The Dangers of Central Bank Digital Currencies
In this post, I am going to focus on three of the most significant dangers created by central bank digital currencies (CBDC). I am hopeful over time, readers will add to the list.
First, depending on how the CBDC is set up there is the potential for loss of privacy. The BIS showed three different forms of CBDC:
Regardless of the amount of handwaving from central bankers, Direct CBDC will result in the loss of privacy over these accounts. By design, these accounts are like checking accounts and have to be set up to track where you receive money from and where you send money. This is unavoidable if the accounts are to accurately track the balance in each account. Guaranteeing the loss of privacy is the fact central banks have to look at the transactions in your account to be sure there is no money laundering going on.
Hybrid CBDC is dramatically better as a structure as the use of third parties to administer the digital currency allows for the introduction of privacy firewalls. Specifically, in the case of money laundering, it is the third party looking and not the government.
Indirect CBDC uses banks as the third parties to administer the digital currency. This does nothing to improve on the privacy firewalls over dedicated third party administrators. And, it has the disadvantage of keeping the payment system hostage to the commercial banks.
Second, CBDC could allow economists in the name of monetary policy to have a direct impact on the account. For example, they might think it is a good idea to get you to spend the money sooner by charging the account a negative interest rate.
Regardless of what form CBDC takes, it needs to be accompanied with a mandatory 2% interest payment. Why? In the 1870s, the father of modern day central banking, Walter Bagehot, established 2% was the minimum return necessary for financial markets and the economy to work properly. In the 1930s, this minimum return was confirmed by Keynes.
But what about the fact we now have negative or zero interest rate policies in much of the developed world? Pointing to an existing fundamentally flawed policy doesn’t make it a good idea or negate Bagehot/Keynes 2% minimum. Monetary policy supporters have argued since the 1980s monetary policy works with long and variable lags. The fact a decade plus of NIRP/ZIRP hasn’t resulted in the strongest economic expansion of all time confirms monetary policy has always been a narrative supported by a correlation that was unsupported by any real world causality. What we see now is a real economy being hollowed out by debt zombies and financial markets driven purely by speculation. Neither of which would exist with the 2% minimum interest payment.
Third, CBDC could allow for restrictions being placed on how the funds in the account could be used.
(hat-tip @chigrl)
The idea of putting restrictions on how people use their funds in a CBDC account is beyond awful and should never be accepted.
In an article debunking inflation expectations and with it the entire charade known as monetary policy, a Senior Fed Economist observed why central banks setting restrictions on use of CBDC funds wouldn’t be a good idea:
I leave aside the deeper concern that the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.
In case I have left any doubt about how appallingly bad allowing “programming” of CBDC would be, there is absolutely no reason to think central banks are better at deciding how the money in CBDC accounts should be spent than the owners of these accounts. For example, it has long been realized bankers do a better job of making loans than central bank economists. Plus, banks are responsible for the losses on these loans.
“Programming” of central bank digital currency isn’t limit to just how it is used. It extends to who can have a CBDC account as well as to issues like the funds in the account expiring. Again, there is no legitimate reason for allowing this programming. However, if the goal is a criminally oppressive, unsustainable and unjust social order, then programming is a necessity.
While I consider most of the ideas associated with “programming” CBDCs unmitigated disasters, CBDC is unlikely to be accepted in the market if it has or could have “programming”. As shown by money market mutual funds, individuals and corporations are willing to forego deposit insurance. As a result, individuals and corporations are likely to retain their deposit accounts rather than subject themselves to “programmable” CBDCs.
As I said at the beginning of this long post, I invite readers to add to the list of dangers posed by CBDC as the three dangers I have discussed are by no means exhaustive of all the dangers CBDC pose.