider as extreme. If, however, it would happen somewhere, it would be certainly China. First of all, the Middle Kingdom already has a problem with gigantic debt at every level. Secondly, in some parts of the country system of assessing citizens was introduced, so it would not be difficult to force them to use particular cryptocurrency. Thirdly, electronic payments are already extremely popular among Chinese people.
On the other hand, it must be said that in some regions of the world, eliminating cash sounds quite abstract. Earlier, we mentioned Germany. In turn, when the European Central Bank recently decided to exclude a 500 euro note, Swiss National Bank decided to introduce 1 000 franc note. Swiss, like many Germans, are still willing to use cash even though they could use electronic payments.
Looking at the overall situation in the system, there is a scenario that seems most likely. At the moment, central banks are doing everything to create high inflation. Sooner or later they will eventually succeed. An increase in inflation will bring temporary relief to the system, because it will devalue debt. On the other hand, decreasing purchasing power of currencies will be increasingly burdensome for ordinary people. Confidence about the notes we pay in stores will drop significantly. Commercial banks will be blamed for this development. Crisis in the form of zero economic growth and high inflation will make the society to demand an intervention by the government. Central banks will be able to announce their plan of action.
One part of it will be an introduction of cryptocurrencies of central banks. Most likely, by that time, cash transactions will be very limited, for example we will pay a special tax for holding funds in a physical form. After cryptocurrency introduction issued by central banks, another hit on cash will probably come. It may be, for example, establishing an electronic currency rate for the paper currency (the latter will be worth less). Total elimination of cash seems unlikely, although it is possible.
Certainly, actions of central banks (fueling inflation and, as a consequence, declining confidence in paper currencies) will increase the price of precious metals. A foretaste of what will happen have been clearly seen over the last few days when the ECB and Fed were competing who would destroy its currency more. As a result, gold has broken through 1 400 USD and reached its highest level over the last 6 years.
Independent Trader Team