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 consultant at Trust Machines.
This article is an excerpt from a Bitcoin Policy Institute white paper “Why Should the US Abandon Central Bank Digital Currencies (CBDCs)?” Written by Natalie Smolenski with Dan Held.
CBDCs are digital money. Unlike traditional (physical) cash, which can be held anonymously, digital money is fully programmable. This means that CBDCs allow central banks to have direct access to the identities of transacting parties and can block or censor any transaction. Central banks argue that they need this power to fight money laundering, fraud, terrorist financing and other criminal activities. But as we’ll see below, governments’ efforts to meaningfully combat financial crime using existing anti-money laundering and know-your-customer (“AML/KYC”) laws have been woefully inadequate at best, while effectively removing the financial privacy of billions of people. proved. Nation.
The ability to block and censor operations also implies its opposite; ability to solicit or encourage transactions. CBDC can be programmed to be spent only at certain retailers or service providers, at certain times, by certain people. The government may maintain lists of “preferred providers” to encourage spending with certain companies over others, and “preferred providers” to penalize spending with others. In other words, with a CBDC, cash effectively becomes a government-issued token, like food stamps, that can only be spent under predetermined conditions. A test can be included in each operation.
But censorship, incentives, and stimulus operations are not the only prerogatives of central banks with programmable cash. Banks can also incentivize savings – the holding of digital cash – by limiting cash balances (as the Bahamas have done for their CBDC) or by 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—the money loaned to them by commercial banks—into cash (M0). After all, if too many people rush to demand cash (hard money), commercial banks will be out of funding, and if they can’t find other sources of capital, they can drastically reduce their loans. Central banks understandably want to avoid these “credit crunches,” which often result in economic recession or depression. However, their policy interventions also leave billions of people, especially the poorest, without recourse to M0 currency – the hardest and safest form of money under the fiat currency regime – during currency crises.
Of course, negative interest rates can be applied by central banks not only to balances above a certain amount, but to all cash. Although the goal of applying negative interest rates is still to prevent recession by stimulating near-term consumer spending, this goal is achieved at the cost of accelerating the destruction of personal wealth. We can cite the current economic situation of the world as an example. Central banks intervened to prevent recession by monetizing rising levels of sovereign debt that flooded markets with fiat money during the COVID-19 pandemic. This resulted in more money chasing fewer assets, a sure recipe for inflation. As a result, the world is seeing the highest sustained global inflation rates in 20 years, with some countries experiencing much higher rates than the global average. Inflation stimulates excess spending because people realize that their money is worth more today than it will be tomorrow. By imposing negative interest rates, central banks further reduce the value of people’s savings and create a perverse incentive to spend their already dwindling resources even faster. This vicious cycle ends not with economic prosperity but with currency collapse.
While fines and generalized negative interest rates are both methods central banks can use to gradually confiscate money from individuals and private organizations, it is not the only method available to them. Once CBDCs are implemented, there is nothing technically or legally preventing central banks from directly applying haircuts to or redeeming anyone’s cash anywhere in the world. Central banks can directly confiscate private digital cash to repay sovereign debt, stop using digital cash, reduce the money supply, or for any other reason. This possibility is built into the political and technical architecture of CBDCs, although not openly discussed.
Finally, central banks can programmatically require tax payments for each CBDC transaction. Some economists have argued that this measure is necessary to restore the tax revenue that is sometimes avoided when physical cash is used, and then more optimistically note that governments can use the recovered tax revenue to lower effective tax rates.76 However, this no event. It suggests that revenue-squeezing governments will take any measure to cut taxes, which have already encouraged private wealth accumulation. Instead, CBDCs will likely be used to generate additional tax revenue for the state at a heavy cost to individuals.
Imagine: With a mandatory withholding tax for every CBDC transaction, you’ll pay a tax on every item you give your neighbor or give your kids an allowance or sell at a yard sale. A person who pays a friend $50 to change a tire or $100 to look at a house will be taxed on those activities. This “informal” economy is not only a necessary method of intimate interpersonal contact, but also the lifeblood of millions of people who rely on it for survival every day. It is morally inconceivable to imagine a homeless person selling flowers on the street being taxed on every transaction.
- Retail CBDCs are programmable currencies.
- A programmable cash center gives banks a direct connection to consumers.
- Direct relationships between central banks and consumers enable central banks to:
- Track all financial transactions.
- Record, block or reverse any transaction at any time.
- Determine how much cash each person can hold and transact.
- Determine what products and services cash can be used to purchase and by whom.
- Implement monetary policy (such as negative interest rates) directly at the level of personal funds.
- Confiscate privately held funds.
- Ensure tax collection on every cash transaction, no matter how small.
Click to read the entire document, which provides more details on Bitcoin’s relationship with CBDCs here.
This is a guest post by Natalie Smolenski and Dan Held. The opinions expressed are entirely their own and those of BTC Inc. or Bitcoin magazine.