Hive's Progress Shows How The Banking System Is Trying To Hold On

There is a lot of confusion around Central Bank Digital Currencies (CDBCs) and for good reason. Nobody is quite clear how these are going to work.

At the core of this issue is the fact there are two levels where money is applicable.

We have money that is transferred between individuals and businesses. This is utilized for commerce. Most often it is referred to as legal tender.

Then we have the transactions that take place between the banks themselves. Many feel they utilize legal tender for this purpose yet that is rarely the case. Instead, the banks utilize what can be thought of as tokens.

Here is where understanding the true nature of different forms of money comes in. Since most miss what I described so far, it is easy to see how the CBDC discussion can really get confusing.

In this article we will break it down.

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Reserves Are Not Legal Tender

Under the fractional reserve banking system, the currency is expanded by the commercial banks through loans. This is something most are aware of. A bank has $10 million in deposits, hence it can lend up to $100 million, creating $90 million out of thin air.

The introduction of Quantitative Easing brought the idea of reserves to the forefront. These are not new yet they were rarely given any attention before the Great Financial Crisis. Since that time, they have served to confuse the average person, much of this by design since a couple of Fed chairs have tried to equate it to USD.

When a central bank does a QE swap, securities are removed from the commercial bank's balance sheet and it is replaced with a token. This reserve is not legal tender since non-banknote liabilities by the central bank do not fall under this category. Instead, it is a token that is effectively pegged to $1 (in the United States). This can only be held by depository institutions.

Here is where we also see many of the inter-bank transactions taking place.

Let us suppose that Bank of America had to settle with Well Fargo to the tune of $100 million. That means, throughout the day, as money was "moved" back and forth, Well Fargo received more than it "sent" to BoA.

This is where the reserves come into play. The banks do not settle using USD. Rather, BoA will notify the Fed to transfer $100 million over to Well Fargo's balance sheet. As we can see, this is nothing more than an accounting transaction.

Within the banking system, the accounts between two individuals (or businesses) has to be settled with the money being removed from the payor and put in the payee's account. However, the banks themselves also have to settle the net difference.

Central Bank Digital Currency

Understanding how the system works enables us to question what is meant when one talks about implementing a CBDC.

Before getting into that, the example used was within the United States. There is also a system that deals with international transactions, also known as cross-border remittance.

When a CBDC is mentioned, many automatically assume it is going to be a public token. While that is the intention of many countries, it is not a given. In fact, both the Bank of Japan and the US Federal Reserve has made it clear they are not embarking upon a digital version of the currencies. Hence, no digital dollar or yen, at least from the central banks.

That does not mean, however, they are not open to creating a more efficient system. The Fed has no need for a CBDC for interbank settlement since it is rolling out the FedNow payment system in 2023. This will allow for near instant settlements, something that is not possible today.

Internationally is still a major problem. Anyone who sent money this way knows the nightmare the system presents. This is true for the banks also.

For this reason, there are trials being explored that utilize CBDCs. Again, this is not a general use token. It is something that is being designed by the banking system to allow for cross-border settlements.

An article in Finbold lays out how the BIS is exploring this very possibility.

The Bank for International Settlements (BIS) has announced plans to explore cross-border settlement and trading involving the central bank’s digital currencies (CBDC) powered by decentralized finance (DeFi) protocols.

The project, dubbed Mariana, will also incorporate the central banks of France, Singapore, and Switzerland to study the “potential between financial institutions to settle foreign exchange trades in financial markets,” the BIS said in a press statement on November 2.

According to BIS, the project will look into the automated market makers (AMM) for international payments leveraging the hypothetical Swiss franc, Euro and Singapore dollar wholesale CBDCs. The project’s outcome will result in delivering a proof of concept later next year.

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Keep in mind that sending money around the world is very profitable for the banking system. Cryptocurrency is a direct threat to that revenue. If one can take a digital wallet and send cryptocurrency to anyone in the world, why do they need to deal with the banking system? More importantly, why do they need to pay the transaction fees the banks charge?

From the BIS perspective, they also need near instant settlement. It takes days for transactions to fully complete. There is no FedNow project on the horizon at the international level. Hence they need to look to other alternatives.

An interbank payment system utilizing a token could be the answer. Notice in the above quote it says "wholesale CBDCs". This means it applies only to the banking system and not individuals or businesses. Of course, the governments of those countries could change their legal tender but that is a separate matter.

Hive Already Crushes This

Hive is the blockchain that keeps lapping the field.

While BIS is working on a proof of concept that will be delivered later next year, Hive is already operating in real time.

Hard Fork 26 introduced One Block Irreversibility (OBI). This means that a block cannot be changed after a few milliseconds. Couple this with the 3 seconds it takes to create a block, we can see how it is just a tad over this for transactions to be fully completed.

Of course, this is anywhere in the world since blockchain does not distinguish geographic location. In terms of a payment and settlement system, Hive is far ahead of anything the BIS is proposing. Right not a merchant in Asia can accept payment via HBD or $HIVE from someone in North America and that will settle in under 4 seconds.

Trying getting a bank to do that. Even a company like Visa takes 24-48 hours to settle payment.

This is an overlooked feature on Hive yet it is something the banking system is struggling with, especially internationally. They are going to spend a couple years trying to get into the range of where they can offer something competitive. Of course, on Hive, the transactions are feeless, only requiring resource credits to engage.

It is important we understand how novel Hive truly is and the real world problems that it is addressing. We are dealing with some serious technology here, something the banking system is desperately trying to combat.

We are at the point where the latter is holding on for dear life. If people on Hive understood how far advanced we are in this area, they would hold a much different impression of the ecosystem that is forming.

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