Is Central Bank Digital Currency the new order of Big Brother?

Background:

The concept or should I say reality of CBDC conjured up my recollection of the time when I read 1984¹, by George Orwell at school. Could it be I am mirroring Winston Smith? Maybe not? Let us read on…

Central bank digital currencies (CBDCs) are the digital form of a government-issued currency that isn’t pegged to a physical commodity. They are issued by central banks, whose primary role is to support financial services for a nation’s government and its commercial-banking system, set monetary policy and control the money (currency) supply. While physical currency is still widely used all around the world, people in some countries have been using it a lot less lately—especially during the COVID-19 pandemic with its hygiene concerns.

Why is this happening:

Trends that have spurred central banks’ interest in CBDCs is partially due to the non-use of physical cash; interest in digital assets; and global payments systems unification. Pro-digital finance camps believe that new digital tools, among them CBDCs, can address many issues related to efficiency and speed, reduced banking cost, greater security and accessibility.

1984¹ – Big Brother is watching you

I read just a few days ago, in a CoinDesk article (6th March 2023) that in Nigeria, citizens have taken to the streets to protest the nation’s cash shortage, whilst objecting to their government’s implementation of a central bank digital currency (CBDC). The shortage came about due to cash restrictions aimed at pushing the country into a 100% cashless economy. Yet, instead of adopting the CBDC, Nigerian protesters are demanding paper money be restored. The country’s experience strongly suggests the average citizen understands that CBDCs present a substantial risk to financial freedom while providing no unique benefit.

Moreover, CBDCs do not add any value in terms of benefits for the public. To the extent people want digital currency/ cash, substantial currencies are already available in digital forms through debit/ credit cards, payment apps and prepaid cards. More worryingly to my mind, our hard-earned money through working will also be limited in how much we may be able to withdraw- all in the name of a new inflation busting monetary policy with a digital wrapper, preventative money laundering, KYC compliance, preventative black economy etc… Or is it genuinely to stimulate the economy, with a hidden agenda in mind to control the people? Can’t help thinking that this may lead to a three-tiered pricing system for goods and services, where there is a differential involved by paying with cash, debit/credit card and lastly CBDC.

There is also potential for a “run on the bank” risk, where commercial banks may not have the CBDC to pay out because the Banks are waiting for the central bank authority to deliver it, by turning on the tap. In theory, CBDC is government backed so a FSCS deposit limit of £85K would not apply! By stopping cash use over a period, it is possible to drain an economy of physical cash so that foundations for CBDC can finally come into play. Perhaps my late grandad’s thinking of keeping money under the mattress had some logic too it.

Quantitative Easing (QE)- noteworthy point

Central banks create money via buying back government bonds from investment banks and pension institutions, by printing money and then supposedly giving cash to lend to the real economy. This drives up the demand for gilts/ sovereign debt and their price, due to a reduction in supply, causing the yield to maturity to fall.

Currently, with the UK interest rate at 4% and potential hikes still on the cards, the money printing machine is on standby mode for now. The current UK government lacks the will and adequate firepower to fight the next downturn, despite warning it could be on the immediate horizon.

After some forethought, I could not help thinking that CBDC could be the next smoke and mirrors gimmick to “QE” when the government want to start dropping interest rates back to pre-pandemic lower levels. My thought process on this is simple, savers with cash assets get low rates on bank deposits, but families with mortgages have cheaper costs, thus ceteris paribus, enabling them to keep on spending – helping fuel the UK economic recovery. For my fellow economists, the marginal propensity to save, (MPS) is made less attractive, thus giving rise for the marginal propensity to consume (MPC) to increase, i.e., assuming there is no leakage in the economy where the delta reduction in the MPS is equal to the delta increase in the MPC. Moreover, Fischer’s MV=PT is disproved, as V is unstable and applies to a society that only uses cash, on the other side of equation, prices are rarely stable and implied value of T would not reflect GDP.

Looking at this from an accounting viewpoint, the double-entry does not stack up for QE either. In fact, it’s illegal to create a fictious asset (cash or CBDC) and a mythical liability- by simply turning on money printing press. Normal accounting folks would get thrown in jail for this trickery, yet the practice still lives on within realms of central banks.

Conclusion:

CBDC is a big mistake, look at Nigeria’s situation as an example. CBDC will fail in a democratic country where liberty is cherished and valued. Nobody wants to be told when and how you can spend your own legitimate money. The cost of this “got out of bed the other day and this idea popped into my head on CBDC” will be picked up by the taxpayer too, as is always the case. Just like the PPE scandal, excessive parliamentary expenses, millennium dome and other controversial UK disasters where the burden of bridging the waste in treasury coffers, due to the government playing with taxpayers money as if it was monopoly money, will fall ultimately on the UK public taxpayer.

So, after taking a closer look at all this- why the would anyone want this anyway?

Dee Singh Kothari is a senior partner in Kothari Partners

Opinions expressed in this article are solely of the authors under Article 10 of the Human Rights Act 1998. The author nor Kothari Partner’s accept any liability for the incorrect use of the source data quoted/ used.

¹ The novel takes place in the year 1984 in which England has been transformed under a totalitarian superstate known as Oceania. 1984 follows Winston Smith, a mid-level member of the Party. The Party demands the allegiance and adoration of its citizens, but Winston Smith escapes the brainwashing that seems to have taken over everyone else’s mind. At the centre of the Party is a mysterious figurehead who goes by the name of Big Brother. Winston’s burgeoning interest in the past and his hatred of the Party and its cruel, murderous and destructive policies lead him to seek out the revolution.

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