Natalie Smolenski is a Senior Advisor at the Bitcoin Policy Institute and Executive Director of the Texas Bitcoin Foundation, and Dan Held is a Bitcoin Educator and Marketing Advisor at Trust Machines.
This article is an excerpt from the Bitcoin Policy Institute white paper “Why the US Should Reject Central Bank Digital Currencies (CBDCs)” written by Natalie Smolenski with Dan Held.
CBDCs are digital cash. Unlike traditional (physical) cash, which can be done anonymously, digital cash is fully programmable. This means that CBDCs allow central banks to have a direct view of the identity of transacting parties and can block or censor any transaction. Central banks argue that they need this power to combat money laundering, fraud, terrorist financing and other criminal activities. But, as we’ll see below, the ability of governments to meaningfully combat financial crime using existing money laundering and know your customer (“AML/KYC”) laws has proven to be woefully inadequate at best. , while effectively removing the financial privacy of billions of people. people
The ability to block and censor transactions also implies its opposite; the ability to require or incentivize transactions. A CBDC could be programmed so that it can only be spent at certain retailers or service providers, at certain times, by certain people. The government could maintain lists of “preferred suppliers” to encourage spending with certain companies over others and “discouraged suppliers” 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. It means that evidence could be built into every transaction.
But censoring, discouraging and incentivizing transactions aren’t the only powers central banks have with programmable cash. Banks can also discourage savings by holding digital cash, limiting cash balances (as the Bahamas has already done for its CBDC), or imposing “penalty” (negative) interest rates on balances above 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 ask for cash (hard money) at once, commercial banks will be starved of funding and may drastically reduce their lending if they cannot find other sources of capital. Understandably, central banks want to avoid these “credit contractions,” 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 case of monetary crisis.
Of course, central banks can impose negative interest rates on all cash reserves, not just balances of a certain amount. While the goal of imposing negative interest rates is, again, to prevent recession by stimulating short-term consumer spending, this goal is achieved at the cost of accelerating the destruction of private wealth. We can take as an example the current economic situation in the world. Central banks stepped in during the COVID-19 pandemic to stave off recession by monetizing rising levels of sovereign debt, which flooded markets with fiat money. This has resulted in more money chasing fewer assets, a reliable recipe for inflation. The world is therefore experiencing the highest sustained global inflation rates in 20 years, with some countries experiencing rates well above the global average. Inflation already encourages spending, because people understand that their money is worth more today than tomorrow. By implementing negative interest rates, central banks further erode the value of people’s savings, creating a perverse incentive for them to spend their already dwindling resources even faster. This vicious circle does not end with economic prosperity, but with a currency collapse.
While penalties and widespread negative interest rates are both methods that central banks can use to incrementally confiscate money from private individuals and organizations, they are not the only methods available. Once CBDCs are implemented, there is nothing technically or legally preventing central banks from imposing direct cuts or repossessing the cash holdings of anyone, anywhere in the world. Central banks could directly confiscate private digital cash to pay off their sovereign debt, to discourage the use of digital cash, to decrease the money supply, or for any other reason. Although this possibility has not been openly discussed, it is built into the political and technical architectures of CBDCs.
Finally, central banks can programmatically demand tax payments for each 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 point out quite optimistically that governments could use the recovered tax revenue to lower effective tax rates .76 However, there is no indication that low-income governments already incentivized to collect private wealth would take steps to reduce taxes. Instead, CBDCs will most likely be used to generate additional tax revenue for the state at a onerous cost to individuals.
Imagine this: with mandatory taxes on every CBDC transaction, you would be taxed for giving your neighbor $20, or giving your kids a bonus, or for every item you sell at a yard sale. A person who pays his friend $50 to change a tire or $100 to take care of his home while he is away will pay taxes on those activities. This “informal” economy is not only a necessary form of intimate interpersonal relationship, but a vital element for millions of people who depend on it for day-to-day survival. It is morally unfathomable to imagine a homeless person selling flowers on the street collecting taxes for each transaction.
- Retail CBDCs are programmable cash.
- Programmable cash gives central banks direct relationships with consumers.
- Direct relationships between central banks and consumers enable central banks to:
- Monitor all financial transactions.
- Flag, block or reverse any transaction at any time.
- Determine how much cash you can hold and make transactions.
- Determine which products and services cash can be used to purchase and by whom.
- Directly implement monetary policy (such as negative interest rates) at the level of private cash reserves.
- Confiscate private cash.
- Enforce tax collection on every cash transaction, no matter how small.
To read the entire white paper, which details how Bitcoin relates to CBDCs, click here here.
This is a guest post by Natalie Smolenski and Dan Held. The opinions expressed are entirely my own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.