Just In Muckraker

September 18, 2023

FREEDOMS DIGITALLY REDACTED 

In a recent publication by Kitco News, Jordan Finneseth writes “The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has announced the launch of the next phase of its work on Central Bank Digital Currency (CBDC) interoperability, which includes the addition of three central banks that will be beta testing the system for interoperable CBDCs.” In the press release that SWIFT issued, they explain that while in sandbox testing scenarios, participants recognized a “clear and potential value.” The next stage will be tested at actual banks, including Hong Kong Monetary Authority (HKMA) and the National Bank of Kazakhstan. The second stage will focus on the interoperability between different countries’ implementation of the CBDC. 

Currently, 130 countries, which represent 98% of the world Gross Domestic Product in trade, are exploring the usage of CBDCs; nineteen of which are in the advanced stages of the CBDC development. SWIFT’s concern is that each country will have their own CDBC which will lead to a “fragmented landscape” where we have the scenario that each country has its own currency. SWIFT’s agenda is to provide for an interoperability for digital currencies that will supposedly seamlessly scale as the CBDC becomes more of a global exchange. 

This article will go into the benefits of having a digital currency, the management of the CBDC, and then conclude with some of the drawbacks of implementing a CBDC. Additionally discussing here will be a little bit of history as well as some controversial matters covering money, in general. 

Benefits of a Digital Currency 

The concept of Central Bank Digital Currencies (CBDCs) has taken center stage in monetary policy and economic discussions worldwide. As nations grapple with the limitations of physical currency and the shift toward digital financial systems, CBDCs present themselves as a compelling solution. While the topic does have its share of critics, the focus in this section will be on the numerous benefits that CBDCs could bring to the table. 

Financial Inclusion: Bridging the Gap 

One of the most touted advantages of CBDCs is the potential for financial inclusion. In countries where a significant portion of the population does not have access to basic financial services, CBDCs could offer an easily accessible entry point. Since they are digital, they could be distributed and managed using basic mobile devices, providing a more inclusive system than traditional banking. The caveat is that everybody in the country that uses money for transactions must have an electronic device on them, which means that the country must have an infrastructure that can handle both electrical and data requirements. 

Efficiency and Cost-Effectiveness 

Physical currency comes with overheads: printing, secure storage, distribution, and degradation. CBDCs eliminate the majority of these costs, providing a more efficient means of exchange. Moreover, digital transactions can occur in real-time, reducing the need for intermediaries and lowering transaction costs for consumers and businesses alike. 

Transparency and Security 

The inherent traceability of digital currencies can significantly reduce financial fraud, money laundering, and other illicit activities. By utilizing secure, transparent, and immutable blockchain technology, CBDCs can offer another level of trust in financial transactions. 

Greater Control Over Monetary Policy 

CBDCs would allow central banks to implement monetary policy measures directly, rather than through the traditional banking system. This could make measures like interest rate changes more effective. In extreme cases, central banks could even implement unconventional policies like negative interest rates directly on CBDCs, providing a new set of tools for economic management. 

Stimulation of Economic Activity 

Programmable CBDCs could be tailored to encourage specific types of economic activity. For example, stimulus funds could be designed to expire if not used within a specific timeframe, incentivizing immediate spending and thus boosting economic activity. 

Global Reach and Soft Power 

Adopting a CBDC could bolster a nation’s currency as a global standard for trade. Given the digital nature of these currencies, cross-border transactions could become more streamlined, elevating the status of the issuing nation on the international stage. 

Consumer Empowerment 

CBDCs can also offer more control to consumers over their own financial data. Depending on the architecture, individuals could have more say over who gets to access their financial history, providing a new dimension of financial autonomy. 

Challenges and Considerations 

While CBDCs offer a host of benefits, it is also essential to tread cautiously. Concerns about privacy, financial exclusion, and the potential for governmental overreach need to be carefully considered and addressed. These challenges, however, do not negate the potential advantages; they simply add nuance to the conversation. 

The Dark Side of Digital Banking 

While the discussion around Central Bank Digital Currencies (CBDCs) often focuses on their potential benefits, it is absolutely crucial to also examine the serious risks involved. From privacy concerns to the potential for unprecedented governmental control, CBDCs present a set of challenges that merit serious consideration. This section aims to shed light on the potential pitfalls that come with the adoption of CBDCs. 

Loss of Anonymity: The End of Financial Privacy? 

One of the most immediate concerns is the loss of financial privacy. Traditional cash transactions offer a level of anonymity that CBDCs, inherently digital and traceable, are unlikely to preserve. The digital nature of CBDCs means that every transaction can, and most likely will, be recorded and traced back to individual users, posing potential risks for both privacy and civil liberties. 

Currency and money are the tools societies use that allow people to interact with others with regards to trade. People trade work for money. A plumber fixes a person’s faucet from which that person pays the plumber for his/her service. That same person who the plumber fixed the faucet for might be the grocery store stocker. The plumber goes to the grocery store to purchase food and household goods, which, in turn, pays the stocker for his/her job. The bottom line is that money provides a method for us all to live in a symbiosis. 

With CBDC, the individuals who run the government, particularly the administrative state from which many call the alphabet soup agencies (i.e. CIA, FBI, CDC, ATF, etc.) will now have access to an individual’s transactions. If you doubt this statement, then please read The lasting Impact (https://justinmuckraker.substack.com/p/the-lasting-impact) from which the PATRIOT Act gave tremendous powers to the administrative state.  

As an example, let’s say an individual exercises his/her fundamental First Amendment Right by posting an inflammatory statement about the government and/or its leaders, or maybe the individual posts data that contradicts the latest narrative that the government is pushing. Agents within these bureaus can cross-reference the post with the person’s CBDC account and restrict access to funds thus causing serious financial strife.  In this scenario, the social media post attracted the attention from different departments of the government. The data is cross-referenced, and an algorithm identifies the offender as a “potential risk,” based on pre-defined criteria that consider both financial transactions and social media activity. 

Everybody is affected by this, even those who do not think they are.  

Financial Exclusion: Leaving the Many Behind 

While digitalization could extend financial services to those without bank accounts, it could also exacerbate existing inequalities as well as create new ones. As stated above in the previous section, the lack of access to the internet, smart devices, or even electricity could exclude a significant portion of the population from the financial system, widening the digital divide. 

Programmable Money: Social Engineering through Finance 

The programmability of CBDCs could allow governments to control not just how much money you have, but also how you spend it. For instance, stimulus funds could be programmed to be spent only on essentials, or within a certain timeframe. While these options offer exciting possibilities for economic planning, they also raise ethical questions around autonomy and freedom of choice. 

Another important aspect of this is the possibility of funds having an expiration date. There have been instances in China where individuals were forced to spend their recently issued Digital Yuan within a certain timeframe. In this scenario, there are no savings.  

Additionally, the CBDC is issued to a specific person. By ensuring that CBDCs are tied to a unique identity and requiring stringent authentication protocols, the system makes it virtually impossible for one person to use another’s CBDCs without going through a major authorization process. While this offers a level of security and traceability far superior to physical currency, it also introduces some significant ethical and practical challenges, such as those relating to privacy and individual freedom. 

Economic Risks: Financial Instability and Policy Errors 

CBDCs may introduce new forms of economic risk. For example, if a CBDC offers a higher interest rate than bank deposits, it could lead to a mass exodus of funds from banks, destabilizing the traditional banking sector. Additionally, direct methods of implementing monetary policy, such as negative interest rates on CBDC holdings, could have unintended consequences that are not fully understood. 

Cybersecurity Concerns: All Your Eggs in One Digital Basket 

Putting an entire nation’s financial system on a digital platform makes it a tempting target for cyber-attacks. From hacking to digital theft, the risks are real and the consequences severe. A successful cyber-attack could cripple an economy and undermine confidence in the financial system.  

As an example, Mt. Gox, was a big player in the cryptocurrency world back in 2011. It was handling 70% of all worldwide bitcoin transactions by 2013. However, in 2014, Mt. Gox was dealt a devastating blow by hackers who were able to steal 840,000 bitcoin from customers as well as the company itself, which amounted to $460 million. Mt. Gox never recovered and many of the customers were hurt badly. 

Informed Consent: Are We Ready for This? 

Finally, the complex implications of CBDCs may not be easily understood by the general public. Do citizens fully comprehend the trade-offs they’re making regarding privacy, freedom, and economic stability? Informed public discourse and education are essential to any transition towards a CBDC. 

While CBDCs offer a tantalizing glimpse into the future of finance, they come with an array of risks that could have far-reaching implications for privacy, freedom, and economic stability. These challenges necessitate a careful review and understanding of the implications. As we venture into this new frontier, it is essential to measure the benefits and ensure the risks are manageable and safe for the benefit of our society. It is critically important to keep an eye on the potential erosion of freedoms and inequalities that could easily be exacerbated. 

The Constitutional Contradiction of CBDC 

The concept of a Central Bank Digital Currency (CBDC) can raise a variety of concerns when viewed through the lens of the United States Constitution. While the potential benefits of CBDCs are frequently touted—increased efficiency, lower transaction costs, and improved financial inclusion—there are also concerns about how these digital currencies could interact with principles that are foundational to American governance and liberties. Below are some aspects where CBDCs may be seen as antithetical to the U.S. Constitution: 

First Amendment: Freedom of Speech and Expression 

Implications: 

Financial Surveillance: A CBDC allows the tracking of all transactions, potentially making it easier to suppress or scrutinize individuals based on their financial activity related to political or social causes. 

Chilling Effects: Knowing that financial transactions are being monitored could discourage citizens from donating to causes or organizations that are out of favor with the government, effectively chilling free speech. 

Fourth Amendment: Protection Against Unreasonable Searches and Seizures 

Implications: 

Privacy Invasion: The Constitution protects against unreasonable searches and seizures, and that has often been extended to personal data. A CBDC would give the government a direct line of sight into private transactions, arguably an invasion of privacy. 

Data Collection and Use: Given the high potential for data collection, the misuse or indiscriminate gathering of financial data could be a violation of Fourth Amendment rights. 

Fifth Amendment: Right to Due Process 

Implications: 

Financial Autonomy: There could be scenarios where the government might freeze the assets of individuals without due process if CBDC technology is misused, effectively “seizing” their assets without legal procedure. 

Economic Punishment: With direct control over individual CBDC wallets, the government could impose economic sanctions on citizens without due process, undermining this Constitutional protection. 

Second Amendment: Right to Bear Arms 

Implications: 

Transaction Tracking: While not directly infringing upon the right to bear arms, the transparency of CBDCs could make it more difficult for law-abiding citizens to purchase firearms privately, potentially affecting Second Amendment rights depending on how the law is interpreted and enforced. 

Tenth Amendment: Powers Reserved to the States 

Implications:  

Federal Overreach: The introduction of a federal CBDC could potentially undermine the states’ ability to manage their own financial systems and control their own economic fate, contravening the principles of federalism inscribed in the Constitution. 

The Financial Reset 

The idea of using a Central Bank Digital Currency (CBDC) to “reset” the financial system and manage national debt is a subject of growing interest and speculation. While such a reset would be a monumental undertaking fraught with ethical, economic, and political complexities, the centralized control afforded by a CBDC theoretically could make it possible. Below, we explore how a government might use CBDC to restructure the financial system and tackle debt. 

Resetting the Currency 

Eliminating Old Currencies 

A CBDC could replace current physical and electronic forms of currency, forcing the conversion of all monetary assets into the new digital format. This provides a chance to “start fresh,” possibly devaluing existing forms of money to address inflationary concerns or to reset economic parameters. 

Currency Revaluation 

A new CBDC could be introduced at a different valuation compared to the existing currency. This might serve to deflate or inflate the national currency in a controlled manner, affecting national and personal debts indirectly. 

Debt Restructuring 

Sovereign Debt 

The government could opt to convert its outstanding debts into the new CBDC at terms that are more favorable, perhaps extending maturity dates or adjusting interest rates. This could be negotiated with creditors as a part of a broader economic reform package. 

Consumer Debt 

Consumer debts like mortgages, student loans, and credit card debts could also be converted into the new CBDC. Depending on the economic goals, the government could restructure these debts to alleviate the burden on citizens, perhaps by lowering interest rates or extending payment terms. 

Asset Reassignment and Redistribution 

Centralized Control 

The transparency and centralized control of a CBDC could enable the government to track and tax assets more effectively. In an extreme case, this could facilitate a form of wealth redistribution, if deemed necessary for economic restructuring. 

Financial Markets 

The government could use the CBDC to implement new regulations or financial instruments to control financial markets more directly, affecting how debts are traded and managed. 

Inflation Control 

With direct control over the supply of money, the government could implement more agile responses to inflation, perhaps affecting the real value of debts in the process. 

Ethical and Political Considerations 

Public Trust 

Such a radical restructuring would require immense public trust in the government’s ability to manage the new system fairly and effectively. 

International Relations 

Redefining the national currency and restructuring debt could have significant implications for international trade and geopolitical relations, possibly leading to economic sanctions or trade imbalances. 

Constitutional and Legal Challenges 

The implementation of such a reset could potentially face constitutional challenges, especially in countries like the United States where individual financial freedoms are constitutionally protected. 

While the introduction of a CBDC could theoretically give a government the tools to reset the financial system and manage national and consumer debts, such a move would be unprecedented in scope and complexity. Moreover, the ethical, political, and legal ramifications would be profound. Such a measure would require careful consideration of its impact on individual liberties, market dynamics, and both national and international economies. However, given that our current financial system is on the brink of collapse, the Biden administration may be thinking that a CBDC swap might just be easier negating many of the indicators that a reset would do more harm than good. 

Conclusion 

CBDCs present an interesting, exciting (for some), and concerning (for others), frontier in the world of finance, offering benefits that range from increased efficiency and security to novel ways of implementing monetary policy. Serious thought must be warranted before the actual implementation of CBDCs. Mitigation of novel concepts tends to be difficult because new developments have problems never experienced before. Some potential drawbacks aren’t considered because we don’t know what we don’t know.  Enacting CBDCs will transform our financial systems significantly, impacting everybody in different ways. 

Those who market CBDCs will work hard to convince anybody who will listen that CBDCs promise numerous benefits and will not discuss the risks they pose to civil liberties. The truth is that centralized nature of CBDCs could lead to a concentration of power in federal hands, potentially at odds with the distributed system of governance and checks and balances that the U.S. Constitution establishes. As the debate around CBDCs continues to evolve, it’s crucial to reconcile their technological allure with the imperatives of a constitution that places individual freedoms at its core.