Governments across the world are racing to adopt so-called central bank digital currencies (CBDCs). So far there are 11 countries that have adopted CBDCs: Nigeria, the Bahamas, Jamaica, Anguilla, and seven small island countries in the Eastern Caribbean. Further, there are 21 countries that have launched pilot programs including Sweden, Australia, Japan, Russia, China, and India. But the technology has proved extremely controversial, with one U.S. lawmaker calling it the “financial equivalent of the Death Star” and the House Financial Services Committee approving a recent bill that will prevent the Federal Reserve from creating a CBDC.
Early experiments have not been so fruitful. After the Nigerian government adopted the e-naira, there were a series of bank runs and even small riots. But this was not so much due to the adoption of the CBDC per se, but rather to the Nigerian government saying that the launch of the e-naira was an opportunity to wipe out cash. Since Nigeria has a large grey economy that falls outside the capacity of the government to police and tax, they thought they could replace cash with digital currency overnight.
Their aggressive policy backfired, and the Nigerian central bank eventually had to dip into their vaults and hand out older banknotes to ensure that the country did not suffer from chronic cash scarcity. While the Nigerian experiment would not have failed so dramatically if it had not been married to an antagonistic attempt to wipe out cash, the fact that it was suggests that bureaucrats see in CBDC a way to increase their power over the population.
Full spectrum dominance?
Looking at videos from countries like Jamaica, it is difficult to see much difference between the CBDC and the banking and payments system that we are used to in Europe and America. The customer needs a ‘digital wallet’ to store the currency, which can be obtained from a bank or building society. The digital wallet is set up as an app on a smartphone, much like Apple Pay and similar apps that we are used to. Payment is made by touching the smartphone to the debit card machine. The similarities are so apparent because most of us are used to digital currency. Even before the advent of the smartphone, our debit and credit cards gave us access to digital currency through the strings of digits written on them and encoded into the magnetic strips at the back.
Digital currency, in the sense that it primarily consists of digits, precedes the digital age. Even before the widespread use of computers, a person’s bank account was a series of digits entered manually into a ledger. Before the computer, banks could contact each other by telephone or telegram to get information from other banks. Prior to wired communications, the system worked on physical notes signed by bank managers, together with very severe laws imposed on those who dared to forge them. In periods when a coherent legal architecture was not in place to prevent fraud, people tended to revert to precious metals, especially gold and silver, which could be tested and weighed.
What makes CBDC different from other forms of digital money? First, we must understand some banking jargon. Let us assume that you have £100 in your bank account. If we go to your bank and ask to see their (digital) ledgers, this will show up as an asset on your side of the balance sheet and a liability on the bank’s. This is because the £100 in your account is a sort of IOU from the bank. The bank owes you £100 when you demand it, either in the form of cash or when you use a debit card or an app to buy something. In the case of the CDBC, it is not the private bank that owes you the £100 but the central bank.
What difference does this make? Almost none. It just means that your money is held on the central bank balance sheet rather than on the balance sheet of the private bank. As we see from the videos of payments in Jamaica, if you were not told that you were using a CBDC rather than the standard, private bank digital currency that we are all used to, you would never know. Critics, however, are concerned that the CBDC could be used to monitor what citizens are spending their money on and even, at the extreme, could be used to impose a ‘social credit score’ that restricts peoples’ spending capacities based on their behaviour. There is even the possibility that a person could have their bank account seized for violating social or political mores, a process that is becoming known as ‘debanking.’
This is certainly a possibility. If the central bank wanted to, it could use the CBDC to track payments down to a minute level. Developments in technology certainly allow this. Regulators have already made moves in this direction for larger payments, under the rubric of fighting money laundering, so the desire appears to be there. Minute tracking of payments could then, in theory, be used to restrict purchases of certain items. Freezing the bank account of someone deemed undesirable would be extremely simple.
The last of these examples should give us pause, however. Recently, it was revealed that British politician Nigel Farage’s bank accounts were suspended by the London-based bank Coutts. Farage managed to obtain internal records from the bank and found strong evidence that his political opinions were a core consideration when the bank decided to suspend his account. Ultimately, the decision was reversed, and the CEO of NatWest, the parent company of Coutts, lost her job. Nevertheless, the Farage example shows that private banks can already ‘debank’ customers. The CBDC does not offer any novel technology that would allow this to be done more efficiently. True, CBDC is ultimately issued by the central bank, so the government could order the central bank to seize a customer’s account. But as it stands, the government can already pressure private banks to do this by threatening to investigate them for money laundering.
In a sense, the same is true for restricting purchases. This can be done and has been done in the past through the distribution of ration booklets. During the First and Second World Wars, governments issued ration booklets that restricted the capacity of people to buy certain items. They could, if they so desired, do this again. Yes, having a computerised tracking system for payments would make it easier to impose rationing today than in 1940 when it was imposed in Britain. But ultimately, it could be done without the CBDC, and ration booklets could be handed out to people who are well-behaved, thereby instituting a social credit score system. As with so-called debanking, forcing rationing on a society is a political choice. Technology can make this political choice easier to implement, but ultimately it is a political choice.
The problem with imposing rationing on a society is that it creates a quasi-socialist or planned economy. This may be necessary in wartime, as certain products become scarce when war production ramps up. But it is a sure path to impoverishment. Imposing full-scale rationing in peacetime would involve effectively planning all consumer demand. We should not expect any better an outcome from this than we saw in the planned economies of the Comecon countries of the Eastern bloc. Securitocrats and political commissars will always be tempted to use the legal and economic system to increase their power over society. If they are not restrained, even abstracting from the moral issues at play, they will destroy our shared prosperity—and, ironically given their typical justifications, raise the probability of political and social destabilisation.
The amazing self-Imploding spycoin
The one area where CBDC gives the government new powers to exercise control over the population is in the tracking of payments. Until now, this was not technologically possible, but the CBDC would, in theory, allow governments to track the purchases made by the population en masse. This technology, which is no doubt extremely attractive to bureaucrats, is the fatal flaw in the entire CBDC project. To understand this, we need to understand something about the nature of money.
When you boil it down, money is ultimately a trust relationship. You can create money yourself, by writing an IOU and using it to pay someone for a good or service. Ultimately, that IOU will only be worth something if you can be taken at your word. In the past, gold-backed monies were based on the trust that people placed in either private or central banks to hold enough gold to meet any paper notes that were to be redeemed. In modern fiat currencies, there is nothing backing the paper note, so the value of the money is solely due to peoples’ confidence: they trust that the government will not undermine its value. When a country breaks this trust, people turn to alternative monies, as in Argentina and Turkey today, where people shun the local currency if they can and use U.S. dollars.
Now, what would happen if you knew that the money you were being asked to use was also being used to spy on you? Immediately, you would not trust it. Even if all your purchases were honest and you tried your best to meet your tax obligations, there would always be a lingering sense that it might be used to do something nefarious. You and every other rational person would therefore go out of your way not to use this money. You would seek out alternatives, whether they were foreign banknotes, or precious metals, or even private digital currencies with a solid track record. Because of this, CBDC is a paradox: a money based solely on trust that is structurally set up to destroy that trust.
Could the government not just force people to use it? Only in certain spheres. The government could compel you to make court-mandated payments and pay your tax in the currency. It could also, in theory, compel the corporate sector of the economy to only accept CBDC payments. But it could go no further than this, and if it did this, it is all but inevitable that a black or grey market would spring up. Entrepreneurs could purchase goods in the corporate sector using CBDC and then offer them to consumers in alternative currencies in the unofficial sector.
A CBDC system, if used to control or cajole citizens, would completely undermine our currency systems themselves. If people lost trust in the currency, the government would lose any control it had over the economy. It would also lose out on tax revenue from vast swathes of the economy, and it would find it much more difficult to borrow and spend. In short, a CBDC that was widely distrusted in the population would turn our functional, developed, free economies into dysfunctional, underdeveloped, unfree economies. We would see many of the economic problems spring up that we now associate with places like Argentina, Turkey, or Africa. The fact of the matter is that the idea to deploy a CBDC to exert more control over the population is madness. It would turn the clock back on the development of our financial systems by over a century, and it would lead to much of the state’s current powers collapsing. It would do precisely the opposite of what bureaucrats think it would and, at the same time, it would make us all much poorer and our societies more dysfunctional.
Back to basics
The reality is that money is less a technological entity than it is a legal entity. It is not so much that technology gives would-be authoritarians any more power to try to control certain aspects of the economy, but rather it gives them the temptation. If a technology makes it easier to impose certain types of control over the economy, those who want to impose that control will be more tempted to do so. But ultimately it is a legal decision whether to do this or not. Either the law is passed, and it happens, or the law is not passed, and it does not. This passes the buck up from the technological to the governance sphere. Ultimately, this is a question of governance, such as we might find in the legal and political thinkers of the Enlightenment and Antiquity, and it should be debated on those terms.
We need to stop getting bogged down in the weeds of the technological debates that are driving concerns about authoritarian overreach forward and focus on the authoritarian overreach itself. First and foremost, this overreach should be addressed in moral or ethical terms: is a society tending in this direction one that we want to live in? But almost as importantly, we should address this overreach in practical terms.
We know from experience—and indeed, mankind has millennia of experience—that tyrannical societies tend to be poor, dysfunctional societies. They tend to be societies with low social trust, little in the way of entrepreneurship, and generally stagnant. If the Soviet Union failed to teach us that this could just as easily be true in a complex, industrial society, then it taught us nothing. Sadly, as the Soviet Union fades from view in the rear view mirror, we are starting to forget its lessons, and those who want to impose aspects of Soviet society on us are pushing forward once again—armed with flashy technology that leads us to take our eyes off the ball. “Everything that needs to be said has already been said,” the French author Andre Gidé wrote, “But since no one was listening, everything must be said again.”
