Bitcoin vs. CBDC

Bitcoin vs CBDC

Central bank digital currencies (CBDCs) are forms of money issued by the central banks of sovereign countries. In this respect, they are no different from traditional fiat currencies issued by various countries.

Individuals who will in future benefit from the use of CBDC as a means of payment will have their bank accounts directly with their local central bank. This is different from modern digital currencies, as individuals currently have bank accounts with commercial banks, which are licensed by the central bank and allowed to issue loans under the fractional reserve banking system.

CBDC benefits

The ideas behind the CBDC are many. The main upgrade to the existing system is to make it easier to use compared to the current banking system, which involves many banks in the same area. The centralisation of banking in a single state institution is intended to improve its usability and thus abolish commercial banking. In addition, the CBDC should also enable the full digitisation of fiat money. This would put an end to cash transactions, and all our financial transactions would be conducted through a centralised central bank database. This raises many of the problems associated with the full centralisation of the financial system. Many critics argue that this would lead to a socialist social and economic order.

Weaknesses of the CBDC

Due to privacy, human rights and similar issues, many individuals and many authorities are moving away from the use of CBDC. The most successful attempts to implement them have taken place in areas where the authorities control a large part of the banking and monetary system, i.e. in more socialist regimes, such as China.

In addition to problems with economic calculation, central planning of the money market and interference with personal property, CBDCs are a major drag on economic growth and pose a major risk of hyperinflation or economic overstretch. By giving one central entity the key to the whole economy, it gives it unlimited power to dispose of capital. This makes it easy for politicians to gain political power, while stealing time and property from the individuals who produce the goods and have to pay the taxes that fund the public sector. In addition to taxation, increasing the money supply through monetary policy also raises the prices of basic necessities, thus reducing the purchasing power of individuals whose wages do not adjust in line with inflation. Interventionism, or state interference in the economy, leads to a socialist social order. This is also the so-called road to slavery, described by Austrian economists Ludwig von Mises and Friedrich von Hayek. Mises, however, in his extensive critique of socialism, stressed above all the problem of economic calculation in a socialist system due to the absence of market signals on the basis of which entrepreneurs make business decisions. The absence of a price mechanism due to the lack of competitors, where economic decisions are taken by a single entity, leads to inadequately invested capital. Since the central planner is not rewarded with a profit or penalised with a loss for his economic decisions, he cannot know whether he has produced the right goods in proportion to their actual demand in the market, as this is reflected through market prices.

Just as a central planner cannot make efficient economic decisions for other goods in the absence of market prices, he cannot make efficient decisions about the supply of money on the market, because he has no information about its demand. Thus, CBDC managers do not know how much credit the market is demanding and what are the real interest rates people are willing to pay for credit. By interfering ineffectively in the market, they cause chaos and confusion, resulting in rising prices and shortages of more desirable goods, damaging and holding back growth at all levels of the economy.

People use the new money in circulation to invest in a variety of investments that cannot be fully successful because the amount of capital is not sufficient for the amount of money it only partly represents. This leads to inflation, i.e. rising prices and falling purchasing power of money, causing newly created market bubbles to burst. These are due to increased investment of new money. When the bubble bursts, the money supply in the economy falls, which is the so-called corrective mechanism of the traditional fiat system, keeping it within the limits of hyperinflation and extending its life. Without this mechanism, an overstretched economic system would quickly turn into a hyperinflationary one, where the purchasing power of money is rapidly declining as its supply increases without limit. This is similar to Bitcoin’s mining algorithm, where the difficulty of mining every 2016 blocks (14 days) is adjusted to the average time it took the miners to calculate the cryptographic equation of a new block, so that it averages out to ten minutes.

CBDCs would nullify the corrective mechanism of the fiat system, because their enforcement would lead to the end of commercial banking. This is also the end of fractional reserve banking, as all money is created entirely within central banks’ databases. The quantity of credit would thus fall sharply and the money supply would rise sharply, as the authorities want to issue a universal basic income, or universal social assistance, which would pay citizens a monthly income that they could use to meet the necessities of life. This would require the constant creation of new units of money, causing a rapid increase in its supply – hyperinflation. While CBDC supporters argue that implementing them would make it easier to regulate the money supply, this only means that politicians would be able to give and take money away from their citizens, causing ever-growing socio-economic disparities and market inefficiencies, as prices and wages would constantly fluctuate and fall behind the new money supply.

Bitcoin

Bitcoin is a free-market alternative to central banking. It is a monetary system that does not rely on state coercion. The free market embraces it because of the advantages it offers its users. It is the hardest form of money in history, a characteristic that is guaranteed by its high stock-to-income ratio. Since Bitcoin has the lowest inflation rate of all monetary commodities, i.e. the lowest annual inflow compared to the total stock, it represents money that does not lose purchasing power. In addition, Bitcoin has a strictly limited total supply of coins, making it an absolutely rare digital commodity. Bitcoin is also the hardest commodity to increase the supply of, because its monetary policy is protected by the world’s most powerful physics- and mathematics-based computer network, while the policies of other monetary systems are determined by humans.

Since Bitcoin’s algorithm generates blocks of 10 minutes on average, we can use Bitcoin as a decentralised clock for longer periods of time. All the energy put into it retains its value in thermodynamic units of satoshi. Since Bitcoin and time are absolutely scarce commodities, we can finally prove that time is money. By spending time, we earn money. The money is used for future leisure activities. People always work to meet their own needs. The ultimate goal of work is not to earn money, but to gain leisure time. We make money by producing goods that others value and are willing to pay for. Money allows us to use it to buy goods or activities in the future, thus gaining leisure and well-being.

This is how we find out that money represents time. The better it serves its monetary role, the better it feeds our spending power and thus the amount of time we can use it to buy. That is why money that does not lose purchasing power is the best store of our time and therefore value, because it allows us to gain more purchasing power over time than we had when we earned it. The reason for this is that humans create new goods every year, and the amount of goods we create grows over time. As the quantity of goods increases each year, the price falls compared to strictly limited units of money, giving us more purchasing power.

Bitcoin as a measure of economic activity

As we have already established, Bitcoin has an absolute limit on the amount of units it can hold, which gives it a closed monetary system without inflation. This brings up another important feature, i.e. the equivalence of its units. One bitcoin will always be equivalent to one bitcoin, not only in that it is made up of exactly 100,000,000 subunits, which we call satoshis, but also in that one bitcoin is equivalent to one bitcoin at any time on its timeline. One bitcoin is therefore always equivalent to one of the 21,000,000 units of coins in the Bitcoin network. This is the most important difference between the absolute scarcity of bitcoins and the relative scarcity of other commodities such as gold. One kilogram of gold corresponds to one kilogram in terms of weight, but not in terms of proportion compared to the total gold stock over time. So one kilogram of gold today is not equivalent to one kilogram of gold in a year’s time, because by then the supply of gold will have increased due to mining. The same is true for all other commodities in the economy, as well as Bitcoin in its first century of operation, as its coins are currently still being mined, but we know that their final supply will surely be less than or equivalent to twenty-one million.

A good metaphor for this idea is a ship that sails. A ship that floats is worth infinitely more than other ships that sink at different speeds, regardless of the size of their hole. It follows that the value of Bitcoin, as a closed system, is infinitely greater than any open system, regardless of the amount of its inflation, or the proportion of newly created units compared to its existing stock. We can also take the Mona Lisa and oxygen as examples. The Mona Lisa is considered a unique work of art that no one can fake. Oxygen is the most important means of our survival, because if we run out of it, we die very quickly. At a biological level, our body experiences the most panic reflex to oxygen deprivation. Despite its importance to our survival, oxygen is abundant. It is an open system with unlimited units on Earth. The Mona Lisa represents a closed system, of which there is only one unit in the world. Thus, the value of the Mona Lisa, expressed in units of oxygen, increases indefinitely. The value of oxygen, expressed in Mona Lisa units, is practically zero. When oxygen is in short supply, it becomes a closed system whose value to us is infinite compared to other open systems.

As we have already seen, all open systems continually lose value compared to a closed system. Another important idea that emerges from this observation is that Bitcoin, as a closed system, is not volatile, but rather its value reflects the volatility of all other assets and commodities. Bitcoin is completely predictable and stable in its structure, as its monetary policy is guaranteed to us by every node that uses its software. By using the software, the nodes agree with and support its monetary policy.

It is about security against foreign actors who would want to interfere with our assets and manipulate our financial transactions. Blockchain technology was used by Bitcoin’s creator to solve the problem of double-spending, which is very common in the digital world. Bitcoin thus bypasses the need for a central entity to oversee our transactions and ensure that money is not wasted twice.

Maintaining blockchain technology is extremely costly and complex, as it requires all nodes in the network to have a constantly refreshed copy of the transaction history to ensure that its ledger is authentic and transparent. This requires a huge amount of computing power, but also a vast infrastructure of miners pinning new blocks of transactions into the chain. Miners consume huge amounts of electricity to do this, while at the same time having to buy the latest hardware in the form of specialised computers to keep them competitive with each other.

CBDCs, on the other hand, do not need blockchain technology to operate, as their operators represent the threat that this technology protects the Bitcoin network from. All bank accounts and transaction history are thus held in centralised databases within the issuing central banks. This gives them a major advantage in terms of speed of transactions and final settlements between bank accounts, and requires less financial and energy input. This provides central bank digital currencies with lower transaction and monetary system maintenance costs.

Despite the remarkable efficiency of centralised systems, the monetary system requires independence and resilience to interference from central authorities, as the damage caused by their interference is far greater than the savings in maintaining them. The main harm they cause is economic, as they create huge socio-economic disparities by redistributing wealth from the poor masses towards the rich minorities closest to the economic trough. Centralised control of the monetary system is the most powerful tool for politicians and financial institutions to gain total control over the population and to benefit themselves. It is the ultimate tool of socialism, giving full power to

Centrally banked digital currencies are based on the coercion of the authorities, who demand that we use their means of payment on their territory. This gives them the status of official national currency without having to pass the free market test. As citizens have a bank account with the Central Bank, the Central Bank has control over all our financial transactions and data. It thus acquires the ability to censor our transactions, to tax and discriminate, and in extreme cases to cut individuals off from the local financial system, making it impossible for them to trade with other citizens in the absence of other alternative means of money. These capabilities have led many people to warn against the potential introduction of a social valuation system, which is already being used in China. It is a system where individuals evaluate each other according to their conformity to state norms and requirements. Anything contrary to these is considered to be acting against the authorities and is punishable by reduced creditworthiness or a fine, or in extreme cases, imprisonment.

This battle also involves the choice of monetary policy, where we choose between deflation (money that grows in purchasing power over time) and inflation (money that loses purchasing power over time), and the type of money dictates our time preference. A low time preference means that individuals save a lot and save capital for later use, knowing that the value of their wealth will be higher in the future, while a high time preference dictates impulsive spending, as its purchasing power requires us to spend it as soon as possible, while it still has value.

The battle for the choice of money also dictates a concentration of power, either in the sovereign individual as the centre of the economic world, or in a sovereign power whose well-being is more important than individual freedom. It is also about the choice of the basis of social relations, which can be either free will or coercion. Sovereign individuals who make decisions of their own free will bear responsibility for their actions and do not pass it on to others, while sovereign power based on coercion takes responsibility away from individuals and provides them with guardianship in the form of social assistance and a public sector that provides free goods and services. Ultimately, it is a question of determining our social maturity and orientation towards or against human civilisation.