Central Bank Digital Currencies

What Are They? What Do We Want Them to Look Like?

On a nation to nation basis, we are facing a monetary turning point of sorts. For better or for worse, Central Bank Digital Currencies (CBDCs) are making their way into our governments.

  • Canada, Brazil, France - (in Development)

  • China, Sweden, The Bahamas (in Pilot)

  • USA, Russia, UK, Australia (in Research)

If implemented without stringent controls on privacy, taxation, and censorship, we could be building cyber economic weapons.

The Current State of CBDCs

On a global scale, CBDCs are in a general state of being implemented. In other words, they’re not here yet. Not entirely. We have been using digital versions of the dollar for nearly 50 years now. However, every country still has physical forms of their currency.

As citizens of our respective nations, I urge you to take notice of how your country decides to implement their central bank digital currency. The countries that are most ahead of the curve on this one are China, Sweden, and the Bahamas; they each have a working, and deployed version of their digital currency. Canada, France, and Brazil are all in various stages of development. USA, Russia, and a host of other countries are still planning, and deliberating on whether or not it makes sense for them to move to a digital currency.

The Case for CBDCs

I am not anti-CBDC. I think there is a lot of benefit to moving to a digital currency. They have the ability to drastically reduce the waste generated by our current monetary system. For example, our current monetary system requires us to grow cotton and linen to be refined into paper USD bills. In Canada, we use polymer (plastic). These bills need to be replaced every few years due to the wear and tear to the bills themselves. Additionally, a majority of financial tools offered to us by our current financial infrastructure require a physical visit to the bank, which is only open between 9:00am to 5:00pm on weekdays. Furthermore, processing requests requires manual administration, adding to the time required to fulfill that request.

CBDCs could reduce the friction in utilizing tools offered by our financial institutions. They could also give citizens more transparent insight on the nature of government spending of tax dollars. This would in turn create more fiscal accountability. Taxes become much easier to pay, and social welfare is able to be distributed in a single instant. Financial accessibility would go up as the cost of providing financial services goes down. Each of these points deserve an extensive elaboration on their own, but I will leave this for another time, so we can dive deep into the potential pitfalls and risks I see ahead of us.

The Case Against CBDCs

I have a number of concerns about CBDCs. Privacy, Censorship, and Control over Taxation and Supply are the key topics of this letter.

The Privacy of Money

“Privacy isn’t about something to hide. Privacy is about something to protect. And that’s who you are. That’s what you believe in. That’s who you want to become. Privacy is the right to the self. Privacy is what gives you the ability to share with the world who you are on your own terms.” — Edward Snowden

Privacy is one of those things that you want when you need it most, but otherwise don’t think much about. Financial privacy is something that I remember being a taboo topic to broach in any social gathering. How much someone earns in their job, or how much savings one has is a sensitive set of questions to ask.

If we use cash, we have total financial privacy. But every purchase that involves an online service or bank account is recorded somewhere in a database. This spending information is disbursed, only because the entire financial system is not unified under a single “central ledger”. Furthermore, this information is benign on its own, and dangerous when combined with other available information. A CBDC would be a single place where all information about where you spend your money lives. In other words, a CBDC spells the end of financial privacy, unless we build it with privacy in mind.

It is one thing to be able to track your online comments, posts, and relationships. It is another to track your spending. Your social interactions reveal who you are, and how you think. Where you spend your money reveals how you act in the world. If an entity has access to all three of these pieces of information, then they can form a very accurate picture of who you are, your thought patterns, and how you will behave in society.

These sort of data collection systems make me think of the movies Minority Report and 1984. This information can ultimately be harnessed to shape our spending through censorship.

Instant Censorship of Money

When goods don’t cross borders, soldiers will. — Frederic Bastiat

One way to censor money is by building the ability to “Turn Off” one’s money - essentially controlling the capital that any individual has earned. Turning off money may be the most potent economic weapon I can think of. It is a total assault on the freedom and liberty of the individual, not to mention other countries. If someone’s money is turned off, all of their basic needs still need to be met. They still need to eat, pay their bills, and save for the future. Financial censorship on the country level (sanctions) can be devastating not just to the regime in power, but the citizens that make up the target country.

The above quote draws attention to the fact that the economy is actually what holds our different countries together. Money articulates the language of value. When you go to another country, you don’t need to speak their language to survive. You already speak the universal language of value. You hand them their local currency, and they will hand you the food you require for sustenance. Since value is a language, and money represents value, to censor one’s bank account is tantamount to censoring one’s speech.

If you deprive someone of the ability to spend, or earn, you deprive them of the ability to live.

If we look at how Facebook, Twitter, Reddit, and Google treat censorship on their platforms, we find that they are quite ready to censor content they deem to be harmful for their platform. These businesses have the ability to dictate what you can and cannot say. A CBDC could have the ability to dictate what you can and cannot buy. While I can think of a large number of things people shouldn’t buy (slaves, bombs, child porn), that doesn’t mean we should create the ability to shut off money for society at large.

Control Over Taxation and Supply

The level of control that a CBDC gives the central bank is something to think long and hard about. Specifically, who is in charge, and what control do they have?

Auto-Taxation

Auto-Taxation is where you are automatically charged extra money when you buy something. This is the opposite of telling you that you can’t buy something. We already have an auto-tax in the form of HST/GST (in Canada). This is known as sales tax in many other regions of the world. It is automatically applied anytime you purchase anything at all. With a central bank digital currency, these auto-taxes become easier to implement.

Selective Taxation Becomes Possible

Regardless of how you feel about taxing the rich, I argue that it is not something that should forcefully and arbitrarily be done. “The Rich” is simply one criteria on which to select people. If selective taxation can be done to the rich, then it is not impossible to imagine a world where taxation can subjectively be applied to groups based on race, age, gender, or social background. I would prefer identity politics stay outside of taxation. The fact of the matter is that once the ability to selectively tax is created, the regime in power can abuse this power by taxing whomever, on whatever basis they deem just for the cause.

Other Aspects to Avoid

Among other features I would rather not have incorporated into CBDC’s are the following.

  • Money that expires (Money that must be spent within a period of time)

  • Money that can only be spent in certain places

  • Universal Basic Income

The Ideal CBDC

I think each of the aspects I mentioned throughout are systemic risks to implementing a CBDC. Instead, I would like to see our central banks create a national currencies that maximizes their utility across the following dimensions:

  • Durability

  • Divisibility

  • Portability

  • Uniformity

  • Scarcity

  • Acceptability

We know it is possible to create a currency on these bases, Bitcoin is the living proof of it. Ultimately, I think our countries would be better on a Digital Gold backed system, but I honestly think this is too far fetched to ask of our governments in the short term. I think the more likely scenario is that we will have CBDCs around the world that essentially manifest the values of the nation that builds them. China’s CBDC will lack privacy for its citizens, and their money will be able to be turned off. Canada and USA’s CBDCs will hopefully protect freedom of speech and not implement financial censorship. Sweden will likely incorporate UBI (Universal Basic Income) into their digital currency. Bitcoin is the opt-out alternative to government money. It was here before CBDCs and will remain long after they’re gone.

All The Best,

Keegan