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If the development of blockchain technology was a financial revolution, central bank digital currencies (CBDCs) are the counter-revolution. A CBDC is a form of digital currency issued by a central bank and hosted on a private blockchain. The value is always pegged to the value of the nation's fiat currency (GBP in the UK). 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 that central banks can be trusted to proceed, the facts stand against them. The evidence suggests that 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 UK's case, our 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 but our experience shows that once investigatory powers exist not only are they used, they are abused. Take the Regulation of Investigatory Powers Act, introduced in the UK 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.
It’s also a big assumption that state regulators will be able to keep CBDC information confidential. In the UK state agencies are always losing data and account for 54% of all data breach fines. Not that long ago our tax agency HMRC managed to lose the records of 25 million taxpayers.
But the threat from hackers is also great. The centrally collected data will be a massive honeypot for hackers and the hostile states who back them.
As the Director of Britain’s cyber intelligence agency GCHQ 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 enquiry revealed that Chinese agents were trying to infiltrate the Fed.
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, 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 Committee on Economic Affairs in a fascinating report on CBDCs, is “what problem are they actually trying to solve?”
Former Governor of the Bank of England Lord King pointed out in the House Lords earlier this month: "CBDCs are about ways of making payments; they are not a new currency. Whether a country needs a CBDC is really about the state of its current payments system.”
"What are the problems in our payments system to which a CBDC might be the answer?” He concluded that “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 exposes 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 on offer to consumers today in the form of fiat-backed stablecoins issued by private companies. Examples such as Circle’s Eurocoin and Poundtoken’s GBPT provide many of the exact same use cases as both wholesale and retail CBDCs for both the Eurozone and the UK.
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. IMF 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.
So what to do? Above all we need to spread 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.