Two-Sided Coin

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There is a topic I believe is going to be exceptionally important over the next decade, and that is Central Bank Digital Currencies. Let me be clear at the outset that I am not a professional economist, nor am I a CBDC expert. I do have a couple of extra IQ points to rub together, however, and for both my sake and yours, I wanted to try to educate myself about this crucial topic.

It wasn’t all fun and games; reading some of the academia about this subject doesn’t exactly crackle with warm-blooded humanity, as with this excerpt:

When households endogenously select into banked and unbanked, the introduction of a CBDC, which pays interest and is assumed to be immune to theft, can be Pareto improving and always increases welfare of at least unbanked households. The economic mechanism driving the welfare implications focuses on the interaction between the new monetary policy tool introduced by an interest-bearing CBDC and banks’ limited commitment.

FEDS Notes, November 9, 2020, “Central Bank Digital Currency: A Literature Review”

I guess if you wind up as one of the Fed’s thousands of useless employees, you can kind of lose your mind. So it goes.

However, I got a decent sense about CBDC, and I thought the approach I’d take with this post is to offer up, on the one hand, a rather rosy scenario for the consequences of this new technology and, on the other, a more dystopian view.

To be clear, CBDC are similar to the likes of Bitcoin inasmuch as they are digital currencies, but CBDC would not be crypto. Indeed, the entire notion of a blockchain wouldn’t even apply.

It’s probably easier to think of a fully-implemented CBDC as little different than using your ATM card, except that you’d use it for everything, and you’d almost certainly execute any transaction by way of whatever mobile device (watch, phone, etc.) happens to be handy at that particular millisecond.

Buoyant Bucks

Let’s first take the doe-eyed, sunny approach. Let’s assume it’s ten years from now, and cash is unheard of. Every transaction is done by CBDC. Your groceries. Your doctor bill. Your gas. Your mortgage payment. That peppermint-flavored lubricant you like so much. Everything. What would be the good reasons for such a shift?

Keeping Up with the Joneses

For one thing, the world seems to be moving this way. 80% of central banks are in some phase of a move toward digital currency (from seriously studying it all the way up through full-blown currency digitalization). It would be absurd to think that the likes of China would move to a purely digital currency and the United States would still be cranking out old-fashioned banknotes with cotton paper and green ink like in George Washington’s day.

Reduce Financial Crime

If everything is perfectly trackable, it’s one whole hell of a lot harder to hide what you’re doing from the government. Offshore banking. Tax evasion. These go away, unless you take up the extremely awkward task of conducting business with, say, gold bullion or something. Suffice it to say that an omniscient financial overseer would make fiscal shenanigans vastly harder than it is now.

Easy Policy Implementation

We saw in Q1 2020 how challenging it was for the government to move from political will to actual execution. In between the U.S. government and the U.S. citizens is a gigantic middleman known as The Banking Industry, and they were the intermediaries that dealt with all those PPP loans, all those stimulus payments, and so forth. I remember Mnuchin declaring that the 1% fee the banks were getting paid for the hundreds of billions of dollars in PPP funds would be the “easiest money they ever made“. It sure was, and I’m sure his butt buddies in banking were grateful to our favorite vermin. This extra “layer” makes things less efficient and more expensive, so removing it would be an improvement.

Kill the Banks

Just to take that idea a step farther, what if CBDC was so sweeping and successful that the notion of having banks at all was ridiculous? If the government can handle all the financial services of the public, who needs banks, right? Of course, I don’t think this would ever happen, but remember, this is all just a mental exercise. And it could happen. Just probably not in ten years.

Inclusion of the Unbanked

One of the most oft-cited benefits of a CBDC would be to enfranchise the poor, homeless, or otherwise “unbanked’ (see the quote at the top of this post) who otherwise rely on unsavory or at least inappropriately expensive means to handle whatever financial business they have to conduct. Let’s face it, dealing with the likes of check cashing services isn’t in the best interest of those who can barely scrape by.


So that’s a relatively rosy scenario. The government has, in this fantasy, done a crackerjack job of creating financial access, ease of use, and transparency to monetary dealings, and they are able to provide aid to citizens instantly whenever it is warranted. So let’s go to more familiar territory for Slope and consider the other side of the coin………

Dismal Dollars

We begin with a similar assumption: that in ten years, CBDC will be in widespread use. What are some of the drawbacks of such a scenario?

Bezos and Zuck Own the Planet

A society in which the federal government – – which already has an exceptionally cozy relationship with the top .01% of its citizenry – – creates a perfect scenario of controlling the social ladder. To put it bluntly, all the mega-rich have to do is make sure the unwashed masses have just enough french fries and cheeseburgers to keep them from rioting and enough mindless entertainment to keep them placid. The message is simple to the 99%: Just do what you’re told, sit on your ass, and STFU. There will be no pitchforks or torches, because you pathetic people have precisely enough to not take any action against those who are strip-mining every asset the country has.

EMT and Cybersecurity Risk

Some of you may remember my post about the Carrington Event. If the economy is 100% dependent on digital transactions, what happens when the nationwide network gets blown to smithereens, even for a month? Unchecked pandemonium, that’s what happens. If the society is utterly cashless, the social fabric would be torn to ribbons in no time. The same goes for a massive cyber-attack from – – oh – – let’s just say – – North Korea? Maybe someone who isn’t too keen on us?

Compel Behavior

If the government utterly controls the economy, it effectively controls the people. If every single penny in your life was under the auspices of a government umbrella, the government could, if it wanted, have a lot of say-so in how you conduct your life. Let’s say the powers that be wanted to heat up the economy. Well that’s an easy problem to solve: just have a message pop up on everyone’s screen saying that their CBDC cash balance would be declining by 1% every day for the next 30 days. In other words, you instantly create deflation. How fast do you think people would be scrambling to the mall and car dealerships to buy crap, just because the money was almost literally burning a hole in their pockets?

Or let’s say the government didn’t want anyone buying guns. Or ammunition. Or pornography. Or liquor. Or something else that, for whatever reason, the government considered to be wrong. Boink! Your card doesn’t work for that stuff anymore.

Invaluable Trove of Metadata

Transaction data is very valuable. However, these days, it is so fragmented, even the likes of Visa only see a subset of what’s going on in the economy. Imagine, however, if one entity – – the fine folks in the District of Columbia – – had absolutely omniscience about every single penny spent? What was bought. When it was bought. Where it was bought. And by whom. It is just mind-blowing to think about how much you could do with that kind of information, because if you know every single penny that’s being spent, you have an extraordinarily lucid view into the private lives of every single citizen. You find up with a vastly magnified version of this:

And I’m not even getting into the concept of a Social Credit Score, which is more of a China thing right now. But there’s nothing to say that such a concept wouldn’t be introduced into the United States, too.

Or at a minimum, it makes for a super-efficient way for the government to pluck whatever feathers it wants. Say, is that your car parked in a red zone? ZAP! We just took $500 from your account. We’re not going to leave you a ticket and hope someday you might pay it. We just take the cash without question, thank you very much. Have a nice day.

What’s It Going To Be?

Change takes time, and a change this big is definitely going to take time. Before 1950, the concept of a credit card didn’t even exist, and it took decades for them to get really deeply integrated into society. Things move much faster these days, however.

I think that China will digitize their economy many years before the U.S., largely for one reason: they can bloody well tell their citizens what to do, and the citizens will fall right in line. It doesn’t work quite that way in the U.S. But it will happen. And I suspect when it finally does, there will be a mix of the good and the bad I’ve outlined above, and I fear that, on the whole, there will be more of the nasty stuff (and of course some items I haven’t even thought of yet) than the aw-shucks, gee-whiz goodness.

I’d wager that 99.9% of the U.S. public has no decent clue what is coming down the road, but it’s definitely sneaking in, piece by piece. The mobile devices. The MMT. The acclimatization with crypto. CBDC won’t appear out of the blue. It will make it appearance subtly, and slowly, until one day, voila, it has saturated all our lives and we hardly saw it coming.