The Dangers Of Central Bank Digital Currencies (CBDCs)

There are a variety of reasons why consumers should be wary of central bank initiatives related to digital currency.

CBDCs are an online kind of currency. Digital currency, in contrast to real currency, can’t be utilised in anonymous transactions because of their programmability. This means that CBDCs provide central banks with direct access to information regarding the identity of the parties to transactions, allowing the banks to censor or block any transaction they so choose. Central banks argue that they need this power to stop criminal activities including money laundering, fraud, and the financing of terrorism. However, as we will see below, present anti-money-laundering and know your customer rules (“AML/KYC”) have proven to be, at best, woefully inadequate in their ability to combat financial crimes. Therefore, billions of people no longer enjoy any form of financial anonymity.

A capability to prohibit and filter transactions, as well as its inverse, implies a capability to require or encourage transactions. It is possible to restrict the use of a CBDC to certain people, certain locations, and certain periods. The government might keep lists of “preferred providers” and “discouraged suppliers” to encourage spending with particular enterprises and discourage expenditure with others. CBDCs transform currency into a restricted-use form of state-issued token, not unlike food stamps. Means testing might be a part of every deal.

In contrast, programmable cash grants central banks even more control over financial activities than their current regulatory, discouraging, and incentivizing capabilities. Banks might discourage saving or maintaining digital cash by putting caps on cash holdings (as the Bahamas have already done with their CBDC) or “penalty” (negative) interest rates on balances above a certain amount. Customers can be discouraged from using their M1 and M2 bank accounts (credit monies made available to them by commercial banks) too quickly by employing this method (M0). After all, commercial banks could run out of money and dramatically reduce their lending if an influx of borrowers suddenly requires hard money (cash). Financial institutions like the Federal Reserve naturally desire to prevent “credit crunches,” which can precipitate economic downturns or depressions. In a fiat currency system, M0 is the hardest and safest form of money, but their policies prevent people from having access to it, leaving billions of people, especially the poor, defenceless against economic downturns.

Central banks are not limited to levying negative interest rates on cash balances above a certain threshold; they can do so with any balance. The idea behind negative interest rates is to boost short-term consumer spending in an effort to stave off recessions, but this only speeds up the erosion of personal wealth. The current status of the global economy serves as a good illustration. Markets were flooded with fiat currency as central banks attempted to halt a recession caused by the COVID-19 pandemic by monetizing growing levels of state debt. More money is chasing after the same amount of assets, which is a recipe for inflation. This has led to the highest level of persistent worldwide inflation in 20 years, with certain countries seeing inflation rates that are far higher than the global average. Inflation already increases spending because customers know their money is worth more today than tomorrow. When interest rates are negative, it encourages people to spend their limited funds faster because their savings are worth less. In the end, this spiral of bad behaviour leads to a monetary collapse rather than increased economic activity.

Central banks have many options at their disposal, including the use of penalties and universal negative interest rates, to progressively collect money from individuals and private institutions. After CBDCs are in place, there is no legal or practical barrier preventing central banks from performing direct haircuts on or repossessions of anyone’s cash holdings. Central banks might promptly seize private digital cash to pay off national debt, discourage the use of digital cash, restrict the amount of money in circulation, or for any other cause. This possibility is baked into the institutional frameworks of CBDCs, both politically and technologically, but has not been openly explored.

At the end of the day, governments can mandate tax payments be made with every CBDC exchange by instituting an automatic system. A minority of economists have argued that this action is necessary to recover tax money that is periodically lost when using physical cash; these same economists have also suggested, albeit pessimistically, that governments might use the recovered tax revenue to lower effective tax rates. 76 There is, however, less evidence that tax cuts will be enacted by cash-strapped governments already inclined to syphon off private wealth. Rather, CBDCs will be used to increase state revenues at the expense of the people.

If all CBDC transactions were subject to legal taxation, it would be like if you owed money every time you gave $20 to your neighbour, gave your kids an allowance, or sold anything at a yard sale. If you paid a friend $50 to change a flat tyre or $100 to protect your house while you’re away, those payments would be taxable income to your friend. This “informal” economy is more than just an essential kind of close-knit human interaction, as millions of people rely on it for their very survival every day. It’s immoral to think that a homeless person selling flowers on the street should be taxed on every transaction.