Bitcoin Magazine Continues Its Expose on the Dangers of CBDCs

Following the publication of Bitcoin Policy Institute’s exceptional white paper on the dangerous implications of a US central bank digital currency (CBDC), Bitcoin Magazine has started a series of articles expanding on the white paper’s conclusions. These should be required reading for any legislator looking to back CBDCs.

This latest piece hits on something we haven’t discussed – the ability of governments to use CBDCs to not just prohibit certain transactions, but to actually require other transactions. And they could be used to regulate the informal economy, hurting the most vulnerable in society.

CBDCs are digital cash. Unlike traditional (physical) cash, which can be transacted anonymously, digital cash is fully programmable. This means that CBDCs enable central banks to have direct insight into the identities of transacting parties and can block or censor any transaction. Central banks argue that they need this power in order to combat money laundering, fraud, terrorist financing and other criminal activities. But as we will see below, the ability of governments to meaningfully combat financial crimes using existing anti-money laundering and know your customer laws (“AML/KYC”) has proven woefully inadequate, at best, while effectively eliminating financial privacy for billions of people.

The ability to block and censor transactions also implies its opposite; the ability to require or incentivize transactions. A CBDC could be programmed to only be spendable at certain retailers or service providers, at certain times, by certain people. The government could maintain lists of “preferred providers” to encourage spending with certain companies over others and “discouraged providers” to punish spending with others. In other words, with a CBDC, cash effectively becomes a state-issued token, like a food stamp, that can only be spent under predefined conditions. Means testing could be built into every transaction.

But censoring, discouraging and incentivizing 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 have already done for their CBDC) or by imposing “penalty” (negative) interest rates on balances over 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 can’t find other sources of capital. Central banks understandably wish to prevent these “credit crunches,” which often result in economic recessions 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 recourse in the event of monetary crises.

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Finally, central banks can programmatically require tax payments for every 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 could take advantage of the recovered tax revenue to lower effective tax rates.76 However, there is no indication that revenue strapped governments already incentivized to harvest private wealth would take any measures to lower taxes. Instead, CBDCs will most likely be used to generate additional tax revenue for the state at onerous cost to individuals.

Imagine: With mandatory taxation on every CBDC transaction, you would be taxed for giving your neighbor $20, or giving your children an allowance, or for every item you sell at a yard sale. A person paying their friend $50 to change a tire or $100 to look after their home while they are away would be taxed for these activities. This “informal” economy is not only a necessary mode of intimate interpersonal relating, but a lifeblood for millions of people who rely on it to survive day to day. It is morally unfathomable to imagine a homeless person selling flowers on the street being taxed for every transaction.