What are CBDCs?
Central Bank Digital Currencies (CBDCs) are digital currencies issued by central banks to complement or replace traditional money. They are fully centralized and backed by the government’s monetary authority, which ensures their stability and acceptance as a legal means of payment. Unlike cryptocurrencies based on decentralized and distributed technologies, CBDCs use centralized systems that allow central banks to maintain total control over their issuance, regulation and traceability.
CBDCs are at the center of a global debate about their potential to transform the financial system. But beyond the promise of efficiency, these digital currencies raise serious concerns about social control and the erosion of individual freedoms.
The main concern with CBDCs is that they could become tools of authoritarianism, combining economic power with expanded state surveillance and control. For example, systems like China’s social credit, which integrate financial evaluation with social and moral conformity, could expand under the guise of CBDCs, allowing governments to condition access to financial services on citizens’ alignment with state policies.
Discrimination and financial restrictions
CBDCs could enable an unprecedented level of control over individuals’ financial transactions. From prohibiting the purchase of certain goods to the financial exclusion of certain groups, CBDCs could exacerbate social inequalities and violate individual rights.
Prohibition and limitation of transactions
CBDCs would allow governments to program and restrict how funds are spent, potentially blocking the purchase of certain products or services, resembling a form of financial censorship. This programmable control of personal transactions increases the ability of the state to enforce social norms through economic means.
Total transparency and state surveillance
An inherent feature of CBDCs is the state’s ability to access and monitor all financial transactions, transforming the monetary system into a tool of mass surveillance. This total transparency could be used to track behaviors and associations, threatening privacy and civil liberties.
Direct fiscal control and monetary manipulation
With CBDCs, the government could not only directly tax transactions, but also impose negative interest rates to discourage saving and encourage consumption. This direct manipulation of economic behavior by government mandate exemplifies a worrisome transition in the role of money in society.
Freezing and seizing assets
The ability to freeze or seize assets would be greatly facilitated by CBDCs. This would give the state significant punitive power over individuals, allowing for immediate and severe economic sanctions against dissidents or anyone deemed hostile to the regime.
Exclusion of the vulnerable
The gradual elimination of cash and transition to CBDCs could exclude significant segments of the population, such as homeless people or those without access to the technology necessary to participate in the digital financial system. This approach could widen social and economic divides, creating a class of financially invisible and therefore more controllable citizens.
Traditionally, currencies offer a degree of anonymity and discretion in how and where money is spent. With CBDCs, however, this paradigm could be completely reversed, allowing governments not only to track every transaction, but also to control its purpose and legality according to criteria that may change over time.
Vulnerabilities in a cashless society
The transition to a fully digital society with CBDCs could increase cybersecurity and privacy issues. Relying on a digital infrastructure for all financial transactions could become a significant vulnerability, as any security failure or breach could have catastrophic consequences for economic stability and public confidence.
In addition, the massive collection of financial data by a centralized entity would increase the risk of privacy violations and potential abuse of power by governments. This could lead to scenarios where citizens’ sensitive financial information is compromised or misused for surveillance or law enforcement purposes.
Regulators and experts’ perspectives
Jerome Powell: Chairman of the Federal Reserve of the United States
Powell has stated that the Federal Reserve is far from considering the implementation of CBDCs, emphasizing that any action in this regard would be carried out through the existing banking system. Powell underscores that there are no imminent plans for the adoption of CBDCs and reassures the public about it.
If we were to ever do something like this, and we’re a very long way from even thinking about it, we would do this through the banking system, the last thing…we the Federal Reserve would want would be to have individual accounts for all Americans.
People don’t need to worry about a central bank digital currency (CBDC). Nothing like that is remotely close to happening any time soon.
We’re nowhere near recommending, let alone adopting, a central bank digital currency in any form.
Eswar Prasad: International Economics Expert, former Head of the Financial Studies Division and the China Division at the IMF
Prasad warns of the implications of a fully implemented CBDC, pointing out that governments could financially marginalize individuals or entire groups with the click of a button, leaving them completely helpless. He also points to the danger of authoritarian regimes like China using CBDCs to persecute dissidents and minorities.
In a fully implemented CBDC system, governments could financially exclude individuals or entire groups of people with the press of a button, leaving them with nothing. Governments like the CCP could target dissidents, sexual minorities, ethnic minorities, or religious minorities. If banknotes don’t exist and access to government‐issued digital cash is revoked, then they are truly helpless.
Christopher Waller: Federal Reserve Governor
Waller acknowledges the logic behind China’s implementation of CBDCs, highlighting their ability to monitor transactions, impose negative interest rates, and directly tax customer accounts. However, he questions why American citizens should support a measure that could compromise their financial privacy.
I can see why China would do it. If they want to monitor every one of your transactions, you could do that with a central bank digital currency. You can’t do that with Venmo. If you want to impose negative interest rates, you could do that with a central bank digital currency. You can’t do that with Venmo. And if you want to directly tax customer accounts, you could do that with a central bank digital currency. You can’t do that with Venmo.
I get why China would be interested. Why would the American people be for that?
Agustín Carstens: General Manager of the Bank for International Settlements (BIS)
Agustín Carstens, General Manager of the Bank for International Settlements (BIS), is one of the few voices in favor of CBDCs, bluntly emphasizing the absolute control they would give central banks over financial transactions. Carstens emphasizes the ability of central banks to create and enforce rules and regulations through technology, thus highlighting the perspective of control and oversight offered by CBDCs.
We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.
Lorenzo Ramírez: Journalist and Finance Expert
Lorenzo Ramírez, a journalist and financial expert, challenges the notion that CBDCs, such as the digital euro or digital dollar, are simply an extension of the financial system. Instead, he suggests that they are designed to exert greater control over citizens’ financial decisions. Ramírez criticizes the idea that the use of the digital euro will be optional and coexist with cash, arguing that proposals such as limiting cash payments in Italy indicate a clear intention to discourage the use of cash.
In addition, he points to the inclusion of an expiration date in the technological architecture of the CBDCs, which would require that the money be spent before a certain date.
In summary, Ramírez suggests that the true purpose of CBDCs is to forcibly utilize people’s savings to stimulate the economy, revealing a less benign aspect of these digital currencies. This perspective offers a critical counterpoint to the more conventional view of CBDCs as simple tools for modernizing the financial system.
Implementation strategies
Given the lack of substantial improvement, who would voluntarily adopt this tool of absolute control? What arguments will be invented to persuade people to accept a measure that offers no tangible benefits?
Here are some ways it could be done:
- Banking system failures: In times of financial crisis or bank failures, governments could present CBDCs as a safe and stable solution to avoid economic collapse. The need for financial stability could drive the population to adopt these new forms of digital currency.
- Implement Universal Basic Income: Governments can begin to implement universal basic income in the form of CBDCs for vulnerable and dependent groups. This could cover a large part of the population and facilitate the widespread adoption of CBDCs.
- Payment of pensions and public sector salaries: They can also choose to pay pensions and public sector salaries in the form of CBDCs. This strategy would not only ensure rapid adoption among government employees and retirees, but also normalize the use of CBDCs.
- Gradual introduction and apparent convenience: CBDCs could be presented as a convenient and modern improvement over the current financial system. It would be argued that they offer faster transactions, improved security, and easier access to financial services, which would persuade the population to adopt them. However, it is important to note that these perceived benefits do not necessarily outweigh those of the current financial system.
- Restrictive regulations on cash: Governments could introduce regulations that increasingly restrict the use of cash in society. By limiting the maximum amount that can be spent in cash, or by discouraging its use through taxes or additional fees, there would be additional pressure to use CBDCs, even if they offer no clear advantage over cash.
- Manipulation of economic or health crises: During economic or public health crises, governments could exploit the situation to promote CBDCs as an emergency measure. Presenting them as a means of preventing the spread of disease, facilitating access to financial assistance, or stimulating the economy could generate rapid acceptance, even if not justified by real advantages over other existing financial systems.
These strategies are not mutually exclusive and can be combined to maximize their effectiveness. Governments could use a combination of these measures to ensure massive and effective uptake of CBDCs, adapting them to different contexts and population needs. In addition, there may be other strategies that have not been considered here, so I invite readers to participate with their opinions and contribute new ideas on this topic. “Let’s guess the future”.
A look at decentralized and distributed technologies
Given the significant drawbacks of CBDCs, decentralized and distributed technologies, such as blockchain technology and cryptocurrencies, offer a more robust and resilient alternative. The inherent decentralization of these technologies eliminates the need to trust a centralized entity to maintain the integrity of financial transactions. Instead of relying on a centralized system that is vulnerable to cyberattacks, distributed blockchain networks rely on the cooperation of multiple nodes to securely and transparently validate and record transactions.
Rather than following the path of CBDCs, which consolidate financial control in the hands of centralized government institutions, we should consider the transformative potential of decentralized and distributed technologies.
These technologies offer a path to a fairer, more transparent, and more resilient financial system where privacy and individual autonomy are paramount. Ultimately, the adoption of decentralized technologies could provide a better alternative to the inherent risks of CBDCs, thus protecting the rights and freedoms of citizens in the digital age.
Conclusion
Under the cover of modernization, CBDCs could increase authoritarianism and social control, becoming what some call “tokens of slavery”. The adoption of decentralized technologies represents a path to a financial future where equity and resistance to government control are prioritized.
In this sense, decentralized and distributed technologies, such as blockchain and cryptocurrencies, are emerging as a more robust and resilient alternative. By eliminating the need to trust centralized intermediaries, these technologies offer a path to a more transparent, equitable, and resilient financial system that is immune to government manipulation.
Resources:
[1] El economista: Crédito social chino: el sistema de puntos que ya se exporta a otras sociedades
[2] European Central Bank: Digital Euro
[3] Cato.org: Risk of cbdcs
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