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It is now clear that central bank digital currencies, or CBDCs, will be in our future and technology will fundamentally change the use of money and the economic system as a whole.
The world’s largest economies and their central banks have announced they are working on CBDCs: The US Federal Reserve, the Bank of Canada, and the European Central Bank are queuing up at the People’s Bank of China, which is already testing its CBDC with over 50,000 citizens. The Bahamas issued the central bank’s digital currency, the “sand dollar,” in October.
Dr. Wolf von Laer is the CEO of Students For Liberty, an international non-profit organization in the field of education that operates in over 100 countries. He holds a Ph.D. in Political Economy from King’s College London and a Masters in Austrian Economics from Universidad Rey Juan Carlos.
CBDCs promise faster settlements, greater security, ease of use, immediate monetary policy implementation (if you consider an improvement) and lower transaction costs than cash. In the future, these advantages will be emphasized Up to nausea by experts and politicians to make technology attractive to the entire population.
While all the benefits are true, it is also vital to reflect on the implications of the technology and how it could negatively impact the economy and citizenship. There are different types of CBDCs with varying degrees of risk and it is important to understand the subtleties of these systems. However, all CBDCs need to be centralized and manipulable to some degree because otherwise monetary policy would not be possible.
On the contrary, Bitcoin is exploding thanks to its decentralized, open, public, borderless, neutral and resistant to tampering and censorship properties. Depending on the type of CBDC, CBDCs can become the exact opposite, especially if central banks offer accounts to the general public, implementing what is known as a direct CBDC model.
This article outlines four scenarios of how CBDCs have the potential to undermine economic stability and eradicate privacy.
Centralize power in the economic system
Governments are fallible. In the United States, think back to the launch of healthcare.gov or federal and state-level violations involving sensitive data in over 300 million cases over the past 10 years. With CBDCs, the entire economic system could be brought to the brink of bad updates or data leaks of the centralized ledger, which will not be protected by proof of work in the same way as Bitcoin. For Bitcoin, it took a decade to build robust decentralized computing power to ensure the integrity of the blockchain. Governments will not go that far and will have to rely on different and more fragile ways to protect the centralized ledger.
CBDC = a dystopian nightmare
The government tends to collect as much data on its citizens as it can get away with. This happens under the pretext of security, as in the Michigan State Governor’s decree to document each customer’s personal information to contain the spread of COVID-19 or under the pretext of pushing people to become model citizens in the case of China. Imagine a social credit scoring system paired with a CBDC. All your buying decisions could affect your score that you depend on for everything. Donating to “wrong” nonprofits like WikiLeaks? Sorry, you can no longer buy train tickets. Have you bought some interesting adult toys for your spouse? Oh no, your credit score may go down or your application for government work is not being accepted.
What sounds like a far-fetched dystopian nightmare is already a reality in China. If you go out with the wrong crowd, your citizen’s score, which is critical for shopping, work, travel and more, suffers. Pair this level of surveillance with the ability to keep track of any purchase decisions you make and you’ve got the perfect recipe for Big Brother on crypto-steroids.
End to the informal economy
More than 60% of all jobs in the world operate in the informal economy. This stems from the lack of free market institutions such as the rule of law, property rights and stable money in many developing countries. But even in developed countries like the United States, the informal economy plays a huge role. Here the International Labor Organization estimates that there are at least 30 million jobs that depend on the informal market. Many livelihoods are threatened by CBDCs. The informal economy includes harmless things like paying your neighbor to fix the roof or paying a teenager to take care of your garden.
See Also: Ajit Tripathi – 4 Reasons Central Banks Should Launch Retail Digital Currencies
Many activities that we all engage in are part of the informal economy and are efficient. They make life easier, overcome unnecessary bureaucracies and save money. The government does not like this because it cannot generate tax revenue. Having a government ledger that keeps track of every transaction would make it virtually impossible to do anything within the informal economy and a huge portion of the 30 million jobs would vanish. A CBDC paves the way for a cashless society, which is very much in the interest of the government. Therefore, it could be the end of informal markets, which are often a safe haven for many people in light of an ever-expanding regulatory state.
Central banks and fiscal policy
Of course, the pandemic has made the work of central banks almost in unison with fiscal policy. Governments “stimulate” the economy like never before. Of course, they run huge deficits in this way. Due to lower interest rates, bond yields are historically low and the demand for bonds is low. Normally, what happens? Governments wouldn’t issue that much debt. But governments need not worry if there is infinite demand produced at the push of a button by the Fed. The Fed mostly buys all the new debt and then part of the secondary markets. This is an indirect monetization of public debt.
Now, CBDCs could do away with fiscal policy entirely. Central banks could immediately generate liquidity and distribute it to small and medium-sized businesses. People with bigger savings might get higher interest rates than those who don’t save. A fiscal stimulus and a tiered interest rate approach are all possible when the government has all your financial data. Governments will argue that this is extremely beneficial. However, it bears the danger of manipulation, economic mismanagement and leads to even faster monetization of public debt, the cost of which we all face by holding money with less and less purchasing power.
There are many other reasons to be wary of CBDCs, but I hope this article encourages you to reflect on the effects of this technology and what it means for you and your future.
The article benefited from the comments of Marcelo Prates. all remaining mistakes are mine. The article reflects the opinion of the author and not the opinion of Students For Liberty.
