There has been much discussion as to the benefits of Central Bank Digital Currencies (CBDCs). Many developed countries are researching the pros and cons, and China has been testing with consumers a digital yuan for some time now. The flip side to a CBDC is it can provide unparalleled insight and access as to how the currency is spent, by who, and to whom. While some central authorities may claim adherence to strict privacy protocols, the reality tends to be different over time – as we have seen time and again.
A video distributed on Twitter this past week highlights this possibility for abuse, as a senior official with the International Monetary Fund (IMF) explained their opinion on the benefits of a CBDC. The Tweet was shared by Nick Anthony, a Policy Analyst at Cato Institute, a pro-market, Libertarian-leaning think tank.
And here we have Deputy Managing Director of the IMF sharing how central bank digital currency (CBDC) would allow the government to precisely control what people can and cannot spend their money on. pic.twitter.com/8cSNIF5XNg
— Nick Anthony (@EconWithNick) October 15, 2022
Bo Li, Deputy Managing Director of the IMF, notes in the video that CBDCs can be programmed, via smart contracts – one of the known benefits of various non-governmental cryptocurrencies. Li previously worked for the People’s Bank of China, most recently as Deputy Governor. According to his bio, he worked on the drafting of China’s anti-money-laundering law as well as the internationalization of the renminbi (yuan) – a key policy ambition of China.
“…CBDCs can allow government agencies and private sector players to program, to create smart contracts, to allow targeted policy functions. For example, welfare payments, for example consumption coupons, for example, food stamps, by programming these CBDCs can be precisely targeted for what people can own and for how the money can be utilized. “
Li packages this programmability as financial inclusion.
It is fairly clear that digital money can help better serve excluded communities as transfer costs can go to near zero and portability is high. But at the same time, the positive ambitions of issuing a CBDC may be outweighed by one official or government deciding to use the digital ledger-based transaction to enact greater controls and montoring. This is a terrifying thought that makes hard cold cash look like the best thing ever.
Digital money is already widely in use, and transfers and transactions are already monitored to a profound degree. A CBDC could ramp up this type of power even further, providing monitoring on steroids.
Private issuers of stablecoins see this policy aspect as boosting their competitive advantage. A well-regulated, privately issued stablecoin could provide the same or similar benefits without having a government entity observing how you spend your own money. With trust in many governments understandably diminished, this may be a better path for digital currency.
In fact, Fed Chair Jerome Powell has mentioned the possibility of a CBDC being utilized on an institutional level while privately issued stablecoins serving consumers and the private sector – creating a separation between public authorities and private transactions. This is another option for policymakers to consider. Whatever the outcome, privacy rights should outweigh anything the government has to say – even if programmability is jettisoned. While China may be ahead of the rest of the world in its pursuit of a digital yuan, the country is well known for not being overly concerned about individual rights. First does not necessarily mean better.