“The best way to destroy the capitalist system is to debauch the currency.”V. I. Lenin apud J. M. Keynes

Imagine the following scenario: it’s Summer 2024, you walk into a convenience store to buy a bottle of Coke and quench your thirst; you scan the bottle at the automated cashier, open your government-issued DigiBucks app and tap your phone. The transaction is declined. Instantly, you receive a very convenient notification saying:

“Dear citizen,

The funds in your DigiBucks account have been temporarily frozen as we have determined that a post made by you on Twitter is in violation of recently enacted Civil Speech Laws.

Once you erase that post [link], your funds might be returned — minus applicable fines and related processing fees.”

Thirsty and disappointed, you return to your AI-enabled electric vehicle and push the start button. But nothing happens. You get a new instant notification. You have reached your quota for vehicular emissions this month… but there’s hope! You might be able to purchase additional carbon credits so you can, at least, drive back home. Except your funds are frozen. You curse technology…

Technology as a Trojan Horse for large-scale Fascism

While the dystopian scenario above still feels very far-fetched, the introduction of a technology called CBDCs (or Central Bank Digital Currencies) could well represent a big step in that direction.

Digital currencies are not a novelty. We might not realise it but — according to the Fed — 96% of the currency in circulation is already digital. But that’s not “Central Bank” digital currency, but “Commercial Bank” digital currency.

The difference is subtle but very important. The money in your bank account is a liability of a commercial bank. You are exposed to the credit risk of that institution: if the bank goes bust, you might lose your deposits. On the other hand, a CBDC — much like paper money — is a liability of the Central Bank, so (theoretically) free from credit risk.

Many formats are currently being discussed for CBDCs, but no design option is more important than the decision to have Central Banks issue CBDCs directly to the public (retail CBDC) or use commercial banks as intermediaries (wholesale CBDCs):

Now, I hate banks, you hate banks, everybody hates banks. Even the banks themselves hate the other banks. They are soulless rentists ready to squeeze the public out of their last penny. But banks might turn out to be our last line of defense against outright Fascism.

Banks might be our last line of defense against outright Fascism

That is because of another feature of CBDCs: they might be programmable, meaning your money might come with built-in code that could potentially allow monetary authorities to pre-approve where, when, how, and if you can spend your money. Such power over the circulation of currency was never possible, not even to the greatest empires of the past.

No wonder China is at the forefront of CBDC development, with the Digital Yuan (e-CNY)…

CBDCs are NOT crypto

CBDCs might sound like the government’s answer to crypto, some sort of innovative, high-tech alternative money, but they are indeed just the same old concept of fiat currency, only with embedded technology.

As with any fiat currency, the value proposition of CBDCs is based on the ability of the issuer to guarantee its sovereignty as well as an underlying economic environment that is stable and healthy. To that effect, there is nothing CBDCs can do to help.

Worse yet, monetary authorities have another very important job: preventing bank runs. One of the issues that might delay the introduction of CBDCs is their potential to be ‘run accelerant’. Since CBDCs would be just as convenient as bank deposits — but without the additional credit risk — customers might just decide to convert their bank deposits into CBDCs en masse.

Even if you dislike the idea of CBDCs, when you realise that all your neighbours are leaving the bank, you will surely convert into CBDCs as well, since you don’t want to be the last one holding risky deposits while the banks run into liquidity issues.

Even if you dislike the idea of CBDCs, when you realise that all your neighbours are leaving the bank you might have no option but to convert

The extreme scenario of a bank run might never materialise, but there are many hidden risks in banking disintermediation. An important one is that banks play a key role in matching projects and companies needing funds with the capital available to chase opportunities. In the absence of banks, it’s not clear who would perform this role.

Another important feature of banks is the fractional reserve system: for every $1 you deposit in a bank, the bank — usually — lends out $5. While this practice introduces certain risks into the system, it is undeniable that fractional banking has been a success story. In the absence of it, the economy could face a risk of massive deleveraging and subsequent recession.

A solution in search of a problem?

All in all, CBCs might be — in the best-case scenario — a solution in search of a problem, as the UK Parliament Economic Affairs Committee pointed out. In the worst-case scenario, it might be the bellwether of an age when privacy rights will hinge on the goodwill of the government, and censorship will be a sword of Damocles constantly hanging over our heads.

In my view it’s a mix of the former and the latter but, foremost, it is a defensive move by outdated monetary authorities that have patently lost faith in the stability of the ‘new’ financial system they engineered post-2008, and are scared to death of crypto and financial innovation they don’t quite grasp.

CBDCs might awaken authoritarian Leviathans across the globe

But that defensive move is a risky one because it will awaken authoritarian tendencies in governments across the globe as it enables the rise of surveillance states with a power never seen before.

Real-time monitoring of citizens through financial data feeds, discretion over transactions and expenditures, the ability to crush the opposition by financially smothering them... who would think that dumb, old physical money was one of the few things standing between a government’s will to control civilian life and its ability to do so?

When you look at the authoritarian crackdown by the Canadian government against the truck drivers protesting lockdown measures earlier this year, it gives you a notion that governments might already have dangerously high levels of control over our financial lives; but also that a CBDC could make things much, much worse.

Because your money will have a memory and it will be programmed to snitch on you.