The Dangerous Implications of CBDCs – Bitcoin Magazine
Natalie Smolenski is a Senior Advisor at the Bitcoin Policy Institute and Executive Director of the Texas Bitcoin Foundation, and Dan Held is a Bitcoin Educator and Market Advisor at Trust Machines.
This article is an excerpt from the Bitcoin Policy Institute whitepaper “Why the US Should Reject Central Bank Digital Currencies (CBDCs),” written by Natalie Smolenski with Dan Held.
CBDCs are digital cash. Unlike traditional (physical) cash, which can be traded anonymously, digital cash is fully programmable. This means that CBDCs enable central banks to have direct insight into the identity of the transacting parties and can block or censor any transaction. Central banks argue that they need this power to fight money laundering, fraud, terrorist financing and other criminal activities. However, as we will see below, the government’s ability to meaningfully combat financial crime using existing anti-money laundering and know-your-customer (“AML/KYC”) laws has proven to be woefully inadequate, at best, while effectively eliminating financial privacy for billions of people.
The ability to block and censor transactions also implies the opposite; the ability to require or encourage transactions. A CBDC can be programmed to be used only at certain merchants or service providers, at certain times, by certain people. The government could maintain lists of “preferred suppliers” to encourage spending with certain companies over others and “discouraged suppliers” to penalize spending with others. In other words, with a CBDC, cash effectively becomes a government-issued token, like a food stamp, that can only be used under predefined conditions. Means testing can be built into every transaction.
But censoring, discouraging and stimulating transactions are not the only powers available to central banks with programmable cash. Banks can also disincentivize saving – holding digital cash – by capping cash balances (as the Bahamas has already done for their CBDC) or by imposing “punitive” (negative) interest on balances above a certain amount. This can be used to prevent consumers from converting too much of their M1 or M2 bank balances – credit money issued to them by commercial banks – into cash (M0). After all, if too many people rush to demand cash (hard money) at once, commercial banks will be deprived of funding and may dramatically reduce their lending if they cannot find other sources of capital. Central banks understandably want to prevent these “credit crunches”, which often result in economic downturns or depressions. However, their policy interventions also deprive people of access to M0 currency – the hardest and safest form of money under a fiat currency regime – leaving billions of people, especially the poorest, without options in the event of monetary crises.
Of course, negative interest rates can be imposed by central banks on all cash holdings, not just balances above a certain amount. While the goal of reintroducing negative interest rates is to prevent recessions by stimulating short-term consumer spending, this goal is achieved at the cost of accelerating the destruction of private wealth. We can take the world’s current economic situation as an example. Central banks intervened during the COVID-19 pandemic to prevent recession by cashing in on rising levels of government debt, which flooded markets with fiat money. This has resulted in more money chasing fewer assets, a reliable recipe for inflation. The world is therefore seeing the highest sustained global inflation rates in 20 years, with some countries experiencing rates much higher than the global average. Inflation already stimulates spending, because people understand that their money is worth more today than it will be tomorrow. By implementing negative interest rates, central banks further erode the value of people’s savings, creating a perverse incentive for them to use their already dwindling resources even faster. This vicious circle ends not in economic prosperity, but in a collapse of the currency.
While fines and generalized negative interest are both methods central banks can use to gradually confiscate money from individuals and private organizations, these are not the only methods available to them. Once CBDCs are implemented, there is nothing technical or legal to prevent central banks from imposing direct haircuts on, or repossessing, anyone’s cash holdings, anywhere in the world. Central banks can directly confiscate private digital cash to pay off their national debt, to discourage the use of digital cash, to reduce the money supply, or for other reasons. Although this possibility has not been openly discussed, it is embedded in the political and technical architectures of CBDC.
Finally, central banks can programmatically require tax payments for each CBDC transaction. Some economists have argued that this measure is necessary to recover tax revenue that is sometimes avoided when physical cash is used, and then rather optimistically note that governments can take advantage of the recovered tax revenue to lower effective tax rates.76 However, there is no indication that governments already incentivized to harvest private wealth will take some measures to lower taxes. Instead, CBDCs will most likely be used to generate additional tax revenue for the government at burdensome cost to individuals.
Imagine: With mandatory taxation on every CBDC transaction, you would be taxed for giving your neighbor $20, or giving your kids an allowance, or for every item you sell at a yard sale. A person who pays their friend $50 to change a tire or $100 to look after the home while they are away will be taxed for these activities. This “informal” economy is not only a necessary means of intimate interpersonal relationship, but the lifeblood of millions of people who depend on it for day-to-day survival. It is morally unfathomable to imagine a homeless person selling flowers on the street being taxed for every transaction.
Summary
- Retail CBDC is programmable cash.
- Programmable cash gives central banks direct relationships with consumers.
- Direct relationships between central banks and consumers enable central banks to:
- Monitor all financial transactions.
- Flag, block or reverse any transaction at any time.
- Determine how much money someone can hold and trade with.
- Determine which products and services cash can be used to purchase, and by whom.
- Implement monetary policy directly (such as negative interest rates) at the level of private cash holdings.
- Confiscate private cash.
- Enforce tax collection on every cash transaction, no matter how small.
To read the full white paper, which goes into more detail on how Bitcoin relates to CBDCs, click here.
This is a guest post by Natalie Smolenski and Dan Held. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
