John Butler
\nFortune and Freedom<\/p>\n
People like to remark that governments foster innovation, especially during wartime. They also like to ignore the slaughter of millions which is usually part of this process. That is not to mention the innovators we missed out on as a result.<\/p>\n
The latest government \u201cinnovation,\u201d which follows in a long tradition of stealing ideas from the private sector designed to improve our lives and using them for other means instead, is central bank digital currencies (CBDCs).<\/p>\n
Designed not to exist in any physical form whatsoever, CBDCs would give their central bank issuers entirely new powers. Indeed, much of the manoeuvring that was required in 2008-9 to rescue the financial system with taxpayer-funded bailouts would have been so much easier had CBDCs been in existence. But if easier, is that necessarily a good thing for the economy as a whole?<\/p>\n
Nigel Farage doesn\u2019t seem to think so. And he has come up with\u00a0a plan to counter the government\u2019s efforts<\/a>.<\/p>\n To answer the question, it is important to differentiate between CBDCs and the concept of private, distributed digital currencies, including those such as bitcoin, that are built using distributed-ledger technology (DLT). In some ways they are opposites.<\/p>\n Rather than offer an alternative currency, CBDCs are mostly aimed at making monetary policy easier to implement and, potentially, more powerful.<\/p>\n As monetary officials have repeatedly made clear, they have no interest in replacing their policy discretion with algorithms, blockchains or any other form of private-sector solution. Recently, Pablo Hern\u00e1ndez de Cos, the chairman of the Basel Committee on Banking Supervision, the regulatory branch of the Bank for International Settlements (BIS, the \u201ccentral bank of central banks\u201d which is based in that Swiss city), made the following comments with respect to DLT:<\/p>\n DLT could, in principle, allow for cheaper, faster and more customised financial intermediation. But, here again, such benefits must be weighed against the risks if not properly regulated and managed. These include potential threats to banks\u2019 operational resilience, a lack of legal clarity with regard to assets transacted on DLTs, and concerns with regard to anti-money laundering and the financing of terrorism.<\/em><\/p><\/blockquote>\n Financial system regulators have a bad habit of associating everything that is unregulated with money laundering and terrorism, when in fact the vast bulk of such activity takes place within the incumbent banking and payments system. Such invidious associations should be seen as primarily self-serving rather than anything necessarily in the public interest.<\/p>\n The Bank of England appears to share these sentiments. Earlier this month, the Bank published the following note:<\/p>\n In the traditional financial system, critical financial infrastructure is regulated to deliver an appropriate level of responsibility, accountability, and control. In the future, critical third parties providing material services to the UK financial sector (eg cloud service providers) may also be subject to regulatory requirements. So, there is a question as to what appropriate regulatory oversight of a blockchain could entail, were it to become a more critical piece of infrastructure in the financial system.<\/em><\/p>\n Blockchains do not constitute critical financial infrastructure (yet). But they could conceivably become so in the future if cryptoasset activity and its interconnectedness with the wider financial system continue to develop. So, it is important that relevant authorities find legal mechanisms and means of co-ordinated action to ensure that an equivalent regulatory outcome is delivered.<\/em><\/p><\/blockquote>\n Hence CBDCs, once introduced, are not intended to displace, but to migrate existing, centralised, regulated monetary systems from paper based to wholly digital. There will still be legal tender laws requiring their acceptance for payment, and penalties for counterfeiting or other forms of fraud. Money laundering will still be a crime. And central banks will still control monetary policy. Indeed, their control of monetary power will grow.<\/p>\n As it stands today, while central banks set interest rates and conduct open-market operations (e.g. quantitative easing) these actions only have a direct impact on the reserves of the banking system which, for many years now, have been essentially digital.<\/p>\n Yes, banks do hold some physical cash in reserve, but it is such a tiny portion of their overall balance sheet as to be practically irrelevant.<\/p>\n The broader money supply, including the amount of physical cash in circulation, various types and amounts of bank deposits and credit, fluctuates along with economic activity and liquidity preferences. Thus, when the global financial crisis arrived in 2008, central bankers slashed interest rates and created huge amounts of reserves, but this did not prevent a general contraction in credit. Liquidity preferences spiked, including a desire to hold larger amounts of physical cash.<\/p>\n Given that multiple banks failed or had to be rescued, and that interest rates had declined to essentially zero, holding physical cash seemed an entirely reasonable thing to do. But it did have the effect of limiting central banks\u2019 ability to add further monetary stimulus to their economies.<\/p>\n As one central bank after another began to consider lowering interest rates to outright negative levels, one immediate and obvious complication was that savers would seek to avoid negative rates by reducing their bank deposits in favour of physical cash hoards. Such a run on deposits would not only negate the proposed further stimulus, but would have the counterproductive effect of reducing banks\u2019 normally stable depositor base.<\/p>\n <\/p>\n CBDCs provide economic officials with a solution to this perceived problem: once introduced, a purely digital currency cannot be physically withdrawn. No matter if central banks cut interest rates to below zero, even dramatically so, in an effort to get savers to spend more. The digital currency must remain in the banking system. It may circulate more as households and businesses seek to pass the depreciating \u201chot potato\u201d around, but there is no other option. A bank run on the system as a whole becomes impossible.<\/p>\n CBDCs also give central bankers the de facto power to \u201ctax\u201d deposits, or to supplement them with stimulus cash, as they did during the pandemic. But they would also give them the ability to easily track and trace every transaction, no matter how tiny, and perhaps embed some sort of sales, VAT or transactions tax, depending on the type of transaction involved.<\/p>\n To what extent these new powers would be used or abused is unclear, and a merging of monetary and fiscal policy in this way would no doubt be political, but CBDCs would enable a complete fusion of monetary and fiscal policy, if desired, and would make any form of avoidance or evasion on the part of households or businesses all but impossible outside of direct barter.<\/p>\nCBDCs expand central bank power, for better or worse<\/strong><\/h3>\n
The end of financial privacy?<\/strong><\/h3>\n