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Why Central Bank Digital Currencies Are a Bad Idea

Thomas Forgac
December 4th, 2020
The Mises Institute
Comments (17)

This article was originally published by Tomas Forgac at the Mises Institute. 

Central bank digital currencies (CBDC) are being sold with the narrative of protecting consumers who are increasingly moving to cashless payments. Some say that these cashless payments will rob us of the privacy advantages of cash while exposing us to bank runs, payment network blackouts, and foreign financial adversaries.

Yet while these risks are real, they would be negligible had it not been for the central banking and financial regulators’ interventions into the market. CBDCs make these interventions worse and introduce some new, much bigger ones.

Design Implications

While the stated intention behind CBDCs is to keep the commercial banks in the picture, these digital currencies will bring their end-users closer to the central banks. This is because blockchains and blockchain-inspired distributed ledger technologies are built on a single common ledger, which is distributed either in a permissionless or permissioned manner. The permissionless distribution exposes a lot of information about the network participants but in combination with proof-of-work verification makes it very difficult for an adversary to attack and overtake the network and, e.g., change the inflation rate.

A permissioned network with no proof-of-work or similar consensus algorithm not only doesn’t provide the immutability feature but by having a single permissioned ledger gives potential control to those who grant the network privileges. As a result, the central bank as the ultimate permission issuer would have much stronger control over the monetary system and payment network than it has right now. This gives the central banks three very dangerous capabilities.

Helicopter Money

The reason why we’ve seen such an elevated business cycle over the past century is the central banking fiat money system. Unnatural expansion of the money supply causes booms, which are unsustainable, and markets try to clear them when they are exposed as such.

Economists of the Austrian school understand that the boom is the real problem and the economic crisis is the necessary and positive cleansing mechanism. Unfortunately, the (neo-)Keynesian response to such an event is to prop the markets up by further monetary interventions.

The problem is that the current design of the banking system requires the intermediary role of commercial banks in issuing credit to businesses. Central banks get frustrated when the commercial banks exercise caution in an economy that hasn’t fully cleared the previous misallocations and hasn’t brought prices of capital goods to more sustainable levels. Needless to say, commercial banks’ cautious approach to consumer credit in a period of growing unemployment doesn’t align well with the central bank’s goals either. During the covid crisis, the governments managed to an extent to get around these hurdles by issuing benefits en masse, but those are complicated by logistics, bureaucracy, or legislation. Since the predominant Keynesian narrative is that spending drives the economy (hint: it doesn’t—capital investments do), the central banks would like to spur more consumer spending by issuing money supply directly to consumers.

With closer integration of the monetary spigot and the end consumers and businesses, the central bank can much more easily issue credit or just outright cash-outs to the private individuals and commercial entities by simply “airdropping” new tokens to the existing users. They would not even compromise their stated intention of keeping the commercial banks in the picture—they would still serve as custodians of the token keys and even have the ability to issue credit along the traditional lines.

This would lead to disastrous consequences. Economies get easily addicted to central banks’ dope. With every new crisis, the chief monetarists have had to increase intervention doses the same way as junkies have to do with their drug of choice. As with every addiction, the longer it lasts and the stronger it grows, the more difficult it is to cure. And while monetary overdoses such as we’ve seen in Zimbabwe or Venezuela might not come for a long time, if ever, junkies don’t perform well, as Japan’s three lost decades of Bank of Japan (BOJ) interventions have demonstrated.

Negative Interest Rates

Hoarding is evil—or so the modern monetarists’ narrative goes. In the Keynesian framework, there is no space for the function of cash as a hedge in times of uncertainty. Savings are just money that doesn’t work in spurring the miracles of spending- and money supply–driven economic growth. Negative interest rates, then, are potentially the most effective method of preventing hoarding—by incentivizing savings account holders to spend their depreciating balances. Currently, the central banks have to rely on commercial banks to pass the negative interest rates on to their customers, but commercial banks instead are trying to convince the account holders to move their deposits from negative-yielding accounts to interest-yielding products and are consuming the negative rates on most of the outstanding cash balances.

With the central bank tokens being tied more tightly to their issuance authority, it would be much easier for the monetary interventionists to impose negative interest rates on all tokens in circulation. This would certainly increase the consumers’ and businesses’ propensity to spend and would also drive asset prices up as people tried to offload their cash savings. But to think of this as something beneficial is foolish. It was massive spending, record-low savings, and unsustainable asset valuations that led to the credit bubbles and crises of the past decades. To think that more of the same recipe will lead to a different, let alone better, outcome is ludicrous.

Financial Surveillance

The final major implication of cash tokenization is the potential it creates for financial surveillance. The central banks are ostensibly introducing digital tokens to protect people’s privacy in the face of those reducing their anonymous cash usage. But the idea that a branch of government that imposes KYC/AML rules on existing crypto token platforms, limits physical cash use to prevent tax avoidance, and uses financial surveillance to catch nonviolent “criminals” cares about our privacy is laughable.

They’re not even hiding the fact that tokenization of money would allow them to run what they call “data analytics.” To think that they would not make the leap from aggregate analytics to individual data processing would be naïve.

It’s not a coincidence that China is the global leader in CBDCs. The surveillance potential of centralized tokenization is extremely attractive to a government that tries to keep tabs on every aspect of the lives of their underlings.

Pro-CBDC Arguments Are Misleading

The proponents of the central banking tokens argue that consumers need to be protected against targeted attacks on a country’s payment network. While such a risk exists—for example, if a country like Switzerland tried to provide anonymity for foreign depositors (as it used to) and as a result Visa and Mastercard were pressured to shut down their payment networks for the country—if it materializes, the economy can always temporarily revert to cash, supported by a vast network of local ATMs and bank branches.

If anything, the biggest attacks on monetary exchange in the Western world have come from the governments themselves suspending or limiting cash withdrawals in times of liquidity crises, as was the case in Cyprus or Greece (not to mention that central banks themselves caused those crises with their credit bubbles of the preceding periods).

The argument about the protection of consumer privacy doesn’t pass the laugh test considering the history of continuous erosion of financial privacy by central banks and financial regulators.

CBDCs Will Come and Will Make Things Worse

In conclusion, the reasons why central banks champion CBDCs are the strongest reasons for which people should oppose the transition toward them. But while the pretense of an investigation into fiat money tokenization gives the impression of there being a debate on the topic, the reality is that there is no debate: the digital currencies will go through and give central banks more control than they had before with all the disastrous consequences such control brings.

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    Author: Thomas Forgac
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    Date: December 4th, 2020
    Website: https://mises.org

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    1. Andrea.Iravani. says:

      The vast majority of transactions are digital transactions. Cash transactions represent a very small percentage of purchases. Cash must not be abolished though. Some of the fraudsters are demanding strictly digital currency because they will never run out of nothing, and digital currency is nothing. There cannot be a run on the banks, since they can just make shit up, literally, which they do, and would do even easier if cash was banned. So you find better rates at one bank on nothing than another bank offers on nothing, and the interest is also paid with nothing. From fractional reserves to no reserves. Anyone in the world could qualify to open a bank with that absence of standards! They are no standards at all! The nothing standard! The possibilities are infinite! Genius! Or, I mean Fraudster! They are salivating over the idea of it and just can’t get it out of their heads, because they have no ideas at all and if they did, they would not be doing what they are doing, and we owe it all to the crypto currency traders that made nothing more valuable than gold, which is heavy and hard to carry around, but nothing is their ultimate fantasy, if people are stupid enough to fall for it!

      Andrea Iravani

    2. Andrea.Iravani. says:

      This is the type of shit that makes people’s blood boil in anger of total fraud! Newly created UAP UFOs F off! Don’t you ever get sick and tired of acting like a gang of over grown, immature spoiled brats and geeks?! Don’t you ever get sick and tired of being completely full of shit?! Just keep fotting the bill for your immature, irresponsible, selfish behavior to your grand children, Losers! Go and plant some trees and earn your keep! Get off of you lazy fat asses! It is not as if there is nothing better to do with your wretched pahetic lives and time on earth than pretending that you are super heroes hunting UFOs! You sick, retarded, fucking losers!

      https://sputniknews.com/society/202012041081362978-us-military-spotted-mysterious-cube-and-triangle-shaped-objects-over-atlantic-media-says/

      Andrea Iravani

    3. Andrea.Iravani. says:

      This is the type of shit that makes people’s blood boil in anger of total fraud! Newly created UAP UFOs F off! Don’t you ever get sick and tired of acting like a gang of over grown, immature spoiled brats and geeks?! Don’t you ever get sick and tired of being completely full of shit?! Just keep footing the bill for your immature, irresponsible, selfish behavior to your grand children, Losers! Go and plant some trees and earn your keep! Get off of you lazy fat asses! It is not as if there is nothing better to do with your wretched pahetic lives and time on earth than pretending that you are super heroes hunting UFOs! You sick, retarded, fucking losers! 

      https://sputniknews.com/society/202012041081362978-us-military-spotted-mysterious-cube-and-triangle-shaped-objects-over-atlantic-media-says/

      Andrea Iravani

      Apparently not, hacking another job for the totally worthless, useless fucking retards in America! You are sentenced to manual labor! Get off of your God Damned fucking asses and plant trees you sick, retarded, freaks!

    4. Genius says:

      You have to be a complete moron to not know this….

    5. SlackMavo says:

      Bichcoin was rolled out to test the waters for Lucifercoin or CBDC as you call it.
      There’s been no privacy from jumptown….just a long list of names waiting to be picked off intermittently.

      Would the fed get involved in underworld activity just to establish early dominance in digital?
      Does a San Franciscon panhandler shit n the streets?
      That’s exactly what they did.

      As stated in the article…regardless what anyone thinks …figital is coming. The pilot program was a success.
      and most important of all CHINA IS DOING IT.

    6. Andrea.Iravani. says:

      If Trump gets away with a police coup as you suggest that he will somehow manage to pull off, and lives to tell about it for more than a week, and so do the police that collaborated with him on it, then everyone can be damn sure once and for all that he also is supported by the intelligence agencies, the military and military contractors, and Wall Street, and why wouldn’t he be supported by them after the largest spending spree handing everything in the world over to them on silver platters? Trump spends like a drunken sailor on those institutions, and is literally perfectly content to starve individuals to death, including children. He frankly does not give a damn if they are thrown into the steeets in the dead of winter after he permitted their lives being completely destroyed by 14th amendment rights violations of states and local governments in the lock downs based on financial and scientific fraud. Trump prefered presiding over the worst economic catastrophy in world history, and it is far worse than the Great Depression. It is the Great Depression on steroids, with a raging bull market and corrupt incompetent finacial, tech, university, medical, state and local governments, and corporate institutions being kept on undeserving life support being fed the assets of individuals that are their victims, and then the individuals are thrown into the streets. This was a coup led by the incompetent, the corrupt, the lazy, and the self-entitled. It was a coup led by parasites seeking hosts to keep them alive and it was all based on lies, and Trump would prefer that for America, rather than to have left office because an incumbent presiding over a recession historically stands no chance of being re-elected, which everyone who knows the most basic thing about the politics of presidential elections knows to be the rule of politics. That is what a diabolically evil monster Trump is, who I confess that I voted for in 2016, but did not do the second time around as a result of his extremely long list of betrayals, terror, high crimes, treason, and corruption.

      Andrea Iravani

      One of America’s many surpluss of retards hacked and prevented me from posting this on Unz.

    7. Arnieus says:

      The point of digital currencies is that they are autonomous, like gold which speaks all languages, or even cash. Governments that can control the value of your wealth own you. A medium of exchange completely uncontrolled by any bank or government is not what we will get from a Central Bank.

    8. Dorf says:

      Central banks, fiat paper and digital “currencies”, corporations and political parties are all signs of societal devolution.

      Beam me up Scottie, there really is no intelligent life down here.

    9. Andrea.Iravani. says:

      Since so many industries are using Superman Complex create a crisis as a business model, in the tradition of the Mafia, in which they create the crisis and then provide the solution 
      at highway robbery fees, when they should be thrown in prison for intentionally creating the crisis, and have even violated RICO laws in order to do it, as with 9/11 and the Scamdemic for two examples, that use terrorism, fraud, and extortion as their business models, this is not going to work. That is just the reeality of it. This country has been destroyed and the scumbags involved have destroyed the world. 

      Let the Nuremburg 2 trials begin! Right here in this shit hole country! 21.3 million healthcare workers and 12.1million technology sector workers kind of shows you what the problem is, and 6.3 million financial sector workers, 4.5 million K-12 teachers for 53 million students, and many classes are overcrowded, but teachers keep demanding more money and benefits at the expense of the students, but even so that is the equivalent of 11.77 per class, much smaller than when I was in school with 28-30 being the average class size, and it was even larger when my parents were in Catholic schools. People now have more PhDs than any time in history, and the country is acting more stupid than it has ever acted. It doesn’t even behave like a society. It behaves like an insane, evil, corrupt, freak show and horror show. There are also 1,984 think tanks, primarily owned by former government employees, and 6.9 million scientists and engineers that for the most part, cannot even design a car that works, or a plane, or ship, and Lockheed Martin has a gang stalking team that works for it, since they can’t design anything, they just terrorize people, American citizens. There are 23 million government employees. There are 7.8 million researchers in America, and 800,000 sworn LEOs, which is the highest in history with 17,985 police agencies.

      So America will never be great, and if anyone ever dares to start becoming great, other Americans will make damned sure that it doesn’t happen because they consider it a crime, as we have seen with the lockdowns hurting successful, honest small and medium sized businesses for the benefit of corrupt, enormous businesses, banks, and governments, and with all of the censorship, hacking,vandalism, arson, and looting. America is no longer a country. It is a crime scene. 

      Andrea Iravani

    10. Darth Skippy says:

      There is never an option for responsible ownership under a benevolent dictatorship.

      • EricK says:

        I do believe the people that lived in the Weimar republic would disagree with you.

        They used deflated cash for wallpaper. They burnt cash to keep warm. They used wheelbarrows of cash to buy bread.

        Physical commodities are king — gold, silver and other items that are not easily stolen from you by “governments” or other criminals.

    11. Darth Skippy says:

      HYIP’s and Ponzi’s remain a legal privilege, held by the state, on behalf of it’s favorites.

      But, a slave is indebted for his right to exist.

      Without regulatory capture, willful collapse, and absolute corruption, any algo might have been adequate, in which the social parasites draw lightly.

      Every modern country performs the same mental gymnastics, without collapsing, outrightly.

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