CBDC Competition: JP Morgan Working On Coin For International Payments

There is so much confusion about Central Bank Digital Currencies (CBDC). It seems many feel governments can simply wave a magic wand and, presto, everyone is on a CBDC.

This shows a failure to understand monetary history, how money works, and the banking system in general. It is understandable since most think the central banks are the ones creating the legal tender, another misunderstood notion.

CBDCs are going to be challenged. In fact, other than a few countries, these will be epic failures.

Central Bank Digital Currencies will not be the norm. That doesn't mean they will not be rolled out. That is going to happen.

A recent announcement by JP Morgan shows how things are really going to unfold.

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JP Morgan: Deposit Token

JP Morgan decided it wants to compete with CBDCs. It didn't come right out and say it but this is exactly what is happening.

US-based JP Morgan has revealed its plans to expand its blockchain initiatives by introducing a blockchain-based digital deposit token.

Oh boy. So it starts.

To explain, a deposit token is tied to the deposits that are on hand within the banking system. This is not at the central bank level. Instead, we are dealing with the digital dollars (in this instance) that are housed by commercial banks.

Actually, if we want to be technical, this is actually reflective of eurodollars. JP Morgan is looking to create this for international settlements and cross-border payments. Therefore, the plan is to operate outside the domestic banking system.

The company did say it will not proceed forward unless it was granted regulatory approval. That is the statement for now.

Here is where understanding commercial bank money, central bank money, and the Eurodollar system are crucial. Give those a quick read if you are unfamiliar.

Private Money

While many like to use the term government money, this is rarely accurate. Governments, for the most part, have not been responsible for the money supply. When we dealt with coinage, there was a time when kingdoms were in control. However, that is overlooking the ledger based money that was created by merchants.

The key with money is that it exists to facilitate trade. It is a tool for business, not governments. Certainly, the latter wants to take over but that never works.

This is why CBDCs were laughable to me from the start. To believe that governments would suddenly gain control of the major currencies goes against all monetary history. Ultimately, businesses use what is in their best interest.

When it comes to money, the odds that a CBDC is going to be competitively superior in the marketplace is a stretch.

It is also why the recent move by PayPal is not surprising. Private companies are going to get into the game. Why does anyone think the banks are going to be left out?

The answer is they will not. JP Morgan is already starting the process.

Of course, the token would be for international settlement and payments to start. How hard would it be to implement this domestically?

In other words, this could be a Trojan Horse. Over time, the banking system takes over more transactions.

Central Banks

Here is another factor overlooked: the major central banks are private entities.

They are owned by the member banks, not governments.

A digital currency issued by the central bank would be structured in a way so not as to compete with the commercial banks. They are not about to put themselves out of business.

As stated, with central bank reserves, these institutions already have a token. What is this? With the Fed, a central bank reserve is a digital product that goes on the balance sheet of depository institutions, is pegged to a dollar while also being redeemable for a physical banknote.

This is legal tender nor is it broad economy money. It is a bank product but it is something the Fed can create whenever it desires. So the idea is nothing new.

However, we have to realize, this is not legal tender. This liability on the Fed's balance sheet is not U.S. dollars. It is no more a dollar than a USDC. Like the stablecoin, it simply represents a dollar.

The money supply is overwhelmingly controlled by the commercial banks. It is a role they are not going to give up.

And guess who owns the central banks.

Better Money

Most have heard of Gresham's Law. This is the idea that bad money drives out good money.

Leaving aside the fact that it wasn't always the case, when it did apply, it was only to legal tender. This is where the "law" held some relevance.

With money creation in the hands of private institutions, this was reversed. The Eurodollar system is a prime example, There, poor collateral (money) is pushed out in favor of better money. In this instance, U.S. Treasuries are superior to all other forms of sovereign debt and mortgage backed securities (MBS).

The same is going to occur.

A token by JP Morgan might be effective because the international system is a nightmare. Sending money internationally is slow, inefficient, and expensive.

The root of this is the monetary system. We see networks that are out of date as well as being convoluted. JP Morgan can clean this up be creating a new digital network that is far superior to what exists.

FedNow was a massive upgrade to the settlements and payments made within the Federal Reserve system. This will eventually replace the FedWire service which was previously in place.

In the end, money comes down to networks. This is why CBDCs are going to fail. They simply will not be as advanced as what the private market creates.

This is a different debate between centralized versus decentralized. What we have is the unfolding of private against government.

It is a battle that is not going to be close.

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