The Potential Orwellian Horror of Central Bank Digital Currencies
As citizens around the world are confronted with the severe curtailment of political, economic and cultural freedoms associated with COVID-19 risk mitigation strategies (e.g., lockdowns, mandatory vaccinations and/or vaccine passports), new risks to economic freedom and prosperity are quickly emerging which citizens must be aware of and remain vigilant about.
One of these risks which is developing with rapid pace are Central Bank Digital Currencies (CBDCs). According to a Bank of International Settlements (BIS) 2021 survey:
86% of central banks are actively researching the potential for CBDCs;
60% were experimenting with CBDC associated technology; and
14% were deploying CBDC pilot projects.
The development of CBDCs potentially represents one of the largest changes to modern banking and finance (as well as the global financial system) in decades, even though, as noted by the BIS, the concept was proposed by American economist, James Tobin, in 1987.
CBDCs have been the subject of much speculation of late regarding their intent and implications within economic and financial circles (both mainstream as well as alternative circles). However, to date, they have generated little debate or scrutiny by the public-at-large.
This latter fact is rather astonishing given the potential scale of change to economic life that may result from the introduction of CBDCs.
Current Structure of Currency
As noted by the International Monetary Fund in 2021, economies around the world currently operate under a “dual monetary system” comprising of:
Publicly-issued currency by central banks in the form of physical cash (coins or banknotes) and central bank reserves which constitute legal tender (i.e., form of currency or money which are legally recognised as a means of payment to settle financial obligations such as debts, taxes, contracts, legal fines or damages); and
Privately-issued currency by private commercial banks, telecom companies and specialised private payment providers – that is, digital forms of legal tender that are issued and held by non-government financial institutions (e.g., bank deposits or balances held in payment systems such as Paypal or Alipay).
This dual system is able to co-exist and facilitate commerce and economic activity given that privately-issued currency can be redeemed at a fixed face value of legal tender currency issued by central banks.
Within this context legal tender currency is of a ‘fiat’ nature meaning that its nominal value is set by government decree and does not possess any underlying intrinsic value, such as forms of money backed by a physical commodity such as physical gold or silver bullion.
An important distinction of this dual system is that physical cash and central bank reserves are the liabilities of central banks, whereas privately-issued currency is the liabilities of private sector payment providers.
Historically, a commercial bank would become insolvent when they couldn’t meet their liability obligations, whether this resulted from a bank run, fraud or experiencing technical outages.
Under this dual system, commercial banks and other private sector payment systems play an important financial intermediation role, including:
managing customer facing activities – i.e., providing retail banking services such as payment accounts, authorisation, clearing, settlement and dispute resolution;
developing and releasing innovative payment products which more efficiently facilitate commerce both domestically and internationally; and
ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) obligations.
Thus, it is argued that central banks play an essential role in the monetary and payment system by providing stability and efficiency, whereas the private sector promotes innovation, diversity and competition.
Definition of CBDCs
Given the above explanation of the current structure of the modern fiat currency system, it is important to define what CBDCs are and what role they may play within this structure.
CBDCs are digital or virtual forms of physical cash represented through an electronic record or digital token that is issued and regulated by a country’s central monetary authority (i.e., its central bank) via a centralised ledger.
CBDCs are centralised, which stand in stark contrast to privately-issued cryptocurrencies (such as Bitcoin) which are decentralised and unregulated.
CBDCs are not uniform and central banks have an immense range of legal, technical, operational and administrative design options to achieve their stated public policy objectives. Importantly, the policy intent of CBDCs will be neither uniform across jurisdictions nor static in time. Instead, they will tend to be a function of a country’s economic, political and social context.
As discussed in greater detail below, CBDCs can both co-exist and operate in parallel with both physical cash and privately-issued currency.
Thus, in assessing whether a proposed CBDC will, in net terms, improve or impair the function of a monetary system and broader economy, each CBDC will require individualised scrutiny and assessment.
CBDC Public Policy Rationale
Advocates of CBDCs suggest that they are necessary, certainly useful, in addressing multiple issues emerging across the global financial system of late. These issues include:
Faster private sector payment systems – payment system providers such as Alipay are able to process 120,000 transactions per second, which is almost double the processing speed of credit card companies (such as Visa) and are much faster than traditional processing times of commercial banks.
Moreover, the emergence of stable coins – i.e., private cryptocurrencies that are backed by a reserve asset (e.g., this can include a basket comprising of fiat currencies (one or more), fiat currency equivalents, or short-term government securities) – means that private cryptocurrencies and their associated digital infrastructure can directly compete with the existing dual-currency central bank-commercial bank system (as described above).
Thus, private sector innovation in payment systems and private cryptocurrencies mean that the existing global financial system with its traditional forms of currency and bank payment systems are too slow and thus are at risk of becoming obsolete legacy systems.
Retaining sovereign control – the emergence of private sector payment systems means that central banks contain less control of the money supply thus rendering monetary policy less effective as an economic policy tool.
Financial stability – the potential failure of a private issuer of digital currency could disrupt the payment system and destabilise either the financial system of a nation (and even the global economy, if significant enough).
Financial inclusion – the rise of narrow and private money networks could exclude segments of an economy’s population from en
Article from LewRockwell