Show notes
In this episode I read through some of the ECB's Annual Report and comment on the current state of the Euro, as well as their efforts to create a digital Euro. This is applicable to bitcoin because the ECB is a major incumbent in the current system, and is trying to launch a bitcoin competitor, which they call a Central Bank Digital Currency.
In the first part of the podcast I detail some of the inconsistencies in their Main Findings. Namely, they claim the Euro's currency status has remained "broadly stable" through 2020. Yet, when we read their stats, nearly everything is declining and at a fairly rapid pace. This is very notable, especially since the Euro is already at "historic lows" of importance in the financial system.
Next, I read through the entire CBDC section and comment thoroughly about what they are getting right and wrong. Unfortunately, they are getting most things wrongs, but they are doing better than, say, two years ago. The main issues I see are:
1) Means of payment is not a function of money. Paypal or Visa are not functions of the dollar. They are separate features. We can easily and plainly draw a line between Paypal and the dollar. We don't consider Paypal as part of the dollar. Therefore, means of payment is not a function of money, it is a function of financial infrastructure around money.
2) Features are not additive. Throughout their report, they claim adding feature X will result in Y, and adding feature A will result in B, as if these features are added in isolation without any second order effects or trade-offs. Indeed, they claim there is a positive feedback loop to adding more and more features. In fact, every feature has a trade-off and adds to the complexity of the whole. This dynamic is actually a negative feedback loop.
3) Interoperability and anonymity - central banks can only give lipservice to these two things. They cannot truly be interoperable, because that opens them up to monetary competition and gives sanction to speculative attacks. One thing legal tender laws do is to close down monetary competition. Anonymity as well is an obvious plus, so they consider it here, but it fact central planners cannot offer anonymity else they'd lose control.
4) Many of these things are already possible and don't need a special new solution by the central bank. In the real world, these solutions are squashed by regulation, not some technical limitation. There is a reason those regulations where put in place (whether you agree with it or not), and providing a new solution effectively routes around those inefficiencies that are part of the regulation process. The central banks would be undermining their very own regulations in other words if they solved for these things in a CBDC.
5) Interoperability, anonymity, censorship resistance, and being a bearer instrument are products of decentralization. A CBDC is by definition centralized around the central bank, so cannot provide these things.
Links ECB 2021 Annual Report https://www.ecb.europa.eu/pub/ire/html/ecb.ire202106~a058f84c61.en.html
Hypothesis link https://hyp.is/go?url=https%3A%2F%2Fwww.ecb.europa.eu%2Fpub%2Fire%2Fhtml%2Fecb.ire202106~a058f84c61.en.html&group=world
Lagarde conviction https://www.nytimes.com/2016/12/19/business/lagarde-imf-verdict-france-questions.html
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