Central Bank Digital Currencies shouldn’t be a mystery. They are a new way to track citizens. We should track them.
A CBDC is a digital national currency. In the case of the United States, a CBDC would be a digital form of the U.S. dollar whereas, in Nigeria, their CBDC is a digital form of the Naira. Like paper dollars, a CBDC would be a liability of the central bank. But unlike paper dollars, a CBDC would be very likely to offer neither the privacy protections nor the finality that cash provides.
In fact, it’s precisely this digital liability—a sort of digital tether between citizens and the central bank—that makes CBDCs different from the digital money people already use.
In the private sector today, people regularly use multiple forms of digital money. They send digital payments using credit cards, debit cards, prepaid cards, and several mobile applications (e.g., Zelle, PayPal, and Cash App). In fact, it’s not just payments that have gone digital. Nearly every financial institution offers services—from savings accounts to mortgages—via mobile applications. So there should be no misunderstanding: money is already widely available in digital form. Moreover, the current system works so well that few people ever take the time to worry about whether the digital dollars they are using are a liability of Visa or a liability of their local bank.
Though consumers have little reason to think about it, when they use a prepaid card, the balance on the card is a liability of the private company that issued it (e.g., Visa and Mastercard). Similarly, when consumers deposit money into their bank accounts, the deposits in those accounts are a liability of the bank (e.g., Bank of America and Capital One). In practice, that means that the bank owes the customer the funds deposited in that account. When a consumer transfers money from a bank account, the bank is responsible for transferring the money.
In the case of a CBDC, however, the digital dollars would be a liability of the central bank itself. That is, the government has the direct responsibility to hold, transfer, or otherwise remit those funds to the ostensible owner. This feature creates a direct link between citizens and the central bank. And it is this feature that opens the door to so many human rights concerns when it comes to the adoption of CBDCs.
These concerns cover issues on financial privacy, freedom, stability, and cybersecurity. And while these concerns cover a great deal of ground, it’s important to know exactly what’s on the table. So here is a brief tour of the reasons why so many people are concerned about the rise of CBDCs:
Around the world, governments routinely pressure banks and other financial institutions to supply customer information. From Canada to Russia, this practice has become all too common. The difference between what is experienced today and what would be experienced with a CBDC, however, is that the financial records would be on government databases by default. In other words, a CBDC could spell doom for what little protection remains because it would give governments complete visibility into every financial transaction by establishing a direct link to each citizen’s financial activity—activity that can reveal details about a person’s relationships, profession, religion, political leanings, locations, and more.
The programming capabilities of a CBDC would provide countless opportunities for governments to restrict citizens’ financial transactions. These capabilities could mean that people would be prohibited from buying certain goods or limited in how much they might purchase. For example, policymakers could try to curb drinking by limiting nightly alcohol purchases or prohibiting purchases for people with alcohol‐related offenses. The possibilities for the programmability of a CBDC are nearly endless. And in all of them, even the best of intentions are just a few steps away from leading to serious abuses of power.
Governments have often turned to freezing someone’s financial resources to lock that individual out of society. For example, the Chinese government froze the funds of protestors in response to the Hong Kong freedom protests and the Canadian government froze the bank accounts of protestors in response to the Ottawa trucker protest. This weaponization of the financial system is already such a common problem that many people have turned to cryptocurrencies as a solution to overzealous governments. However, due to the direct access it would provide governments, a CBDC could greatly exacerbate these events.
With direct access to each citizen’s financial activity, governments could also go beyond freezing funds to seize citizen’s funds. These seizures could come in the form of automatic fines, negative interest rates, civil asset forfeiture, or mass confiscations depending on what controls are in place in each country. This risk is made worse in countries with rampant corruption and authoritarian systems of government.
Proposals for CBDCs often tout negative interest rates as a benefit because it would offer policymakers “greater control” over the economy. For citizens, however, a negative interest rate amounts to a fine or tax for saving money. Worse yet, implementing negative interest rates depends on there being no alternative payment methods for consumers, which is likely one reason that governments introducing CBDCs have been banning cryptocurrencies. But it’s not just private alternatives that would need to be removed—central bankers cannot effectively implement negative rates with CBDCs if people can still switch to cash.
A CBDC would likely worsen bank runs, lead people to leave the banking system, and increase the cost of loans. To lessen this risk, some central banks have proposed limiting how much CBDC a person can own and what they can do with it. But if the tradeoff becomes a question between making something people will want at the expense of the larger financial system or making something no one will want at the expense of taxpayer resources, then the best choice is to not introduce a CBDC at all.
Globally, governments have demonstrated that they want a CBDC specifically to hold on to their monopoly over national currencies. For instance, China banned cryptocurrencies just as its CBDC was launched; India announced its plans for a CBDC while simultaneously calling for a ban on cryptocurrency; and Nigeria prohibited banks from cryptocurrency transactions just as it launched its CBDC. Such bans may not be inherent in the design of a CBDC, but there is no denying that CBDCs are being used across the world to combat the existence of cryptocurrencies.
Recent history has shown that governments are not immune to hacks or data breaches. The private sector is not immune either, but it does have the distinct advantage of being more decentralized than the federal government. For example, Bitcoin is often celebrated for the security of its decentralized system. A hacker may attempt to “break in” to one computer, but such actions do little to affect the larger network considering there are countless other computers across the world that work around the clock to verify the system. A successful attack on a centralized CBDC system, however, could bring down the entire economy.
New government powers often mean new avenues for abuse. Questions as mundane as choosing what company to build the CBDC platform to as complex as choosing who will be allowed to use the CBDC can lead to grave implications. Where corruption runs rampant, a CBDC could be yet another tool to exert political favoritism. Where discrimination is still deeply engrained, a CBDC could be a tool to further cut off religious and social classes from society. One of the best ways to reduce government corruption is to reduce government power. Launching a CBDC would be to do the opposite.
CBDCs have the potential to radically transform the financial system, and all signs point to that transformation being a detriment to citizens around the globe.