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Why the U.S. Banned Gold from 1933 Until 1974 & Which Countries Are Leading the CBDC Race Today?

The Future of Money with Henri Arslanian
Why the U.S. Banned Gold from 1933 Until 1974 & Which Countries Are Leading the CBDC Race Today?
By Henri Arslanian • Issue #89 • View online
Dear Friends, 
Today we’ll look back in time at one of the most significant events in the modern history of money: FDR’s 1933 ban on gold ownership within the United States.
What catalysed this decision? What was the broader impact? And could something like this ever happen again, especially with regards to Bitcoin?
We will also discuss which countries have made the most progress over the past year in developing retail and wholesale CBDC? And what trends should we watch out for in the CBDC space over the rest of the year?
I cover it all in my newsletter this weekend!
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Here we go!

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Why the U.S. Government Banned Investing in Gold from 1933 Until 1974. And Could It Happen to Bitcoin Today?
A major milestone in the history of money took place 89 years ago last week.
On April 5, 1933, U.S. President Franklin Delano Roosevelt signed Executive Order 6102, which forbade “the hoarding of gold coins, gold bullion, and gold certificates within the continental United States.”
Source: Getty Images
Source: Getty Images
As families and businesses all over America struggled to climb out of the depths of a rapidly-ballooning financial crisis in the wake of the 1929 stock market crash, FDR attempted to dramatically increase federal spending so as to stimulate the economy.
However, his hands were tied by the Federal Reserve Act of 1913, which mandated that each banknote had to be backed by 40% of gold held in federal reserves. 
So for every dollar printed, the government would need to hold 40 cents equivalent of gold.
But foreign and domestic holders of U.S. currency were rapidly losing faith in paper money and were redeeming dollars at an alarming rate for gold.
In order to slow the process, FDR declared a “national emergency” and ordered all banks to close over a four-day span in March 1933 so as to prevent “the export, hoarding, or earmarking of gold or silver coin or bullion or currency.”
The terms of the presidential proclamation specified that “no such banking institution or branch shall pay out, export, earmark, or permit the withdrawal or transfer in any manner or by any device whatsoever, of any gold or silver coin or bullion or currency or take any other action which might facilitate the hoarding thereof; nor shall any such banking institution or branch pay out deposits, make loans or discounts, deal in foreign exchange, transfer credits from the United States to any place abroad, or transact any other banking business whatsoever.”
Source: The New York Times
Source: The New York Times
For that entire week, Americans would have no access to banks or banking services. They could not withdraw or transfer their money, nor could they make deposits.
One month later, an executive order made private gold possession illegal. 
All Americans were required to turn in their gold on or before May 1, 1933, to the Federal Reserve in return for $20.67 of paper money per troy ounce.
Violations of this order would be punishable by up to ten years in federal prison and a fine of twice the amount of gold that was not handed over to the feds.
Source: Library of Congress
Source: Library of Congress
The order was quickly challenged and made its way to the Supreme Court, where it was upheld…with one notable exception: dentists who could own up to 100 ounces of gold!
Interestingly enough, many Great Depression-era photos capturing Americans waiting in long lines at banks were often characterized as people waiting to get their money out.
But in many cases, the opposite was actually true, with people standing in endless lines for hours to hand in their gold possessions.
Source: American History USA
Source: American History USA
Ultimately, outlawing gold ownership was a central pillar that many argue made FDR’s New Deal programs possible. Without the ban, the government itself would have been in violation of its own laws against printing money.
Fast forward to the 1970s, when the U.S. was looking at another crisis in the works.
At the time, foreign governments could trade the dollars they received through international trade back to America for gold at $32 dollars per ounce. 
But with a trade imbalance and a ballooning federal deficit causing gold to drain out of its reserves, President Richard Nixon took the dollar off of the Gold Standard, allowing the dollar to float freely against other currencies.
Yet the prohibition against gold continued to stand until 1974.
But after being swayed by a pro gold advocate he saw on TV, President Gerald Ford reversed FDR’s executive order and legalized gold ownership.
This piece of history is often discussed in crypto circles and recently made a resurgence, with some commentators mentioning that in a post-COVID-19 economic environment, such a scenario could very well happen again. 
Could governments ban gold today? Or even ban Bitcoin?
For example, last year Bridgewater’s Ray Dalio wrote:
“If history and logic are to be a guide, policymakers who are short of money will raise taxes and won’t like these capital movements out of debt assets and into other storehold of wealth assets and other tax domains so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected.”
Ray Dalio also mentioned that he believes there is a “good probability” that governments will try to ban Bitcoin. 
It’s certainly worth reflecting on whether a government could ban Bitcoin.
In theory, at least, banning Bitcoin could be easier than banning gold. 
For instance, unlike gold that one can physically hide, Bitcoin transactions are traceable, meaning governments could trace it back to their owners using some of the tools available in the market today along with the quasi omnipresence of KYC requirements at crypto exchanges.
This is particularly the case when it can be argued that buying Bitcoin in countries like the U.S. is probably easier than buying gold.
In less than 5 minutes, anyone in the U.S. with a credit card can open an account at a crypto exchange or platform and buy Bitcoin. On the other hand, buying gold could be a bit trickier, as it would require someone to open a brokerage account or physically go to a pawn shop, for example.
In addition, many recent regulatory efforts, from the EU to the FATF, have focused on crypto wallets (including self custody wallets) as well as decentralised finance.
Whilst initially it could have been argued that citizens could always have the option to self custody their crypto assets (and thus be able to hide their crypto assets somewhat like hiding a bar of gold under your mattress), the KYC requirements on those wallets, if they are enacted, could also enable governments to trace them.
The reality is that whilst a certain country could decide to ban Bitcoin, the decentralised and digital nature of crypto assets make it difficult to do so. 
For example, whilst crypto trading in China has been banned for a couple of years now, the reality is that many Chinese users can simply buy and sell crypto peer-to-peer. A lot of crypto trading also takes place on crypto platforms offshore or simply on permissionless DeFi platforms.
In addition, unlike in the 1930s, the world is much more globalized and interconnected today. Even if a large economy like the United States banned Bitcoin, users would have many options to find other venues in other jurisdictions where they could interact with digital assets. 
It could be argued that due to these practical difficulties, governments may try instead to tax the asset rather than outright ban it.
Many crypto investors could then simply pay the relevant tax and have peace of mind.
As a matter of fact, and as we have covered in previous issues of this newsletter, every American is now asked on their annual tax return whether they have made any crypto investments. 
And countries are getting better at taxing Bitcoin and other crypto assets. 
For example, a recent survey showed that an increasing number of countries are coming up with tax guidance on crypto. 
Source: PwC
Source: PwC
Many today are not aware that the U.S. government banned gold in the past century. Whilst the chances of a democratic government banning Bitcoin are very low, this is a topic worth reflecting on as we think about the future of money and the potential benefits that a decentralized cryptocurrency like Bitcoin provides.
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Which Countries Are Leading the CBDC Race?
Last week PwC launched its second annual Global CBDC Index, in which central banks are ranked based on the levels of maturity of their CBDC initiatives. 
The rankings were based on 3 metrics and were all determined by indicators introduced by the Bank for International Settlements, the convenor of central banks. 
The first metric, CBDC Projects’ Status, tracks three stages of development – research, pilot, and production. The more advanced a CBDC project is, the higher score it receives. 
The second key metric, Central Bank Speech Stance, measures the recent average opinion expressed by central bankers captured within the BIS central bankers’ speeches database. This indicator aims to provide information about the future of the project status and legal aspects. 
The final metric, Public Interest Proxy, is the average score of Google Trends (for projects outside of China) and the Baidu Index (for China only) over recent periods. This metric ultimately helps to gauge general public interest in CBDC projects whilst suggesting potential collaborative interest from the private sector, which could support future project advancement. 
But enough about the metrics! Who made the podium for this second edition?
For retail CBDC, Nigeria, The Bahamas, and China take the top three spots.  
Source: PwC
Source: PwC
In both Nigeria and The Bahamas, every resident can access their countries’ respective CBDC (the eNaira and the Sand Dollar) through digital wallets as well as payment cards. 
Source: PwC
Source: PwC
Nigeria became the first country in Africa to issue a CBDC when the eNaira was launched last October.
Designed by the Central Bank of Nigeria in an effort to broaden financial inclusion and strengthen payments within the country, the eNaira is a hybrid CBDC with a two-tiered approach. 
This type of architecture means that in this case, the Central Bank of Nigeria is responsible for issuing this CBDC and then using traditional financial institutions around the country to distribute the eNaira and help facilitate payments. 
The expectation is that the eNaira will stimulate Nigeria’s finance and payments ecosystem whilst driving innovation forward in the space. 
The Bahamas is another jurisdiction that launched a retail CBDC in late 2020 with its Sand Dollar, a digital version of the Bahamian Dollar, via authorised financial institutions with the goal to allow greater flexibility and accessibility for residents that want to participate in financial services via either smartphone (iOS and Android) or using a physical payment card to access a digital wallet.
The Central Bank of The Bahamas has been clear on the role it intends to play:
“Central Bank of The Bahamas plays a multi-purpose role, including currency issuance, monitoring of holdings and sponsoring a centralised KYC/identity infrastructure. In particular, although the (Central) Bank will not provide front-end customer service, nor directly sponsor digital wallets, it maintains the ledger of all individual holdings of the digital currency.”
On a near to medium-term timeline, the Central Bank of The Bahamas wants to promote a centralised KYC register to maintain identification and profile data that would either mandate or allow individuals who do not maintain such information within banks or licensed intermediaries to supply data for the register.”
The Sand Dollar also has a tiering mechanism, with two types of wallets for individuals and one for businesses.
Such tiering mechanisms are now being implemented by various central banks.
As for wholesale CBDC, not much has changed over the past year, with ThailandHong Kong, and Singapore continuing to lead the pack. 
Source: PwC
Source: PwC
A number of general trends appear in the report.
For example, no central bank is looking at disintermediating their commercial banks but rather want to keep them involved. 
Source: From Henri Arslanian's upcoming book "The Book of Crypto"
Source: From Henri Arslanian's upcoming book "The Book of Crypto"
PwC also points out several trends to watch for in the CBDC space over the rest of the year, mentioning that over 80% of central banks globally are exploring CBDCs for retail or wholesale purposes.
BIS largely echoed these findings in a survey on global CBDC activity last year.
Source: Bank for International Settlements
Source: Bank for International Settlements
However, the legal authority to even issue a CBDC in the first place is something to keep an eye on moving forward. 
According to BIS, a quarter of central banks globally do not have a legal mandate to issue a CBDC, and nearly half remain unsure whether or not they have the power to issue a CBDC under their existing legal frameworks.
 Source: Bank for International Settlements
Source: Bank for International Settlements
The PwC report also highlights the fact that the speed and intensity of these projects are rapidly increasing, particularly in developing countries, where the financial inclusion aspect of CBDCs has spurred an aggressive approach.
PwC also points out the need for broader alignment and interoperability between nations as more and more CBDCs are introduced to the public.
Of particular interest is the role of privacy. For example, whilst all CBDCs are traceable on the blockchain, greater emphasis on how users’ personal information is protected will become increasingly paramount moving forward. 
Ultimately, this year’s index demonstrates the speed and depth with which such CBDC projects are being developed. 
And as for who will make the cut next year? It’s anyone’s guess!
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Henri Arslanian

Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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