A CBDC is a digital banknote issued by a central bank. Instead of holding physical bills in your physical wallet, your digital wallet (in other words, your smartphone) would hold digital currency units. CBDCs, similar to bitcoin, would be based on blockchain technology. 

But whereas bitcoin is the ultimate decentralized payment system and independent of central banks, CBDCs are the ultimate in centralization. The amount of transactional information flowing into central banks would be staggering. And they might be here sooner than you think: 114 countries are actively exploring or rolling out CBDCs.

There are several undeniable advantages to CBDCs. It is more efficient than cash (no printing costs) and presumably more difficult to forge. CBDCs would give governments greater power to affect economic cycles. For example, they could dig us out of an economic recession by zapping helicopter money into everyone’s account. It might even be programmed with an expiry date, thereby forcing people to spend and stimulating growth.   

Despite a robust economic efficiency argument, the disadvantages are overwhelming. There is a privacy argument: the government would see your every transaction and may be tempted to spy on you to prevent tax evasion.

But what solidifies my anti-CBDC position is the degree of control given to the government. As mentioned, CBDCs would be programmable by a central authority. Every transaction could be monitored in real-time, tracking all activities and movement of individuals. Individuals deemed as threats (or not to the government’s liking) could be targeted, especially significant in countries with poor human rights records.

Frozen Assets

To go even further, CBDCs would make it easy for governments to freeze anyone’s wallet, making it impossible to send or receive money. You may think this will never happen in an “advanced,” democratic society, but it already has, and in a country that is supposedly one of the most liberal and democratic on earth: Canada.

You may recall a strike in 2022 in which thousands of truckers were demonstrating against COVID restrictions. The government enacted emergency legislation that enabled it to freeze the bank accounts and cancel the credit cards of hundreds of people who contributed to the “Freedom Convoy” campaign.

Granted, these were bank and credit card accounts, not CBDC accounts, but freezing the latter would be much easier, as these would be held directly with central banks rather than the government having to work through third-party private banks. Anyone deemed undesirable could easily be deprived of mainstream financial services.

CBDCs will also make it easier for governments to implement negative interest rates and financial repression. In other words, CBDCs will not just make putting money into your account easier but will also facilitate taking it out of your account (negative interest rate or wealth tax).

Perhaps the only realistic way governments worldwide can escape national debt spirals is financial repression: ensuring interest rates are lower than inflation for the coming years and even pushing interest rates into negative territory if necessary.

Sore Temptation

Although financial repression has been successfully implemented in the past without CBDCs, in the late 1940s, for example, today’s debt levels are much higher than at any previous time, and capital is more internationally mobile; hence, governments will be sorely tempted to introduce CBDCs.

And while they will no doubt try to reassure us that CBDCs will not be abused, once introduced, there is no way to curtail the government’s use of them. Every emergency will justify yet another encroachment.

CBDCs create disintermediation: if private wallet holders hold accounts directly with central banks, main street banks are cut out of the loop. In other words, the power that resided with banks will be transferred to central banks, one of the least transparent and accountable organs of government. CBDCs represent a massive power grab by central banks at the expense of the banking sector and individuals.

Perhaps it is unsurprising that China is one of the countries leading the charge in implementing CBDCs.

According to Federal Reserve board member Christopher Waller, “CBDC accounts could give the Federal Reserve access to a vast amount of information regarding the financial transactions and trading patterns of CBDC accountholders […]. The introduction of a CBDC in China, for example, likely will allow the Chinese government to closely monitor the economic activity of its citizens. Should the Federal Reserve create a CBDC for the same reason? I, for one, do not think so.”

This will be the most important monetary policy debate of the coming decade. The outcome will fundamentally determine in what kind of society we live.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (www.businessexitplanningbook.com), and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of February 24, 2023.