There is a growing body of information about a new form of money called Central Bank Digital Currency, or "CBDC". The basics of CBDC are described in a report from the Bank of International Settlements (BIS) titled Central Bank Digital Currencies: Foundational Principles And Core Features. The definition given is: “A CBDC is a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank.” The key advantages of a CBDC are said to be: (a) better ability to monitor transactions, (b) greater diversity in payment systems, (c) improved resilience in the monetary system, (d) inclusion of the “unbanked” population in the monetary system, and (e) improved “cross-border” payments.
In the newspeak of the central bank establishment, the three foundational principles of CBDC are Do No Harm, Coexistence, and Innovation and Efficiency. The “Do No Harm” principal means that issuance of CBDC will be consistent with supporting the banking cartel. The “Coexistence” principal means that CBDC will be exchangeable for and be capable of replacing paper Federal Reserve currency notes if that becomes expedient. The “Innovation and Efficiency” principal means that CBDC will be used to prevent users from adopting other instruments or currencies and to protect the “payments ecosystem” of the central bank, commercial banks, and payment service providers.
The Chinese are the first-movers with their Digital Currency Electronic Payment (DC/EP). Because China has taken the lead in this new monetary form, the western banking cartel controlled monetary systems are in a defensive position in terms of payment systems and system integrity.
From one perspective, CBDC follows the historical pattern of centralization of money systems. From city-states re-striking coins, to goldsmith receipts replacing circulating bullion, to banknotes replacing coins, to checks replacing currency notes, to credit cards replacing checks, we see the consistent adoption of more convenient and centralized means of payment. In the digital age, payment methods such as AliPay or WeChat, requiring only a tap on a digital phone, have become ubiquitous in China. The Silicon Valley corporate giants have also explored this topic through their own payment apps and proposals such as Facebook’s Diem (formerly Libra) currency. And, of course we have all heard of Bitcoin, the most ambitious and famous of the digital currencies.
What distinguishes CBDC from other digital money systems is the political and legal authority that CBDC would carry. CBDC would be legal tender money, while the others are either payment networks or a combination of a speculation vehicle and a payment system, lacking the legal authorization that is essential for money. This digital money threatens to usurp the role of commercial banks in managing or exploiting government sanctioned systems. WeChat, AliPay, and Bitcoin all demonstrate that banks are no longer necessary to maintain deposit accounts or payment systems, as the individual balances, reconciliation, and accounting of payments can be completely automated with computer software and networks. The same is true in the area of lending and credit creation as so called “DeFi” companies proliferate.
The digital currency activity we see today is perhaps best mirrored historically by the free banking era of the United States in the mid-1800’s, when it became relatively easy to open a state-chartered bank and commence issuing notes as credit. From 1820 to 1860, bank-issued credit grew from $55.1 million to $691.9 million (a 6.3% annual rate, similar to M2 growth under the Federal Reserve system). In those days, people had to carefully monitor the value of notes from multiple banks, guard against counterfeit notes, and be wary of inevitable bank failures. The free banking era ended in 1863 with federally chartered banks and a tax of 10% on state-chartered bank notes.
From this perspective, CBDC is a response to a threat to the banking cartels that presently control monetary systems around the world. Banking cartel domination of governments and economies would be undermined by alternative monies and payment systems which allowed organizations to be funded and resources to be controlled outside the banking cartel monetary systems. This topic is specifically addressed in another paper titled G7 Working Group on Stablecoins - Investigating the Impact of Global Stablecoins. Covered in that paper are the possibilities of funding terrorist or criminal activities, money laundering, tax avoidance, market manipulations, and various forms of fraud. Aside from these exceptional events, the fundamental problem is that a person might no longer need a bank account. This irrelevance of banks could expand into replacing the debt-money creation by commercial banks and a loss of control over economic resources and activities.
There are open questions about the design and implementation of CBDC. Design alternatives are defined by technological capabilities and political choices. Besides the general principals mentioned above, there are questions on data tracking and control over individual activities. There are also questions about the relationship between government, central banks, and participants in financial systems. If central banks issue CBDC money, do they become the de facto government?
The so-called distributed ledger system of bitcoin tracks transactions and maintains account records in an encrypted data file that is widely distributed on different computers and is not dependent on a central payment system or clearinghouse. Bitcoin is, however, dependent on huge electricity consumption, high CPU usage, and a near flawless computer network. The distributed ledger is unlikely to be used in CBDCs because it limits centralized control. For example, the Chinese DC/EP system is designed to replace circulating cash, has a tracking system to monitor transactions, and does not use a distributed ledger.
There seems little to differentiate CBDCs from payment apps or ordinary debit cards for the user. The customer account may be with the central bank instead of an ordinary bank, but even this is unnecessary with modern computer technology. There is little doubt that central banks will seek to maintain the position of commercial banks and established payment systems such as SWIFT, Fedwire, or CHIPS.
The eventuality of CBDC may become a device to increase monetary and price inflation. We have seen impressive monetary inflation in terms of financial assets (i.e. the stock market boom) and the federal debt. Monetary inflation is a requirement of bank-credit schemes such as the Federal Reserve monetary system because it is the means of alleviating shortages of money needed to pay bank debts. We know from history that speculative manias end in a crash and a severe downturn in the economy. The current stock market boom has not had a “trickle down” effect and the public remains financially restrained with a low labor force participation rate, ever declining velocity of money, and large numbers in a precarious financial situation. Thus, one may hazard a prediction that, following the upcoming financial crisis, CBDC will be introduced as “QE for the people,” being issued to enable payments on consumer debts such as mortgages, auto loans, and student loans. Whatever the exigency that prompts CBDC issuance, the goal will be to place the privately controlled Federal Reserve system even more firmly in control of the economy.