Arthur Hayes: Is CBDC a super antidote?

Any views expressed below are those of the author and do not constitute any investment advice.

Perhaps except for the speed of light, everything is relative. So when I call central bank digital currencies (CBDCs) “pure evil,” the next logical question should be – from whose point of view?

What is evil for some can be a product of pure goodness for others.

The three participants in this tragedy are:

  1. “We (that is, the people)”, or those who are ruled.
  2. The government and the political elite manipulated behind the scenes.
  3. Commercial banks chartered by the governments of specific countries.

For us ordinary people, CBDCs will attack the right of people to trade in good faith in all aspects. For the government, this is the best tool to change people’s behavior because we voluntarily upload our lives to social media platforms such as Instagram and TikTok. For banks, CBCD will continue to threaten their survival.

Popular apathy will give governments an opportunity to easily trade CBCD for our physical cash, and a financial regulatory utopia (or dystopia) is coming. But we have an ally, perhaps unrealistic, that can prevent governments from implementing the most effective CBDC structures to control ordinary people—domestic commercial banks.

Satoshi Nakamoto “Adult” brought blockchain. While his purity and kindness shine like the sun, his teachings on the blockchain can be distorted by some ill-intentioned people. This is a very important question because the inflation of the future will be very different from the inflation we have become accustomed to over the past 50 years – a crisis that will require governments to adopt an equally novel, blockchain-powered mechanism, known as CBDC, to stop it. I think CBDCs will enable the government to tackle this new inflation forcefully, but with numerous losses for the people.

Let’s pray.

This inflation is not the kind of inflation of the past

Since the early 70s of the 20th century, the exchange rate began to fluctuate, and since then, the participants in the world’s largest economies have largely experienced inflation of a financial nature. At that time, people’s fiat currencies fell dramatically, but the cost of living did not climb too much (at least to a large extent).

Arthur Hayes: Is CBDC a super antidote?

Oil prices have risen nearly 180% since 1983, with a CAGR (compound annual growth rate) of 2.75%. Since 1983, the S&P 500 has risen nearly 35 times, with a CAGR of 8.44%. Energy is a major currency. To put that in perspective, the Fed is on average only 0.75% above its inflation target of 2.00%. Over the same period, the Fed’s balance sheet has grown from almost zero to nearly $9 trillion.

Crazy money printing is good for financial asset prices, which in turn drives global income inequality – but this inflation does not destabilize governments. This inflation sent an apartment on 57th Street across Central Park skyrocketing to hundreds of millions of dollars in value; This inflation allows you to make $25 in any café in an international financial center.

But today we face an even more terrible inflation: food and fuel inflation. No one is immune except the richest – all will be forcibly displaced, and its iron fist is strangling all the developed and developing countries of the world. Civilians do not care what kind of economic “ism” their government should practice. They are starving, and if those in power cannot solve the problem immediately, then a coup d’état should be staged to get those in power to abdicate.

As a result, the government was in trouble. They must print and distribute money to those who suffer. But at the same time, governments must ensure that capital does not spiral out of control. Never in the entire history of mankind has the world endured such low interest rates and so much debt. Overall, savings and capital will suffer significant losses because debt needs to be erased through inflation. Under the traditional financial and monetary system, its two goals do not conflict – not printing money will make people suffer, but printing money will destroy capital through inflation – and the government will need to rely on some kind of technological innovation to achieve both goals and remain in power.

I believe the answer to innovation will be CBDC.

CBDC is the answer!

Open your wallet and take out your cash. Reach into your pocket or handbag and grab your phone. Now, try stuffing your cash into your phone.

If this were a sci-fi movie, you might succeed—but you’ve discovered that this physics doesn’t hold true in the real world.

CBDCs are government-issued digital currencies (i.e. digital cash) that exist in purely electronic form, making it impossible for you to depend on the above. It’s base money, just like physical cash — it’s a central bank liability. This is different from the electronic money you are familiar with, which relies on traditional commercial banks to operate. These currencies – created by the banking system through lending – are made up of credit money, not the direct liabilities of central banks (a cold form of hard cash).

Another big difference between CBDCs and current electronic cash is that blockchain technology offers innovation so governments can program CBDCs to keep them 100% in control. This additional control allows them to address the twin plagues of inflation.

In this CBDC dystopia, people will no longer take to the streets to protest the high prices of food and fuel, but will have direct access to electronic money and more affordable prices for staple foods. With the exception of government bonds that yield below the inflation rate, those with capital may be barred from making any other investments — restrictions are enforced through the coding of the currency itself, not just the law. All this can be done programmatically, and almost no mistakes, if any.

This in itself is not pure evil. This is certainly not good from a saver’s point of view, not much different from a mandatory pension plan, where you need to hold a certain amount of government debt below the inflation yield as an investment that is “suitable” for retirees. However, CBDCs make these policies easier to enforce than legislative regulation — because their rules are actually codified into money — and can prevent citizens from using their hard-earned money to buy gold, other high-yielding foreign government bonds, or bitcoin.

But what really makes CBDCs potentially hellish is that when governments can push a technology to their own benefit, they never stop and limit themselves to the initial use case. Instead, they will do everything in their power to advance. When CBDCs are used to the limit, they are used by governments to directly control who can transact and for what purpose.

Imagine that you are the “other”. The other in any society is those who are economically exploited because of their race, immigration status, religious beliefs, and/or accent. Most people approve of this ongoing exploitation because they are led to think that some people are inferior because they have certain quality defects.

Now imagine that you and others decide to change your situation through nonviolent means. You march, shout in protest, and participate in nonviolent civil disobedience. You use social media platforms like Facebook, Twitter, and Weibo to organize and influence people to do things. The campaign is gaining momentum, and you decide it’s time to march through the capital to show the country how unjust its discriminatory policies are.

Prior to the march, the movement effectively generated and disseminated photos of small protest sites in other parts of the country that were heart-wrenching and thought-provoking, and led to sustained attention. The government began to feel nervous. The police try to fight back by using tried and tested tactics, such as spraying water on you and your peaceful protest partner, or attacking you with dogs. As history warns us, governments will not sit idly by.

The police have a new tool – CBDC. Instead of taking public action against protesters to stop the upcoming march in the capital, the police have asked Facebook, Twitter, Weibo and other platforms to use their algorithms to find out the data of all those involved in or sympathetic to the movement. In the days leading up to the march, these people were completely frozen outside the financial system.

In the CBDC era, all economic activities between citizens are conducted using digital currency, and the money of the past, such as physical cash, is no longer accepted or even exists. As a result, protesters and their supporters could not fill their cars with gas, buy buses, trains or tickets, eat in restaurants, buy food and water at grocery stores, and ultimately organize effectively – so the march in the capital never materialized. If you don’t have enough to eat, or if you can’t go to the parade from the start, the parade can’t happen.

Under this monetary system, social progress is difficult to achieve because the government can completely restrict citizens from engaging in honest business, and citizens cannot effectively organize against the government. If you believe in hell to some extent, this is a portrayal of hell on earth. Society will no longer progress. With this evil tool, human society will no longer be viable.


When it comes to CBDCs, civilians share a common enemy with the entities in power, which are also their potential allies (although unlikely) – domestic commercial banks.

The power and profitability of banks stems directly from the government’s granting of privileges to legally print money through loans. Banks also benefit from the legal system for the enforcement of financial contracts. Therefore, when the debtor is unable to repay the debt and faces violent sanctions from the state, the bank has the right to recover its collateral assets. Bankers want to make money, and governments want power. Power and interests often go hand in hand (though sometimes not), often with controversy.

Reckless lending by banks has always left governments in political trouble. But historical governments had no choice but to tolerate their presumptuous behavior, because before the invention of CBDCs, banks were needed to make the financial system work. In particular, banks are better equipped than governments to assess credit risk because they put profits above politics. Bad credit is bad credit, regardless of the political party to which the debtor belongs.

Because of their importance to the entire financial system, even when banks screw up and trigger a financial crisis, governments always have to step in, print money, and rescue the banking system without being able to impose any actual sanctions for the damage done by banks.

But now, the government has a tool that can completely take over the most important function of commercial banks – namely, to receive, store and lend citizens’ deposits. All of this can be done at a fraction of the cost and manpower of the commercial banking industry.

Government and government banks, i.e. central banks, have the following options when it comes to how to implement CBDCs. They can do one of the following:

  1. Create a network of nodes for commercial banks. The end user has an account with the bank, and the node is able to move data (that is, money) across the network. I call it the wholesale model. Central banks support commercial banks, so there will never be a digital bank run.
  2. Create a network with only one node, the central bank. Every citizen has an account directly with the Central Bank. I call it a direct model.

The Bank for International Settlements (BIS) has produced this beautiful infographic that categorizes the various types of CBDCs:

Arthur Hayes: Is CBDC a super antidote?

The wholesale model I describe is a convergence of hybrid and intermediary CBDCs listed in this chart.

Wholesale model

JPMorgan Chase (JPM) and Bank of China (COB) are the two largest commercial banks in the world. They are all able to liquidate dollars at the Federal Reserve. Let’s imagine that the Fed launched their own CBDC, which we call FedCoin (FED). There are only two FED nodes, operated by JPM and BOC.

As a U.S. citizen (and citizens of other countries, here for simplicity), you can either download the JPM app or the BOC app. No matter which app you choose, you have a digital wallet for storing the FED. The internal database in the JPM ecosystem transfers FED between JPM’s two accounts. Transferring FED between JPM accounts and Chinese bank accounts requires JPM and BOC to agree on the transaction. It’s like the Bitcoin network, but it’s private, and only JPM and BOC can verify transactions.

JPM and BOC compete for FED deposits by offering attractive deposit rates. JPM and BOC then use their short-term deposits to fund long-term loans to federal government businesses in the form of FEDs.

The Fed is not a for-profit entity and therefore does not charge JPM or BOC fees for operating nodes. However, the Fed may from time to time ask them to detail who did what on the web, and banks must comply with and provide the requested data. The Fed may also direct banks to lend to certain groups of people at attractive interest rates and/or send federal government officials to JPM and BOC to direct them to lend to certain customers.

Although JPM and BOC are subject to the Federal Reserve, they are only one step away from government control. This means that they have their own priorities, which is to make profits, and they may not carry out the Fed’s orders in time to prioritize profitability. Under this model, the government would have more control over the money supply than in economies with physical cash — but given that the government relies on private organizations to implement policies, these policies may not be strictly enforced.

This model does not improve much over FedWire’s dollar clearing system. The banking system is still run by private banks, which are profit-oriented. They may be angry about policies that affect their bottom line. The only major change is that cash is banned and payments will be made entirely digitally.

The horror story of the government’s complete control over citizens’ transactions, which I outlined in the previous section, is still possible in this case, but it will require more manpower to materialize. The more people involved, the greater the risk of poor process execution.

Banks clearly prefer this model. As gatekeepers of the financial system, they can still charge as they see fit, and they can also remove a key competitor – physical cash.

Direct model

The Fed develops its own app, which every citizen can download. This app is the only means of storing and transferring FED. Commercial banks can still get licenses to receive deposits and lend, but they compete directly with the Federal Reserve. Given that the Fed is only concerned with politics, the Fed can set policy that, if banks follow suit, will bankrupt those banks. Specifically, the Fed can pay the highest interest rate on deposits and offer the lowest interest rate on loans because of the spread it is willing to bear as long as it can gain political benefits. The Fed can do this because it will never go bankrupt because it is the government. This makes it the safest place for citizens to deposit federal deposits.

Commercial banks will soon lose their entire deposit base unless they are willing to oppose the Fed. Here’s an example: Imagine the Fed becoming a social justice warrior trying to correct the historical advantage its citizens have gained — the wealth accumulated through slavery and other discriminatory practices. Under the new policy, people of color in the U.S. can keep their money in the bank and earn 10 percent interest and borrow at 0 percent to start a business. White Americans can save their money, get -1 percent interest, and borrow at 20 percent to start a business.

Banks could counter this policy by offering whites higher savings rates and lower rates on business loans. But they may encounter some problems because there are anti-discrimination laws that apply to federally chartered banks. This put the bank in a difficult position. If the government wants to deprive a certain group of people, banks can offer them better conditions, which will be a profitable business opportunity. But the compliance department said no – the profitable business just slipped away. This example, although simple, illustrates why commercial banks cannot confront the government and win in direct mode. Governments can and will set rules that banks must follow, but governments are not subject to such restrictions.

Real world

Below is a brief summary of the measures that the five major central banks have put in place or plan to implement in terms of CBDCs.

  • People’s Bank of China (PBOC) – They launched electronic CNY in a wholesale model.
  • The Federal Reserve-Boston Federal Reserve Bank is working with MIT on the issue. They have not yet decided whether to use wholesale or direct mode.
  • The European Central Bank (ECB) – They have decided to implement a wholesale model, but are still working on the issue.
  • The Bank of England (BOE) – which is working on this and have not yet fully decided whether to issue a CBDC – but if they do, they have said they will implement a wholesale model.
  • Bank of Japan (BOJ) – They are still working on this issue, but have decided that they will implement CBDCs in a wholesale model.

Every country that has at least started to “opt for the CBDC model” has opted for the wholesale model, so it is clear that no central bank wants its commercial banks to go bankrupt. Even in China, the largest banks are directly owned by the government. You can see how much political power banks have within the government. For politicians who care more about power than profit, this is their chance to completely destroy too-big-to-fail banks – and yet, they still seem to be unable to do so on a political level.

Some degree of bankruptcy

How much business will global commercial banks lose if CBDC is introduced in a direct model? McKinsey released a detailed chart on payments as a percentage of bank revenue.

Arthur Hayes: Is CBDC a super antidote?


We can assume that if governments issued money directly to the people, there would be no need for a global payments industry. As of 2021, the industry’s revenue is worth $2.1 trillion, accounting for 40% of banks’ total revenue.

Therefore, $2.1 trillion worth of revenue depends on which model is chosen for the CBDC – which is why, assuming CBDC becomes a reality, the banking sector will make every effort to continue to participate in the payment process.


Whenever the mainstream financial media collectively publish their fears and anxieties about stable currencies, the discussion about CBDCs heats up. The most issued stablecoins are those in the banking system that are pegged to the US dollar 1:1.

For every $1 token issued, stablecoin issuers typically hold a combination of cash, short-term government bonds, and short-term corporate bonds. Here is the latest publicly available information on the 3 largest stablecoins, and I estimate the net profit margin (NIM) and annual revenue for each stablecoin:

Arthur Hayes: Is CBDC a super antidote?

That’s a lot of income. But what about the cost?

The advantage of running these stable bonds is that they cost a fraction of the cost of running a bank.

One bank has thousands of branches and employees demand salaries and benefits. Stablecoins have no branches, only a few employees do middle-office work, and transactions take place on public blockchains like Ethereum.

Banks must pay billions of dollars to build, secure, and maintain physical infrastructure to protect various forms of money, such as cash, coins, and precious metals. Stablecoins do not have to pay any security fees. In fact, every time a user wishes to send value, they pay a transaction fee to the network to cover the cost of security. For example, on the Ethereum network, a fee is paid every time a transaction is sent on the network.

Banks pay billions of dollars for legal and compliance professionals to comply with the law. Stablecoins must also be paid to these people, but need to accept fiat currency from trusted counterparties to buy fixed-income securities. I don’t think the total legal and compliance spend of the three issuers will exceed $100 million per year.

Just like banks, stablecoin issuers like situations where interest rates rise. They don’t pay any fees to token holders, so every time JayPow raises short-term interest rates, they have more cash in their pockets. This week, JayPow raised short-term interest rates by another 0.75 percent — meaning revenue would increase by $1 billion if their NIM grew by equal multiples.

Now you understand why banks hate these monsters, right? Stablecoins do better than banks in banking because their profit margins are almost 100%. Anytime you read about stablecoins, just remember: banks are just jealous.

Also, keep in mind that it’s the too-big banks and financial intermediaries (TradFi) that place beautiful full-page ads in the Wall Street Journal, Financial Times, and Bloomberg. I don’t see a lot of ads for USDT, USDC or BUSD in the aforementioned newspapers. TradFi players pay for the existence of these publications, and it’s clear that coverage of direct competitors is often biased negatively.

The reason stablecoins exist and are popular is because there is no competing CBDC. If the Fed rolls out FED, there will be no reason to use these solutions anymore because the FED will be backed by the government and will never go bankrupt.

To see how I estimate the annual revenue of these stablecoin issuers, see this table. Since the disclosure of assets held by issuers is inconsistent and incomplete, I have to make some assumptions. For example, I don’t know when certain securities were acquired, and I don’t know what certain assets actually are, because they are described in very generic terms. I’m grateful to Circle and Binance for providing CUSIP for most of the assets they hold. This transparency should be emulated by all, so that banks can no longer complain through the mouthpiece of the mainstream financial media.

Super antidote

I’m pessimistic because I believe CBDCs using the wholesale model will be rolled out in all mainstream economies. Because they have nowhere to go, they cannot get out of the predicament of inflation without using such tools to pacify the commoners and suppress the nobility financially.

I’m equally pessimistic that people are busy scrolling through videos and don’t have time to think about why their physical cash has disappeared and their financial sovereignty has been blatantly stripped away.

On the other hand, I’m optimistic because at least the most commonly used CBDC model will be the wholesale model, and the most negative aspects of this technology may be offset by profit-oriented, too-big-to-fail commercial banks that are often at odds with power-hungry politicians.

I am also optimistic that we still have the ability to buy the supreme antidote: Bitcoin. This time will not last forever. Capital controls are coming, and when all funds are digitized and certain transactions are not allowed, the ability to buy Bitcoin will soon disappear. If this description of doom resonates with you and the gains in your liquid equity don’t come from Bitcoin, the best date to buy Bitcoin was yesterday.

China’s digital currency, CNY, is supported and primarily operated by PBoC and is the most widely used CBDC in the world. “As of August 31, transactions using the digital yuan exceeded 100 billion yuan ($14 billion), up from about 88 billion yuan in 2021,” according to the central bank. More than 5.6 million merchants can now accept payments. People’s Bank of China said users completed 360 million transactions in 15 pilot areas covering 23 cities. These figures are the best contrast with the statistics for the end of 2021 listed below.

A report by the Atlantic Council states that PBoC has not released official data on the adoption and use of e-CNY since October 2021. Earlier this year, however, some PBoC officials said there were now 261 million wallets with a total transaction value of more than 87 billion yuan ($13.75 billion).

According to more comprehensive October 2021 data, 123 million personal wallets and 9.2 million corporate wallets are currently opened, with a transaction volume of 142 million yuan and a transaction value of 56 billion yuan (about 8.8 billion US dollars). This means that the average balance of an individual wallet is 3 yuan (about $0.47) and the average balance of a company wallet is 31 yuan (about 4.90 dollars). The relatively high number of wallets indicates that many wallets are opened but not used for transactions or to hold electronic CNY balances.

In China, the private sector is responsible for guiding customers, enforcing AML/CFT regulations and due diligence, and making retail payments in real time, with the central bank backing them.

Digital CNY competes directly with mobile/online payment services such as Alipay (Ant and WeChat Pay (owned by Tencent).

Ant Group’s 2020 data shows that its monthly payments average 10 trillion yuan, and as of June 2020, they had 711 million monthly active users (MAU).

In its 2022 interim report, Tencent disclosed that WeChat has 1.3 billion MAUs. It did not release WeChat Pay totals.

The Hamilton Plan for the United States

The Federal Reserve Bank of Boston and MIT’s Digital Currency Initiative (MIT DCI) are collaborating on an exploratory study called the Hammill Segment Project, a multi-year research project to explore the design space for CBDCs and gain insight into the challenges and opportunities of CBDC technology. While the project doesn’t currently release any tests, the project boasts impressive statistics such as TPS over 100,000.

As of the first phase, the project has not yet decided how to deal with intermediaries (i.e., which BIS classification it will target).

“The Bank for International Settlements (BIS) simplifies intermediary options into three possibilities – a ‘direct’ model, where the central bank issues CBDCs directly to users; a ‘two-tier’ model, where the central bank issues CBDCs to intermediaries, which then manages the relationship with users, and a hybrid model. We do not directly study the intermediary role in Phase 1. —Hamilton Project White Paper

European Central Bank (ECB)

Many details about the ECB’s CBDC are still being worked out. The ECB has indicated that they are interested in using supervised intermediaries, but did not specify in what capacity or role the agents would act. The current guidelines are:

  1. The digital euro should be used primarily as a means of payment, not as a financial investment vehicle;
  2. Regulated intermediaries should be involved in the processing of digital euro.

In July 2021, the ECB launched the investigation phase of the Digital Euro Project after the ECB and the central banks of the eurozone countries completed their experimental work. This phase aims to determine the best design for the digital euro and ensure that it meets the needs of users. In this phase, the ECB will also analyze how financial intermediaries can provide front-end services based on the digital euro, which is expected to be completed around October 2023.

Bank of England (BoE)

In the words of BOE, “We are taking a closer look at how the Bank of England digital currency (CBDC) might work.” But we have not yet decided to launch this plan. “While they have published some discussions and papers on potential business implications and technology options, they have not specified how central banks work with the private sector, other than prioritizing private intermediaries.

The BoE presented the CBDC in 2020 for public comment. The document outlines the CBDC’s illustrative “platform” model, in which banks will provide the core technology infrastructure and minimum necessary functions for CBDC payments. The platform connects private sector payment interface providers (PIPs) to provide customer-facing CBDC payment services and any additional value-added services as part of a competitive and diversified payments landscape.

Public opinion is that banks should provide the system with a minimum level of infrastructure to make it reliable, flexible, fast and efficient. However, the private sector should play a leading role in addressing end-user needs, including by providing users with innovative “coverage” services using core CBDC infrastructure through competition. BoE will continue to refine and develop the concept of the “platform model” in the exploration of CBDC. Interoperability between CBDCs and other forms of money, including innovations such as stablecoins—the ability for users to convert with minimal time or monetary costs—could be an essential requirement.

Bank of Japan electronic money

While the BOJ currently has no plans to issue a CBDC, the bank is exploring various design possibilities for eventual implementation.

As the first phase of the BOJ’s CBDC investigation, the BOJ entered the “first phase of proof-of-concept” from April 2021 to March 2022. The bank has built a publicly available CBDC around the ledger system. The Bank of Japan experimented with all three designs simultaneously, collecting data on TPS, latency, and other KPIs. However, as banks move into the second phase, they have yet to give an indication of which, if any, design they will implement.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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