Blockchain, Debt Ceiling, CBDC and Helicopter Money Policy
Updated: 7 days ago
In two days, we will commemorate the 12-year anniversary of the last message from Satoshi Nakamoto, the enigmatic founder of Bitcoin. In that message, Nakamoto expressed a desire to shift the focus away from himself as a "mysterious shadowy figure," arguing that this characterization led to the media portraying Bitcoin as a "pirate currency." Instead, he urged the community to emphasize the open-source nature of the project and give credit to the developers who contributed to its growth. From its humble beginnings, Bitcoin has experienced remarkable growth, reaching an all-time high of $64,400 before settling at its current value of $27,357.70 per bitcoin.
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With a total market cap of $529.48 billion, Bitcoin now rivals Thailand's 2022 GDP of $536.16 billion, highlighting the cryptocurrency's remarkable growth and stability over 12 years, even in the absence of its creator. No longer a mere curiosity, Bitcoin has garnered the attention of governments worldwide.
Last month, US President Joe Biden signed Executive Order 14067, titled "Ensuring Responsible Development of Digital Assets," marking his 83rd executive order since taking office. Signed on March 9, 2022, the order aims to promote the responsible development of digital assets, while addressing their potential national security implications. However, the deeper implications of this executive order extend beyond its general interpretation.
As the ongoing dispute over the US debt ceiling between the Biden administration and the GOP-led Congress persists, hopes for near-term reconciliation seem dim. Just seven days ago, US House Speaker Kevin McCarthy pledged to pass legislation to raise the nation's debt ceiling, but only if future federal spending increases were capped at 1%. McCarthy criticized President Joe Biden for refusing to engage in budget-cutting negotiations to prevent a debt crisis. The Biden administration responded that negotiations would be challenging without a concrete plan.
Four days ago, the conservative budgetary think tank, Committee for a Responsible Federal Budget, reported that House Republicans unveiled their proposal – the Limit, Save, Grow Act of 2023 – to address the debt ceiling and reduce federal spending. The bill would suspend the debt ceiling through either March 31, 2024, or a $1.5 trillion increase from the current $31.4 trillion ceiling, whichever comes first. Speaker of the House Kevin McCarthy (R-CA) claimed that the plan would save $4.5 trillion over a decade. Although the Congressional Budget Office (CBO) has not yet released an official score, a preliminary calculations also estimate savings of $4.5 trillion, with approximately $4 trillion in policy savings and $500 billion in interest savings.
Despite the detailed plan presented in the draft bill, the Biden administration remains reluctant to negotiate with McCarthy. They argue that during Trump's tenure, the Democrat-led Congress passed the debt ceiling without conditions, and the GOP should reciprocate this time around. The administration has even labeled the bill as a "ransom." Complicating matters further, deep-seated partisanship within the GOP itself makes it difficult to secure enough votes to support the bill, not to mention the unlikelihood of the Democrat-majority Senate passing it. This stalemate grants the Biden administration significant leverage in the debt ceiling debate.
But what happens if Congress fails to reach an agreement on the debt ceiling? Will the US default on its debt? And what strategies does President Biden have up his sleeve to handle a potential default crisis?
If the GOP-led House refuses to endorse future debt limit increases, Biden may have to resort to alternative measures to avoid a default. Some possible strategies include:
Utilizing budget reconciliation: This procedural tool enables Democrats to pass certain legislation with a simple majority vote in the Senate, bypassing a filibuster. Biden could use this mechanism to raise the debt ceiling without Republican support, as some Senate Democrats have suggested. However, this option may face challenges, such as securing the approval of all 50 Senate Democrats and adhering to reconciliation rules.
Invoking the 14th Amendment: This constitutional provision asserts that "the validity of the public debt of the United States … shall not be questioned." Some legal scholars and lawmakers contend that Biden could use this clause to unilaterally raise or eliminate the debt ceiling, or to direct the Treasury to continue paying the debt, irrespective of the limit. This option, however, is controversial and risky, as it could trigger a constitutional crisis and prompt legal challenges from Republicans.
Minting a platinum coin: This creative proposal involves exploiting a legal loophole that permits the Treasury to mint platinum coins of any denomination and deposit them at the Federal Reserve. In theory, Biden could mint a $1 trillion coin (or more) to pay off some debt without raising the borrowing limit. Nevertheless, this unprecedented approach is also dubious, as it could erode the credibility of the US currency and monetary system.
Of the three options, our focus primarily lies on the third possibility. A critical question arises: is the technical feasibility ready? Our short and straightforward answer is "yes." According to a press release, the Federal Reserve Bank of Boston (Boston Fed) and the Massachusetts Institute of Technology's Digital Currency Initiative (MIT DCI) have been collaborating on exploratory research known as Project Hamilton. This multi-year research project delves into the Central Bank Digital Currency (CBDC) design space and examines the technical challenges and opportunities associated with it. The project's Phase 1 research is detailed in a recent paper.
Their primary objective was to design a core transaction processor capable of meeting the stringent speed, throughput, and fault tolerance requirements of a large retail payment system. Additionally, they aimed to establish a flexible platform for collaboration, data gathering, comparison with multiple architectures, and future research. In line with this goal, they have made all software from their research publicly available under the MIT open-source license.
Moreover, we have scrutinized almost every line of code in Project Hamilton, dedicating our efforts to monitoring Central Bank Digital Currencies (CBDCs) rather than solely focusing on cryptocurrencies, as CBDCs have the potential to significantly impact geopolitics. For years, we have subscribed to the OpenCBDC community and mailing list. While several essential technical issues exist, one critical aspect concerns the definition of "blockchain." Blockchain can be defined as a decentralized, digital, and distributed ledger that records transactions across a network of computers. This technology ensures transparency, immutability, and security of transaction data, resulting in a trustless and verifiable record-keeping system.
Contrary to popular belief, blockchain is not synonymous with a database, and the debate is not solely about the false dichotomy of "centralized" versus "decentralized" databases. This distinction is clearly demonstrated in the OpenCBDC project.
Atomizer and 2PC peak (considering clients) average throughput and 99% latency at peak average through- put with varying logical shard count and clients. In 2PC there are the same number of coordinators as shards. -- [source]
The Fed has also indicated that progress continues on OpenCBDC, revealing that it has achieved a throughput rate of 1.84 million transactions per second. This is presumably for the non-blockchain version, the blockchain version processed 170,000 transactions per second at that time. These impressive figures are possible because the system demonstrates 1.7 million transactions per second in the two-phase commit (2PC) architecture with less than one second of 99% tail latency and under 0.5 seconds of 50% latency. Adding more resources could further increase throughput without adversely affecting latency. The atomizer design peaks at 170,000 transactions per second with under two seconds of 99% tail latency and 0.7 seconds of 50% latency.
Project Hamilton's transaction throughput stands as the fastest to date when compared to Bitcoin Cash at 300 TPS and Solana at 50,000 TPS. The blockchain version (Raft) employs consensus via a leader, rather than using proof of work (PoW) or proof of stake (PoS) as seen in major cryptocurrencies. This approach could significantly reduce energy consumption and increase peak transaction throughput, surpassing currently available cryptocurrencies.
To provide a practical example for Project Hamilton, let's consider a recent Phue Thai Party's election campaign of "Digital Helicopter Money" campaign distributing 10,000 Thai Baht to each of 50 million people. The number of transactions made by each person in a month can vary significantly based on factors such as individual spending habits, income, and location. However, on average, a person might make 30-60 transactions per month, including cash transactions, credit or debit card payments, and digital transactions through online banking or payment apps. It is essential to note that this number is only an approximation, as actual transaction volumes may be higher or lower based on personal and situational factors.
The "Digital Helicopter Money" campaign is considered to be of high financial risk and socially controversial. Without proper policy and technical knowledge, it is challenging to smoothly navigate the policy implementation phase, not to mention the bureaucratic politics involved in the budget legislation process.
There have been studies that attempt to estimate the average number of transactions per person. One such study is the "2019 Federal Reserve Payments Study," which provides insights into non-cash payment trends in the United States. According to the study, the number of non-cash payments made by individuals, businesses, and government agencies totaled 174.2 billion in 2018 in the U.S., representing a 6.7% annual increase from 2015 to 2018. The average American made over 80 non-cash payments per month (including debit cards, credit cards, ACH transfers, and checks) in 2018.
The table above illustrates the assumptions for the stimulus campaign, including the number of agents, funds disbursed per agent, total transactions per agent, and active transaction time per day. Based on these assumptions, the calculated transaction throughput requirement is 385.8 TX/s. Project Hamilton's capacity of 170,000 TX/s is substantially higher than the requirement, leaving a surplus capacity of 169,714.2 TX/s to accommodate any variations in transaction volume. The non-blockchain version with the capacity of 1.7 million transactions per second is even more than enough.
Please note that our concept differs from the recent campaign by the Phue Thai Party. However, the "senior advisors" within the Phue Thai Party seem to be aware of the potential of a genuine CBDC project like Project Hamilton, unfortunately, their "junior technical team" doesn't have enough technical capability to understand the OpenCBDC details. It's important to understand that minting a platinum coin requires no backup fiat money. Critics may argue that this is akin to creating money out of thin air, but we believe it is closer to the "Nixon shock" that announced the creation of fiat money and detached the US Dollar from the Gold Standard. Project Hamilton is similar in that it could create a further digital CBDC standard, potentially providing leverage for the US if Biden chooses this policy option. Such a move would have radically transformative implications for global geopolitics.
We are currently conducting thorough policy research on Project Hamilton as a "stop-gap" solution for the debt ceiling. We require more time to study the political evolution between the GOP-led Congress and the Biden administration. We expect to publish our complete study paper before the debt ceiling deadline this July. Please stay tuned.