Today an opinion piece in the Financial Times argues that the key challenges of a central bank digital currency (CBDC) is freedom and security. It’s written by economist Tony Yates who spent 17 years working at the Bank of England and another 24 at BNP Paribas. We’d complement Yates’s points with the need for control or self-determination, which means self custody of any digital currency.
His short piece states, “having an organ of the state, the central bank, potentially having access to information about every transaction within its borders and the ability to pry into every detail of people’s financial lives is the stuff of dystopian nightmares.”
We’d agree, but most Western central banks recognize that to encourage the adoption of a CBDC, they have to limit central bank access to personal transactions. That’s a good thing, but who knows how that will evolve if a CBDC gets traction.
Yates’s next point hits the nail on the head: “The power to deny access to funds could have a chilling effect on domestic political dissent and democracy. Externally, central banks’ desire to do away with paper currency would remove the safety net of a redundant system — cash. Imagine if a hostile power were to shut down a country’s CBDC, the financial system and the economy as a whole could quickly hit a brick wall.”
Today there is already plenty of power to deny access to electronic money in the form of bank accounts. The most public display of this power was its use by the Canadian government last year when it blocked bank accounts in an effort to quell demonstrations by anti-vaccine-mandate truckers.
As the Wall Street Journal put it, “the government has used emergency powers to put the nation’s financial institutions in the unusual position of using their anti-money-laundering and sanctions expertise to crack down on banking customers.”
And anti-money laundering rules are far from perfect. A few years ago, I had a business account blocked for weeks by one of the world’s largest banks. Mine was one of hundreds of small businesses that had accounts blocked. Simply because the bank messed up in implementing a new AML process. It needed more staff to process all the responses in time for its self-imposed account blocking deadlines.
To Yates’s point, cash provides a redundant system when all else goes wrong. And it’s extremely difficult to stop people from using cash.
The need for control over your own money
As the world goes digital, there is no mainstream digital alternative to cash. Love it or hate it, the closest thing is Bitcoin. There’s a reason why a handful of experienced payments entrepreneurs have chosen to build solutions on Bitcoin, despite its environmental issues. Examples include Jack Dorsey, founder of Twitter and Square (now Block) and David Marcus, formerly of Meta/Libra/Diem and PayPal.
However, onramps to cryptocurrency invariably require identification, so for the vast majority of people, that is not anonymous either.
But is the real issue privacy or even anonymity?
Or is it about control?
Sure your Bitcoin transactions can be monitored because the ledger is transparent. However, if you have custody of your own Bitcoin, in theory, you can transfer it to whomever you choose. A government could issue an edict not to accept transactions from certain wallets, but it won’t impact person-to-person payments.
This is one reason governments are not keen on self custody of cryptocurrencies or CBDCs. Despite research from MIT’s Digital Currency Initiative showing the control of self custody is craved by those that experience financial exclusion.
It’s about who has the keys to your money.
