Beware the Digital Dollar and CBDCs

Central Bank Digital Currencies (CBDC) should be rejected by every American who cares about personal freedom and economic liberty.

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The facade of the Federal Reserve Bank.

The New York Federal Reserve Bank has entered a partnership with major global banks to test the concept of a digital dollar, according to a Reuters report Tuesday.

The NY Fed’s “Innovation Center” will join Citigroup, Mastercard, Wells Fargo, HSBC, and other major financial players to run tests in a simulated environment.

That might all sound like gobbledygook to you, but you should be paying attention.

Central Bank Digital Currencies (CBDCs) constitute the single greatest threat to the future of economic liberty in our lifetimes. These tools, which come dressed as fancy financial innovations, are inimical to the principles of individual liberty and economic liberty.

To illustrate the dangers of CBDCs, let me offer a few hypothetical examples of how a digital dollar controlled by a central government might work in practice:

1.) To protest governmental limits on personal freedom, liberty activists stage a peaceful protest around the nation’s capital. That nation’s leader, wanting to quell the protest and protect his power, instructs his Minister of Economic Control to reduce the protesters’ CBDC balances by 50 percent everyday until the protest ends. The protest ends shortly after the message pings on the CBDC smartphone app.

2.) Economic growth is lagging, and the economists in the federal government suspect it is because consumer spending isn’t strong enough. People are saving their money, rather than spending it. To fix this problem, the Ministry of Economic Control announces a new year-long negative interest rate for all CBDC accounts. Unspent balances of CBDC will be reduced by 10 percent every month. As a result, no one saves, every one spends, and the economists have saved the economy.

3.) You’re at the grocery store picking up some ribeye steaks because some friends are coming over for a barbecue. When you get up to the counter, there’s a problem. The cashier says the payment isn’t going through. You check the CBDC app on your smartphone. There is an alert: “You have exceeded your monthly carbon credit usage; please remove the following items from your grocery cart in order to proceed…”

4.) You want to pick up a new firearm for hunting season, so you swing by the local sporting goods store. But when you go to transfer CBDC credits for the purchase, you’re denied. The trusty CBDC app explains: “We’ve detected activity on your social media accounts that suggests you are at risk of causing harm to yourself or others. You are prohibited from purchasing a firearm for one year.”

5.) A mild coronavirus has arrived from Asia. Although it’s only lethal to people who are old and obese, society and the government has gone hysterical and decided to implement lockdowns. The Ministry of Health, working in concert with their friends at the Ministry of Economic Control, issue a nationwide freeze on all unnecessary expenditures to stop virus transmission. Of course, the accounts of politicians and certain government employees remain unfrozen so they can continue their important work keeping us safe. When the vaccine emerges, only those registered with the central government as vaccinated are permitted to uses their CBDC balances. The unvaccinated find their CBDC balances are subjected to a 10 percent Social Credit Tax because of their irresponsible behavior.

If you think these examples are the work of an overactive imagination, you haven’t been paying attention. Each of these examples has been cribbed from the actual activities of governments and banks, or the fantasies of left-wing think tanks that support CBDCs.

In Canada, Prime Minister Justin Trudeau ordered banks to freeze the bank accounts of his political critics. In America, President Barack Obama instigated “Operation Choke Point,” an unofficial Department of Justice program that blocked from the financial system certain businesses, such as gun dealers other frowned-upon enterprises. In a 2021 white paper, the World Economic Forum fantasized about the possibilities for micromanaging society with a CBDC, including by placing limits on transactions sizes, limits on how much currency one might hold, and limits on the nature of goods a user can purchase. It’s not a stretch to imagine imagine that a government with a CBDC in place might use such a system in furtherance of other goals, like fighting climate change or protecting us all from a mild coronavirus.

To truly understand what CBDCs are and why politicians and banks support them — and why they are such a threat to the free way of life — it’s necessary to understand how the largest, most important digital currency — bitcoin — operates. Because the digital dollar, the Americanized iteration of the CBDC idea, has emerged as the state-run alternative to a decentralized, politically neutral digital monetary system like Bitcoin.

Bitcoin transactions are broadcast and recorded on a public database known as a blockchain. For a broadcasted transaction to enter the blockchain and settle, it must follow the rules of the network. Those rules are enforced not by a centralized entity but a decentralized network of simple computers called nodes.

Transactions on the Bitcoin network cannot be blocked or censored by any nation station. Nor can any nation state create new bitcoin that will be accepted on the network. Although a nation state could theoretical summon the massive amount of computing power required to change the rules of the Bitcoin network, the economic cost of doing so would be prohibitive. And although nation states can regulate the points of access to the Bitcoin network, like registered exchanges and traditional payment channels, they cannot control transactions on the Bitcoin network itself.

This is because the rules of the Bitcoin network are enforced by those nodes — tens of thousands of them distributed globally. It’s a common misconception that Bitcoin miners control the network. The opposite is true: Bitcoin miners work for the network, and they only get paid for the electricity they use if they follow the rules of the network. That’s a powerful incentive to follow the rules, which were first articulated in Satoshi Nakamoto’s 2009 white paper. Bitcoin is decentralized, politically neutral, and not subject to the whims and wishes of any government’s central planners, but it does follow these simple rules, rules that align game theory and economic incentives to keep the system running.

CBDCs are the exact opposite.

Rather than peer-to-peer exchange, CBDCs offer peer-government/bank-peer exchange. Rather than clear, public, simple rules, CBDCs are subject to the murky machinations of whatever unelected bureaucrat happens to be in charge at any given moment. Whereas the Bitcoin blockchain is a public record of transactions anyone can inspect and validate, CBDCs would exist on a private ledger, and users would have to trust that governments and large banks were administering it properly.

To be clear, the U.S. already operates on a digital dollar. When was the last time your paycheck arrived by mail? The vast majority of domestic and international dollar transfers happen electronically on private databases managed between large banks. Although this system is not ideal and has disadvantages compared to Bitcoin, it’s far preferable to any CBDC.

CBDC’s are a would-be tyrant’s dream tool of oppression, and they should be rejected as totalitarian schemes wherever and whenever they are proposed.

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