If the development of blockchain technology was a financial revolution, central bank digital currencies (CBDCs) are the counter-revolution. Their development has intensified in 2023 across the globe, and it’s now more important than ever for the world to know what could lay behind the acronym.
While there are some who think central banks can be trusted to proceed, the facts stand against them. This technology would give central banks unprecedented control, could pose serious security risks and is also entirely unnecessary.
If you understand blockchain, you also understand the privacy dangers inherent in government-issued digital currencies. Every detail of every transaction would be available to state regulators, such as tax authorities. In the United Kingdom’s case, the tax agency would not require any additional legal powers to examine all the details of every CBDC transaction.
Some might say that these powers wouldn’t be used. However, these investigatory powers don’t just exist — they are used and abused. Take the Regulation of Investigatory Powers Act, introduced in the U.K. to deal with threats from terrorism. Before long, local councils were using the new powers to spy on people walking dogs, feeding pigeons and dumping waste.
Related: UK think tank launches a crusade against ‘surveillance’ CBDCs
It’s also a big assumption that state regulators will be able to keep CBDC information confidential. In the U.K., state agencies too often lose data — accounting for 54% of all data breach fines. Not that long ago, HM Revenue & Customs managed to lose the records of 25 million taxpayers.
But the threat from hackers is also significant. The centrally collected data will be a massive honeypot for hackers and the hostile states that back them.
As the director of Britain’s cyber intelligence agency, the Government Communications Headquarters, commented, a CBDC “gives a hostile state the ability to surveil transactions. It gives them the ability […] to be able to exercise control over what is conducted on those digital currencies.” Acquiring CBDC data would be the equivalent of hitting the jackpot for hostile states. We may also assume that hacking won’t be their only approach. For example, a recent congressional inquiry revealed that Chinese agents were trying to infiltrate the United States Federal Reserve.
An unelected bureaucrat stating a willingness to trade your right to financial privacy for a surveillance-style U.S. CBDC https://t.co/TKqpTtCNWQ
— Tom Emmer (@GOPMajorityWhip) March 3, 2023
A CBDC could also be programmed to achieve various government objectives. Some central bankers want to use CBDCs to conduct monetary policy, imposing negative interest rates by taking funds out of CBDC accounts. Taxes could be levied at the point of transaction, and purchases of certain items could be prevented or restricted to support rationing. The possibilities for increased government control are endless.
A key question, asked by the House of Lords Economic Affairs Committee in a fascinating report on CBDCs, is: What problem are they actually trying to solve?
Former Bank of England Governor Mervyn King pointed out in the House of Lords earlier this month: “CBDCs are about ways of making payments; they are not a new currency. […] What are the problems in our payments system to which a CBDC might be the answer?” He concluded, “There are no problems to which a CBDC is the only, or even the most obvious, answer. Our payments system is more efficient than those in most other countries.”
Lord King exposed the hollowness of the whole drive to create CBDCs. They are little more than a power grab by central banks, with risks hugely outweighing the benefits, insofar as these exist at all.
Proponents of CBDCs argue that they would improve payment system efficiency, promote financial inclusion, and make cross-border transactions easier and cheaper. What they won’t tell you is that all of these features are already offered to consumers today in the form of fiat-backed stablecoins issued by private companies. Examples such as Circle’s Euro Coin (EUROC) and Poundtoken’s GBPT provide many of the exact same use cases as both wholesale and retail CBDCs for both the eurozone and the United Kingdom.
Related: CBDCs require governments to put a special focus on security
Make no mistake: Central banks know this. Private stablecoins have already hit the mainstream in parts of the world such as Latin America, where local currency devaluation has led to more than a third of people making a purchase with stablecoins. International Monetary Fund economist Eswar Prasad even predicted last year that in regions facing similar issues, “national currencies issued by their central banks […] could be displaced by stablecoins.”
It should be no surprise that the recent CBDC development push around the world has coincided with unprecedented stablecoin scrutiny and legal action from government regulators.
What can we do? Above all, we need to spread a greater understanding of the issues, both in the policy community and the general public. Let’s bring the facts out into the open. The best way to do this is through an international awareness campaign that occurs before CBDCs are entrenched. This matter is too important to be decided only by those with vested interests, such as central banks.
Conrad Young is a co-founder of Athena Labs, a global Web3 communications agency. He serves as digital assets adviser to U.K. think tank the Tax Reform Council and its activism arm, Cut My Tax, and has worked at the intersection of blockchain and public policy throughout his career. He graduated from the University of Bristol in 2017.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cryptox.
