CBDC Failure And Network Effects

At various points throughout crypto history, the talk of Central Bank Digital Currencies (CBDC) hits a fevered pitch.

This is something that is long rumored yet fails to materialize. We can go back 8 or 9 years and find warnings about governments issuing their own crypto coin.

Of course, this is not without merit. Many central banks and/or governments have experimented with them. Some went through various stages of testing. I believe the Japanese entered their second phase before shutting it down.

The EU appears intent on bringing a CBDC out. This is the most likely center for this experiment. Other countries appear to be moving in the opposite direction. South Korea just paused their CBDC program, realizing that stablecoin adoption is taking off.

For years I stated my view very simply: CBDCs will be an epic failure.

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CBDC Failure And Network Effects

Why do I confidently make this claim? There are a couple reasons.

To start, money is not driven by government. People like to think that, especially those in government. It is one of the fallacies of money.

Instead, we have to look at the origins. Money was created by and for merchants. It is designed to facilitate trade. Throughout history, governments tried to get their hands on it, with varying degrees of success. It is ironic but the periods where the governments had the most control over money was when it was commodity based.

In the digital world, that is not the case. With crypto, anyone can "print" money. Of course, this does not mean that it has any value (or utility). That is where markets decide.

We also have to acknowledge there is a different between a financial asset and a medium of exchange. Most cryptocurrencies are digital assets. They are lousy mediums of exchange.

The other issue that CBDCs are going to have is the fact we are in the digital world. This changes the game completely. It is also what affects the stablecoins as we will see.

Network Effects

The model for success online (i.e. the digital world) is network effects. We see this with the businesses that are dominating. PayPal. Meta. YouTube. Amazon. All these companies have incredible network effects in their particular genre.

What we see happening is the situation where "winner takes most". There are some other competitors but they are miniscule compared to the top dogs.

Let us look at video.

Rumble did an amazing job, becoming a legitimate video platform. It has over 50 million monthly active users. This, however, pales in comparison to YouTube, which has a couple billion.

When we look at money, it is mostly digital. The overwhelming percentage of transactions are in non-physical form. This means the same impact of network effects is in place.

Under this scenario, that means the US dollar will continue to be the leader. Adoption is only increasing, something that will be catapulted by the expansion of stablecoins. With legislation pending in the United States Congress, regulatory clarity is likely to set off some fireworks in this sector.

CBDC Failure

The ultimate failure for CBDCs will come from adoption.

To start, anything that is not denominated in USD will lag. This is a killer to the CBDC realm because the Congress is looking at banning the Fed from issuing one. That means no USD CBDC.

Stablecoins are going to take over. Some assert that this is a defacto CBDC since they are regulated. That view certainly has merit. It is how the government gets their hand into things.

I counter this with the view that "dark" stablecoins will also rise. These could be synthetic or algorithmic base. Either way, they will operate outside the legal framework that governments set up. Remember, the digital world is global making it difficult to apply national laws across the board.

With so many options. merchants will opt for what serves them best. Why would a company in Japan use a currency that the CCP has full control over? For that matter, why would it use one from Brussels?

The answer is they would not. We are going to see hundreds of stablecoins, all which can transfer value. Merchants will be able to choose which best serves their needs.

CBDCs are about power and control. That is not in the best interest of businesses. Certainly, there is regulation they have to adhere to. That said, signing up for more is not in the cards for most entities.

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