Central bank digital currencies are coming, whether you like it or not
Central banks around the world are considering creating their own digital currencies. It’s not a matter of if we get them, says Dominic Frisby, it’s a matter of when. So how will they affect your life, and is there any alternative?
Today we talk central bank digital currencies – CBDCs.
Are they evil? The final step into the Brave New World Orwellian Great Reset Dystopia that we seem to be heading inevitably, inextricably towards?
Or are they the on-ramp (or, as we British call it, the slip road) to the bitcoin motorway?
The answer is both.
CBDCs can give governments extraordinary control over your spending
The big issue with CBDCs is that their money is programmable. That means that the issuer can build certain rules into it.
If I have a £10 note in my hand, I am free to do pretty much as I like with it. I can put the money towards buying a house; I can give it to a beggar; I can buy booze or fags with it. I can go to some shady part of town and buy some weed. What’s more, if I want to keep what I spend that money on to myself – if I want privacy, in other words – I can have it.
Cash grants its user freedom. Freedom is a power. When you start using banks, you lose a certain amount of that freedom. In exchange for that loss of freedom you get convenience. You can now safely store, receive and send over distance large sums of money. On the other hand, the bank sets the terms of the relationship and it knows exactly how much money you have spent and received, and exactly what it was spent on and received for.
Any large sums the banks will usually question. It can limit how much you send in a day and, in some cases, prevent you sending and receiving money altogether – to and from bitcoin exchanges, for example.
Programmable money – CBDCs – means that you, the user, have even less control over your money. Pretty much anything can be coded into a CBDC. China is looking at expiry dates in its CBDCs, for example. You have to spend the money by a certain time or it expires. Perhaps there is a national crisis which requires, according to the central planners, a boost of consumer spending, so an expiry gets implemented. Harsh on those who would rather save, but this is a national crisis. Money velocity can be manipulated by changing expiry dates.
It could be arranged that the money won’t work in certain retailers, on certain products or in certain jurisdictions. Every transaction ever made will be visible to and traceable by the all-seeing government. Should Big Brother choose to watch, he will see all.
It’s likely that, in some jurisdictions, other bodies will have direct access to your wallet – for the removal of taxes, for example. Imagine the headache you will have retrieving money that is yours when the wrong amount was removed.
Different rates of interest can be granted to different users. Perhaps you are wealthy and, in the same way as you are in the higher tax threshold, you might also get put in the negative interest rate threshold.
Monetary policy can be linked to your social rating as well as your credit rating. If a user has a high social credit score – they do and say the right things in other words – they might qualify for a more generous interest rate. Or they might receive higher levels of a universal basic income.
In the same way that the US freezes enemies – Iran or North Korea, for example – out of the international financial system through a process known as “dollar weaponisation,” so the same possibility will exist for enemies of the state at home. I am not saying this will happen, but I am saying that programmable money opens up the possibility.
A government can pre-program the types of loans banks can give out. Perhaps only loans for a certain type of house or a certain type of business will be allowed.
CBDCs are inevitable – but cryptocurrencies provide an alternative
As you can see, scope is opened up for Orwellian levels of economic intervention in the economy. Money, like taxes are today, will be used to control and shape behaviour.
In exchange for getting its CBDC over the line, a government might promise that this or that intervention will never happen. But promises get broken. Different governments get elected. At times of crisis, such as a global pandemic, all the rules go out of the window.
You can’t, however, uninvent a technology. Once it’s there it gets used. CBDCs are inevitable. Nine out of ten central banks are now looking into them, according to a recent study by Fintech and IT Benchmarks. They are coming. It’s a question of when, not if.
Benevolent governments with respect for freedom will take a more laissez faire approach; the authoritarians will use CBDCs as a means to implement their designs.
There will be unintended consequences and loopholes galore. There always are. Crony capitalism will go even more bananas than it is now. Special interest groups, big corporations, big banks and whoever else is rubbing elbows with powerful politicians will curry all sorts of favour. Snouts will be in the trough wherever you look. What could possibly go wrong in an economy where success is determined more by social credit rating than merit?
The Cantillon effect, named after 18th-century economist Richard Cantillon, describes an inflationary process whereby those closest to the issuance of new money benefit most, while those furthest from it lose out. Things will get Cantastic, so to speak. Who knows what the counterfeiters will make of it?
Bitcoin fixes many things, and perhaps it fixes this Great Reset as well, because crypto provides alternatives. Those alternatives mean competition, and that competition should keep CBDCs that suffer from overreach and mission creep in check.
What’s more, once ordinary consumers start getting the hang of central bank digital wallets, the use of wallets and peer-to-peer money will be normalised. And right there is your slip road, your on-ramp into bitcoin.
In short, CBDCs should benefit crypto. Heck, Rishi Sunak is even calling the Bank of England’s coin “Britcoin” (some hypocrisy given the FCA’s stance towards crypto). Nevertheless, it’s a tacit recognition that bitcoin is top dog.
So, fintech companies aside, the way to play the CBDC might be to own a healthy portfolio of crypto.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.