Central Bank digital currencies – Why I am sceptical

By Ewen Stewart – 5 minute read

THE MOVE to CBDC is likely to be global: 134 nations are currently exploring the feasibility of CBDC with every OECD nation in the advanced technical appraisal stage. I would suggest that by the end of the decade it will be the primary financial tool in developed economies.

We are told there is nothing to worry about, that there are safeguards, that no decision has been made yet and that in any case it wont be functional until the second half of the decade at the earliest. Parliament will decide so there will be full democratic control.

Indeed!Moreoverwe will still be able to use cash, so whats the concern? The Bank of Englands cuddly video on the digital pound is anodyne enough with a friendly northern accent to reassure.

On the other side of the argument a quick search of X suggests it will lead to total governmental financial control, the end of financial privacy, programmable money (which I explain later), digital IDs and a social credit system with ever increasing centralisation of power. So who is right? A grave threat to freedom or a natural technological evolution that will make transactions cheaper and more transparent?

The reality is we dont yet know as the architecture of the proposed CBDC has not been agreed or made public.

There are a range of options which countries could adopt, from the relatively benign at one unlikely extreme to complete surveillance and control at the other.Where we will lie on the curve, and just as importantly might end up in time, is unknown because no direct detail has yet been published either by the European Central Bank or the Bank of England.

One might imagine it is welcome that a major central bank should be forward thinking by examining the various options for sterling in an increasingly digital world; there are, however, major grounds for concern. Ultimately, confidence in currency is perhaps the most paramount lever a state has and a free people enjoy. If trust is breached the impact could be devastating.While I think some of the more polemic control arguments are over the top,CBDC does potentially offer a grave threat to liberty without very strict, timeless and enforceable safeguards which, even if in place at the off, risk erosion over time.

It is likelyin the initial iteration, in the UK anyway, therewouldbe safeguards andCBDCprobably will run in parallel with both cash and traditional banking, but it is nave to believe that such safeguards will be foolproof. What is certain is the UK and Euro versions will not be linked to any hard commodity such as gold.

There is a grave risk of mission creep.We only have to seehow politicians responded to the alleged covid crisis as an example. In extremis all options are on the table and a digital centralised currency materially increases the potential power options for Governments.

What the UK central bank seems to have in mind is a very far cry from private digital currency with the central bank core ledger at the heart of it, enabling regulated entities authorised access. These payment interface providers are the user friendly interface with the individual or company, as the Bank of England inelegantly puts it. This new Government-backed CBDC would thus potentially be quite different from its private equivalents inthreeprimary spheres.

First, Government envisages that the central bank sits at the core, not a decentralised process of controlled currency expansion as with private currencies.While it is likely that individual accounts will still be held with financial intermediaries, or possibly traditional banks, it potentially gives far greater central oversight of transactions and loan growth.

Second, with a shorter direct transmission mechanism than is currently the case, it theoretically makes it easier for central banks to micromanage. It might be argued that as things stand controls in the recent world of monetary extremism are pretty limited anyway.The record since the global financial crisis has shown just how willing central banks are to create money via quantitative easing. A CBDC would theoretically enable that process to be taken a stage further, simply creating or withdrawing credits as centralised policy makers dictate, with a potentially much more direct transmission mechanism than the current QE and Asset Purchase programmes.

Third,politicians must decide whether this government-backed digital currency is programmable or not.This sounds innocuous, yet it is anything but. The CBDC-world would have an immediate transmission process that would potentially allow for the temptation of even more activist monetary policy, limited by what the central authorities deemed appropriate. While in parts of the eurozone, under conventional money, rates were strongly negative for quite long periods, CBDC could allow this to be taken a stage further with a much greater potential for materially negative rates, with clear implications for savers and indeed personal choice and liberty.

A second aspect of programmability means that in effect the statecouldhave control over how you spend your money and not just the quantum of it. Theoretically it could be tied into behavioural incentives and penalties built into the system at a theoretical touch of a button. This needs very careful watching and clarification, for without very strong safeguards CBDC would result in the greatest power grab of the state over the individual yet.

With current money held in ones account one is free to do with it as one pleases (within understood and accepted laws). Its yours to spend or invest as you like. A programmable CBDC currency could theoretically override that freedom based not just on the sum in the account but also other variables at the whim of the central bank or politicians.

Unless a CBDC was set up entirely neutrally, it could be used to block expenditure on items deemed socially harmful. Carbon-intensive purchases are an obvious example (diesel or indeed any fossil fuel). The direction of spending of state benefits (no sugar, salt, fat, alcohol or tobacco products) is another area that might attract attention.

The point is that under the current monetary system there is no direct check on what you do with your money so long as it is legal be it to buy red meat or go vegan and rightly so: that is what a free society is all about.But unless explicitly excluded it would not be hard to imagine a CBDC tax or credit system introduced simply at the whim of government to suit whatever short-term target it might have. This has to be a legal red line, for if lockdown has shown us anything, it is how easy it is for the state to control our thoughts, words and deeds.

Sure, central banks have caused serious damage to fiat currency with their interference and constant desire to micromanage and debase. The CBDC, unlike the private equivalent, potentially opens a whole new avenue of state power to direct, control, helicopter in and withdraw at the flick of a switch.We need to watch these developments very carefully.

Any attempt to make this programmable, even if the authorities generously allow this digital currency initially to run in tandem with traditional currency, would effectively mark a major breach of an individuals or corporate freedom to buy legally what they like.

The Man from the Ministry already demands a state of almost half the size of entire economy but to nudge, direct and dictate how the remainder might be spent goes well beyond any reasonable definition of a free society. Break the link between currency and productivity/production in all its forms and you play with fire; breaking the link with personal choice and preference of what to buy and you cease to have a free society.

So ultimately it comes down to how much you trust the government. Trust is being eroded for sure and we have witnessed a huge transfer of power from the private to the public sphere over the last 100 years, with the pace picking up.

It would be wrong to write polemically about this just yet as the details are unknown but read the small print very carefully, look at how it is backed (almost certainly on trust in governmentalone) and look at the liberty safeguards, central bank objectives and potential programmability. I am deeply sceptical watch this space.

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