Central Bank Digital Currencies

“If you've got nothing to hide, you've got nothing to fear.”

Life is full of worries.  Employment, inflation, family, relationships, it seems never ending.  This list probably grows in proportion to the time you spend on some social media platforms.  Is the government trying to “take away our guns?”  Force us to live in “15-minute cities?” Do we only have a few years to prevent the “climate extinction?”  Was the “Hamas attack a ‘false flag’ staged by Israel?” The mix of conspiracy theories and real threats can sometimes be overwhelming.  Some can be discarded immediately (no, the Earth is not flat) and others may be intriguing but aren’t worth the time (did Oswald act alone?  I don’t know, but I’m unlikely to add anything to the debate so I won’t be wading into it).  The third area concerns “threats” which sometimes sound paranoid or conspiratorial but have (at least) a grain of truth to them.  I have neither the time nor the desire to run down every one of these but two that I find interesting and believe warrant investigation are digital currencies and social credit systems.

By Stanjourdan - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=64570499

What are Digital Currencies?

If you’re like me, you pay your bills with credit cards and pay the credit card bill via online transfers from the bank.  Personally, I can’t remember the last time I carried cash.  In fact, in Canada, physical currency represents less than 5% of the overall money supply, the rest is just data in record tracking systems. If this is the case, aren’t we already using digital currency?  Not quite.  What we are really doing when we pay bills online or use credit cards is manipulating digital representations of physical cash.  The electronic records are what we might call virtual representations of physical cash.  You can still go to the bank and be given cash to carry with you.  True digital currencies would eliminate this.  Instead of money in your wallet you would possess a “digital wallet,” possibly on your smartphone, that would contain some or all of your digital currency (which would be password protected and encrypted for security purposes).  The key difference would be that money would only be available in electronic form.

Why bother?

The Good

If we have a system that lets us use “virtual” cash to perform transactions online without the need for physical cash, then why would be move to a currency that is entirely digital?  There are a few advantages to digital currencies, and some depend on who controls them (we’ll get to that a little later).  Let’s look at a few of the common advantages first:

• Increased security – Unlike our current currency, which is not dependent on who possesses it, digital currency would be linked to your identity, could not be used by anyone but you, and consequently would require the use of a digital identity.  Linking digital identities to the “digital wallet” would enable central banks to authenticate all transactions.  As they are linked to your identity digital currencies would likely reduce fraud, money laundering, and the financing of terrorist activities.  They might even protect individuals from accidental loss.

• Increase access to financial services – As digital currencies could be stored and spent using digital wallets, citizens might not need bank accounts.  People living in remote areas or who otherwise are underserved by traditional banking systems might have better access to financial services.

• Simplify tax collection – as all transactions would be recorded by the system and linked to unique individual identification, the process of collecting taxes could be simplified. 

• Increase transaction efficiency – digital currencies could streamline payments and reduce settlement times which would enable faster transactions.

• Enhanced monetary policy – digital currencies would improve central bank control of monetary policy be providing real-time visibility of cash flows.  This would enable the central bank to more efficiently monitor the health of the economy and more effectively manage inflation, interest rates, etc.

Note: Cost savings is frequently mentioned as a possible advantage, but I don’t think it is one and have consequently left it off of this list.  Cost savings are usually tied to eliminating the need of producing cash however this argument neglects to factor in the cost of maintaining the server and software infrastructure required to maintain a digital currency. 

All in all, it sounds pretty good, doesn’t it?  So why are many so adamantly opposed to it.  To understand why some view this as somewhere between a bad idea and a danger to freedom we have to look at how these “advantages” can be abused.  Supporters may view the following as paranoia or link it to conspiracy theories, but a healthy dose of skepticism never hurt anyone.  Before examining the potential abuses though it’s important to distinguish between the two broad forms of digital currencies:

• Private - cryptocurrencies are almost always decentralized, meaning they can't be regulated by a single authority, such as a bank.  Put another way, they are resistant to inflation caused by governments printing money.  Of course, they can be volatile due to speculation so it may be a “pick your poison” type of situation.  They are also frequently anonymous.

• Public (government controlled) – also known as Central Bank Digital Currencies or CBDCs.  Unlike the private version of digital currencies which maintain anonymity, as noted above, CBDCs would require unique digital identities.  Government control is often the root of the “problem.”

The Bad

If we examine the advantages with a slightly less trustful eye we see that the security benefits result in what to many would be a disturbing lack of privacy.  Eliminating fraud, money laundering, and financing of terrorism is all well and good but it requires that all transactions be linked to a digital ID.  Put simply, increased security/safety means decreased privacy. 

• It will make filing your taxes simpler (should be simpler, the government usually finds a way to complicate things) but to do this every single penny you spend will be tracked.  Want to give you child an allowance?  Tracked.  Need to pay the babysitter?  Tracked?  Want to give your grandchild some birthday money?  Tracked.  Putting aside the lack of privacy in how you spend your money, how long do you think it will take the government to decide that all these little “transactions” should be taxable?

The Insatiable Beast

• As the currency is entirely digital it might be vulnerable to hacking attempts and as it’s linked to your digital ID all your personal information could be stolen.  Centralizing the data adds additional risk.  The current system means that a breach at a bank would only affect the banks customers.  Centralizing all data would mean that every taxpayer in the country would be at risk of a single attack.

The Ugly

Granting governments more control always comes with a risk of abuse.  As with safety there are many issues to be concerned with here:

• There is a risk that the system could be used for surveillance purposes. In case you don’t already know this, if you have a cell phone your location is known at all times.  If the cell phone provider didn’t know where your phone was you wouldn’t be able to receive calls.  This technical requirement enabled the US National Security Agency (NSA) to gather information from and track the movement of “hundreds of millions of devices” as part of the War on Terror.    

• It would make freezing and seizing of assets easier.  One need only think back to the Freedom Convoy in Canada to see how this could be abused.  Regardless of where you stand regarding the actual protests, the fact remains that Canadian Federal Court Judge Richard G. Mosley ruled against the Trudeau government’s use of the Emergencies Act finding “the government’s use of the act to be “unreasonable” and an unjustified infringement of individual rights.”  Mosley also “pointed out the government’s economic order used to identify who would get their bank accounts frozen had no specific procedure. Instead, it was a case of the RCMP ‘making it up as they went along.’”

• Restriction on what you’re permitted to buy or who is permitted to participate in the economy could become an issue.  A CBDC’s programable nature means governments could prohibit people from “buying certain goods or limited in how much they might purchase.” For example, alcohol purchase might be restricted to limit how much people could drink over a period of time.

“In a fully implemented CBDC system, governments could financially exclude individuals or entire groups of people with the press of a button, leaving them with nothing. Governments like the CCP could target dissidents, sexual minorities, ethnic minorities, or religious minorities. If banknotes don’t exist and access to government‐​issued digital cash is revoked, then they are truly helpless.”

-- Alex Gladstein, Human Rights Foundation

These last two bullets are the ones that usually raise the most concern (although letting Big Brother see everything you buy does raise the hackles of many people).  You don’t have to be a conspiracy theorist or paranoid to think CBDCs might be a bad idea.

“We would not want a world in which the government sees, in real time, every money transfer that anyone makes with a CBDC.”

-- Federal Reserve Chair Jerome Powell

Conclusion

CBDCs, as a stand-alone system, provide an interesting mix of advantages and disadvantages.  Where one falls on the topic likely depends on ones’ comfort with technology and change, and trust in governments and public institutions.  For myself, I am not comfortable with the government knowing everything I do.  I think even “the innocent” should be wary of letting the government see too much.  Afterall, it’s not without reason that Cardinal Richelieu was alleged to have said "Give me six lines written by the hand of the most honest man and I'll find enough to hang him."  The real concern however comes when CBDCs are combined with Social Credit Systems like that being developed by the government of China and which we will examine in a future article.