Some CBDC architects have foregone soothing assurances or ludicrous euphemisms for brusque honesty. Ivan Zimin, Director of the Financial Technologies Department of the Bank of Russia, puts it this way: “Anonymity will be incomplete in any case, unlike cash, which the digital ruble is an analogue of. The digital ruble will be issued and circulated on the Central Bank’s platform. Each digital ruble will have its own unique code, which will allow tracking its lifecycle. For example, this will allow the government to verify that the funds allocated under government contracts, programs, or subsidies are not used for other purposes.”

Zimin’s bracing clarity brings us to the second unique feature of CBDC: centrally controlled traceability will facilitate many ways for a government to not only see but influence where this alleged “cash replacement” goes and how it is used. A closer look at Zimin’s statement reveals another important characteristic of the digital ruble – programmability. The ability to make CBDC “smart” is unequivocally present in all of its current implementations. The unique code of each digital ruble, states one Russian bank in its CBDC explainer, “Allows tracing and even its programming for certain actions, similar to what cryptocurrencies can do.”

This revelation seems to have caused some embarrassment. In April, the Bank of Russia published an FAQ (in Russian) about its digital token, which included debunking “myths about the digital ruble.” One of these was that “digital rubles can only be spent on a limited list of goods.” Nonsense, the bank asserted: “You will be able to spend your digital rubles as you see fit.” But then Interfax in September reported (in Russian) that marking digital rubles so they can only be used for specific purposes would be explored by the Bank of Russia. “This opportunity will be considered at later stages of promoting the digital ruble,” the central bank’s deputy chairman, Alexey Zabotkin, told reporters.

At the end of the day, the debate about what CBDC design is the best and most risk-free is moot because such design can be changed by the designer as long as the technology allows it. And it does, and the designer (i.e., government) knows it and seems willing to change its mind as progress is made.

Does the Looney-Tunes Crowd have a Point?

Centrally controlled traceability and programmability are CBDC’s two defining (as opposed to claimed) characteristics. These could very well have useful applications: reduction of crime and tax evasion; elimination of counterparty risk with commercial banks which, in turn, would increase the financial system’s security and stability; implementing efficient policies by bypassing intermediaries and directly targeting sectors or groups (such as parents with children); manipulating currency value to manage economic instability, stimulate growth or support certain industries; or implement negative interest rates on cash holdings and thus reduce money in circulation.

Patrick Schueffel, writing in the Journal of Digital Assets, provides an excellent overview of these kinds of CBDC advantages in a happy utopian society under wise, benevolent and altruistic government. According to Fabio Panetta, a member of the Executive Board of the European Central Bank (ECB), which is also actively working on a digital euro, “Central bank money is a risk-free form of money that is guaranteed by the State: by its strength, its credibility, its authority.” (Emphasis added.) This is the foundational premise of any argument in favour of fully traceable and programmable CBDC.

The problem is that wise, benevolent and altruistic government has been hard to come by throughout history. Recent examples of Western democratic governments forcing political compliance by attacking dissidents’ bank accounts serve as a reminder of today’s state of affairs (as also discussed in this recent C2C essay). Indeed, Schueffel also warns about a worrying number of other, not-so-welcome CBDC “special purposes”: spending caps or blocks on individuals or organizations; transfer limits; foreign exchange limits; capital export/foreign asset purchase controls; consumption controls; penalty taxes; forced loans (the government, for example, borrowing money from you arbitrarily); nudge economics; geo fencing; and curfew enforcement (such as by imposing automatic fines for violations). Those utterly undemocratic and, indeed, tyrannical purposes should outrage any Westerner, but they fit China’s social credit system like a glove.

And those are just the dangers of abuse in the perfect implementation scenario. But CBDC also bears the risks of destabilizing the financial system by disintermediating fiscal transactions from commercial banks and eroding the established banking system, which could lead to a financial crisis. And as with any other information system, CBDCs will be like catnip to hackers. CBDCs will be especially vulnerable due to their centralized nature, which could lead to counterfeiting of money, theft or disruption of the whole financial system. With foreign governments joining the “hackathon,” CBDCs will become another front in the expanding theatre of “hybrid warfare,” bringing such attacks to a whole new level for espionage and to destabilize the target country’s entire economy.

The UK’s House of Commons economic affairs committee’s paper, Central bank digital currencies: A solution in search of a problem? flagged many concerns about a retail CBDC. Among them: “To what problem is a CBDC the answer?”, “How can a CBDC be a competitive payments option without causing a level of banking sector disintermediation that would have negative consequences for credit allocation and financial stability?”, “How can a CBDC ensure strong privacy safeguards while also meeting financial compliance rules?”, and “Which organisations will be able to access sensitive CBDC payments data, and for what purpose will that data be used?”

Just this month came new evidence of the creep toward this troubling future. The European Parliament and member states came to a provisional agreement to establish an “EU Digital Identity Wallet.” Issued by member states, on a voluntary basis to start, it will hold digital identification and personal information, from drivers’ licences and educational diplomas to medical records and banking information. The EU touts is as a secure way for people to prove their identity and share electronic documents with a tap on a smartphone icon. Robert Roos, a Dutch Member of the European Parliament, quoted EU Commissioner Thierry Breton as saying: “Now that we have a Digital Identity Wallet, we have to put something in it.” Roos helpfully explained: “What he meant is the digital euro, also known as a CBDC,” clearly indicating where the effort is headed.

Full adoption of CBDC, especially if cash and “permissionless” cryptocurrencies were eliminated, would facilitate a system of digitized surveillance and allow governments to enforce compliance with monetary incentives or punishments.

If the traceable and programmable nature of CBDC – plus its entwinement with other intrusive, privacy-killing measures like digital identification – is hushed while virtue-signalling but meaningless “financial inclusion” and questionable innovation motives are publicly advertised instead, then it’s little surprise that the “looney tunes crowd” has reached this conclusion: full adoption of CBDC, especially if accompanied by elimination of cash and any alternative trust-less, permission-less, decentralized monetary systems like cryptocurrency, would close the loop of digitized surveillance with integrated incentives/punishments and AI-enabled automation for ensuring “the right” behaviour of the citizens. Humanity would face a dystopian future of a sort not imagined even by Orwell or Huxley.

What about Canada?

In Ontario most community centres have gone annoyingly cashless. It was done under the pretext of the Covid-19 pandemic and has never been reversed; similar things have occurred in other organizations and some private businesses. Governments so concerned about “financial inclusion” seem to be busy generating inclusion gaps themselves. Who’s going to bet that once the Canadian e-dollar becomes available it will be made immediately acceptable at those community centres and celebrated as a gap getting closed?

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