Few likely paid much attention when, on March 9, President Biden signed an executive order directing the government to begin developing a “central bank digital currency” (CBDC) to be issued by the Federal Reserve, alongside a framework to regulate private cryptocurrencies. But this was a moment to which close attention is very much due. CBDCs have the potential to become an unprecedented totalitarian nightmare.
As the term implies, a CBDC is digital money that a central bank issues directly. You might assume that you are already using “digital currency” regularly if you rarely use physical cash anymore and instead buy almost everything with a credit card or a digital payment app. In truth, the process of moving money from A to B is vastly more complicated than that. It involves a tangle of payment processors, banks, financial clearinghouses, and, if your money is crossing borders, international communication and exchange systems, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The money itself doesn’t move anywhere fast, so each intermediary institution must assume risks to fulfill your transaction by accepting promises, sending transfers, verifying receipt of funds, and so on. Many fees get collected along the way for such services.
A CBDC system would be radically simplified. A customer would open an account directly with a country’s central bank, and the central bank would issue (create) digital money in the account. Crucially, this makes the money a direct liability of the Fed, rather than of a private bank. Using a simple smartphone app or other tools, the customer can then initiate direct transactions between Fed accounts. The digital money is deleted in one account and recreated in another instantaneously. Moving money across borders no longer requires something as complex as SWIFT or wire transfers, and currencies can be exchanged instantly as long as friendly central banks have agreements to do so. No promises or trust are necessary; every transaction is permanently recorded on a digital cryptographic ledger in real time—a bit like Bitcoin, but exquisitely centralized rather than distributed.
Such a system technically no longer needs such middlemen as banks or credit card companies. The Fed retains complete oversight and control over the creation, destruction, and “movement” of money, no matter where it is “held” or who “has” it. As Agustin Carstens, general manager of the Bank of International Settlements put it at a 2020 summit of the IMF: “We don’t know who’s using a $100 bill today and we don’t know who’s using a 1,000 peso bill today. The key difference with the CBDC is the central bank will have absolute control [over] the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.”
Biden’s order described “research and development efforts into the potential design and deployment options of a United States CBDC” as a matter of “the highest urgency” for his administration. Why should such a seemingly obscure and technical monetary innovation be of such urgency to the U.S. government? Since cash has been working at least fairly well for a few thousand years, what reason has been given for why central banks should receive “absolute control” over money? A Fed report from January portrays CBDC as a way to “support faster and cheaper payments,” and “offer the general public broad access to digital money that is free from credit risk.” And it would promote “financial inclusion—particularly for economically vulnerable households and communities.” That, the report notes, “is a high priority for the Federal Reserve.” Biden’s order also calls for the need to “promote equitable access to safe and affordable financial services.”
But this can hardly explain the urgency. After all, it wasn’t long ago that Fed chairman Jerome Powell warned that, when it came to a CBDC, it was “more important to get it right than to be first,” given “potential risks” and “important trade-offs that have to be thought through carefully.” Why is the administration now pushing for accelerated development?
The answer lies largely in foreign policy. The order states explicitly that “the United States derives significant economic and national security benefits from the central role that the United States dollar and United States financial institutions and markets play in the global financial system.” Therefore, it “has an interest in ensuring that it remains at the forefront of responsible development and design of digital assets.” Or, as Brian Deese, the former Global Head of Sustainable Investing at BlackRock and now director of the National Economic Council, put it, the order’s intention is to “reinforce U.S. leadership in the global financial system and safeguard the long-term efficacy of critical national security tools like sanctions and anti-money laundering frameworks.”
China has pioneered the development of a CBDC and even begun putting it into limited circulation and testing its cross-border functionality. This has prompted the sense that U.S. “financial leadership” is under threat. Currently, the dollar is used to settle some 80 percent of global cross-border financial transactions, and the U.S. thus has the leverage to strong-arm banks, or the whole SWIFT network, into not doing business with anyone it doesn’t want them to do business with—i.e., imposing sanctions. But if a strong alternative existed, something that could reliably move across borders and be exchanged instantaneously with zero cost, such as a digital yuan, then some around the world might be tempted to start using that instead of the dollar. And if use of this alternative became widespread, then little would prevent America’s enemies from escaping the long arm of the liberal international order’s sanctions regime.
Today, that means Russia. Hence the true source of Washington’s urgency seems to be the fear that the massive sanctions imposed on Moscow by the West will prompt not only the Russians but others around the world rapidly to scale up digital alternatives to the dollar. In the long run, only the development of a similarly fast, convenient, convertible, widely used, and easily controlled digital architecture by the West seems certain to allow it to maintain its collective dominance over global financial flows. Seven of the largest Western-aligned central banks, led in practice by the U.S. Federal Reserve and the European Central Bank, have formed a tentative consortium aimed at creating a system of “interoperable” CBDCs. One can imagine the accusation that will predictably be deployed against those in the West who oppose a CBDC: sympathy for the enemy.
But before we do our patriotic duty, we should consider the other potential ways in which the Fed may be tempted to use a CBDC at home. CBDCs have another unique feature that opens up a huge range of alarming possibilities that even the central banks may not yet have fully considered: their inherent “programmability.”
When word first arrived that the People’s Bank of China has “tested expiration dates to encourage users to spend it quickly, for times when the economy needs a jump start,” Western monetary policymakers—who struggled for years to use negative interest rates to stop people from saving—probably spat coffee all over their monitors. But even this is limited creative thinking.
The Fed could directly subtract taxes and fees from any account, in real time, with every transaction or paycheck, if it wished. There could be no more tax evasion; the Fed would have a complete record of every transaction made by everyone. Money laundering, terrorist financing, any other unapproved transaction would become extremely difficult. Fines, such as for speeding or jaywalking, could be levied in real time, if CBDC accounts were connected to a network of “smart city” surveillance. Nor would there be any need to mail out stimulus checks, tax refunds, or other benefits, such as universal basic income payments. Such money could just be deposited directly into accounts. But a CBDC would allow government to operate at much higher resolution than that if it wished. Targeted microfinance grants, added straight to the accounts of those people and businesses considered especially deserving, would be a relatively simple proposition.
Other creative methods of financial redistribution could also be tempting. Why not assist minority-owned businesses with automatic subsidies, or even change the effective price of any purchase based on the identity of who’s buying it? Surely, as many have already argued, the central bank could be doing more to achieve equity. And as the Federal Reserve Bank of San Francisco has contended, being “‘race-neutral’ is not enough” on monetary and fiscal policy.
The progressive dream of prison abolition has proved challenging. But a CBDC could help: just geofence the location within which parolees’ money can be used and not disappear—house arrest will have never been better enabled. A similar protocol would also work if the government wanted to keep people confined to their homes for some other reason.
Should people be encouraged to eat the foods decided best for them, such as a plant- or insect-based diet? CBDCs could do the trick. Should people be limited in how much they can spend per week on carbon-intensive purchases? CBDCs could help with that, too. But the government need not focus only on individuals. Preferential treatment could go to companies meeting environmental, social, and governance (ESG) goals.
At the same time, consumers could be nudged away from undesirable organizations and businesses. Why not collect additional fees for transactions with “risky” businesses or charities that have low ESG scores? Or slow down their transaction speed to allow for greater “verification”? In fact, why not create comprehensive credit scores based on behavior and number of connections with risky individuals and organizations? It would be a logical next step.
And if it were ever really necessary—if protestors were honking truck horns too many times in a row, say—then the most dangerous individuals or organizations could simply have their digital assets temporarily deleted or their accounts’ ability to transact frozen with the push of a button, locking them out of the commercial system and greatly mitigating the threat they pose. No use of emergency powers or compulsion of intermediary financial institutions would be required: the United States has no constitutional right enshrining the freedom to transact.
All this would require that cash be phased out. But many central bank reports explicitly pose that as a possibility, or even an inevitability of market competition. Such a future would mean little limit on the possibilities of CBDCs.
If not deliberately and carefully constrained in advance by law, CBDCs have the potential to become even more than a technocratic central planner’s dream. They could represent the single greatest expansion of totalitarian power in history. Never has there been any regime with such omnipotent insight into and control over its people’s every transaction as what CBDCs may soon make possible. And yet this is the technology that seems likely to soon be smuggled into use in our societies in the name of convenience, social justice, and patriotism.
Photo: D-Keine/iStock