It has become clear by now that Central Bank Digital Currencies or CBDCs will be in our future and the technology will fundamentally change the use of money and the economic system as a whole.
The world’s biggest economies and their central banks have announced working on CBDCs: the Federal Reserve, the Bank of Canada, and the European Central Bank are trailing behind the People’s Bank of China, which already is trial testing their CBDC with more than 50,000 citizens. The Bahamas has already issued its central bank digital currency – the “Sand Dollar” – in October.
Dr. Wolf von Laer is the CEO of Students For Liberty, an international educational non-profit operating in over 100 countries. He holds a Ph.D. in Political Economy from King’s College London and a Master’s in Austrian Economics from Universidad Rey Juan Carlos.
CBDCs promise faster settlements, better security, ease of use, instant implementation of monetary policy (if you consider that an improvement) and transaction costs that are lower than cash. In the future, these advantages will be stressed ad nauseam by pundits and politicians to make the technology palatable to the whole population.
While all of the advantages are true, it is also crucial to think through the implication of the technology and how it could negatively affect the economy and the citizenry. There are different types of CBDCs with varying degrees of risks and it’s important to understand the subtleties of these systems. However, all CBDCs need to be centralized and manipulatable to some extent since, otherwise, monetary policy would not be possible.
As a contrast, Bitcoin is booming due to its decentralized, open, public, borderless, neutral and tamper and censorship-resistant properties. Depending on the type of CBDC, CBDCs can become the exact opposite, especially if central banks offer accounts to the public at large, implementing what is known as a direct model of CBDC.
This article outlines four scenarios how CBDCs have the potential to undermine economic stability and eradicate privacy.
Centralizing power in the economic system
Governments fail frequently. Just think back to the launch of healthcare.gov or that governments in the U.S. have lost control of sensitive data in more than 300 million cases in the last ten years. With CBDCs, the whole economic system could be brought to the brink by bad updates or data leaks of the centralized ledger, which won’t be protected by proof-of-work in the same way that bitcoin is. For bitcoin, it took a decade to build a robust decentralized computing power to assure the integrity of the blockchain. Governments won’t go to such lengths, and they need to rely on different, more fragile ways of protecting the centralized ledger.
CBDCs = a dystopian nightmare
Government tends to collect as much data about its citizens as they can get away with. This happens under the guise of safety, as in the Governor of Michigan’s decree to document every customers’ personal information to contain the spread of COVID19 or under the pretext of nudging people to become model citizens in the case of China. Imagine a social credit scoring system coupled with a CBDC. All your purchasing decisions could influence your score that you are dependent on for everything. Donate to the “wrong” non-profit like Wikileaks? Whoops, you cannot purchase train tickets anymore. Bought some interesting adult toys for your spouse? Oh no, your credit score might drop, or your application for the government job does not get accepted.
What sounds like a far-fetched utopian nightmare is already a reality in China. If you hang out with the wrong crowd, your citizen score suffers, which is crucial for purchases, jobs, travel, and so much more. Pair this level of surveillance with the ability to track any purchasing decision you make and you have the perfect recipe for big brother on crypto-steroids.
End to the informal economy
More than 60% of all jobs around the world operate in the informal economy. This results from the lack of free-market institutions like the rule of law, property rights, and stable money in many developing countries. But even in developed countries, like the U.S., the informal economy plays a huge role. Here the International Labor Organization estimates that there are at least 30 million jobs that rely on the informal market. This is a lot of livelihoods that are threatened by CBDCs. The informal economy includes innocuous things like paying your neighbor to fix your roof or paying a teenager to take care of your yard.
See also: Ajit Tripathi – 4 Reasons Central Banks Should Launch Retail Digital Currencies
Many activities that we have all engaged in fall within the informal economy, and they are efficient. They make life easier, they overcome useless red tape, and they save money. Now, the government does not like this since it cannot generate tax revenue. Having a government ledger that tracks every transaction would make it virtually impossible to do anything within the informal economy and a huge chunk of the 30 million jobs would vanish. CBDC paves the way for a cashless society which is very much in the government’s interest (see Rogoff). Thus, it could be the end of informal markets which are often a safe haven for many people in the light of an ever-expanding regulatory state.
Central banks and fiscal policy
Admittedly, the pandemic has made central banks work almost in unison with fiscal policy. Governments “stimulate” the economy like never before. Of course, it runs massive deficits doing that. Due to depressed interest rates, bond yields are historically low and demand for bonds is low. Normally what happens? Governments would not issue as much debt, but governments do not have to worry since there is infinite demand produced at the Fed’s push of a button. The Fed predominantly buys all of the new debt and then some in secondary markets. This is an indirect monetization of government debt.
Now, CBDCs could completely do away with fiscal policy. Central banks could immediately generate cash and hand it out to small and medium-sized businesses. People with higher savings could get higher interest rates than then ones who do not save. Fiscal stimulus and a multi-layered interest rate approach are all possible when the government has all of your financial data. Governments will argue that this is highly beneficial. Still, it bears the danger of manipulation, economic mismanagement and leads to an even faster monetization of government debt, which costs we all have to face by holding money with less and less purchasing power.
There are many more reasons to be wary of CBDCs, but I hope this article encourages you to think through this technology’s effects and what it means for you and your future.
The article benefited from comments from Marcelo Prates. All remaining errors are my own. The article reflects the opinion of the author and not the opinion of Students For Liberty.