Central banks around the world are increasingly exploring the possibility of issuing digital currency, with over 130 countries currently experimenting with central bank digital currencies (CBDCs). While the potential to remove private banking middlemen is attractive, the introduction of CBDCs could have dangerous implications for individuals and firms.
The basic idea as it stands is that a central bank – say, the Bank of England – would issue a so-called ‘digital pound’ that would represent a direct claim on the central bank, explain Max Raskin and Richard Epstein, adjunct professor of law and law professor at New York University, respectively.
The removal of private banking middlemen could lead to the creation of the wrong incentives, as these actors often provide value through new banking products and services. Furthermore, CBDCs would give confidential information and vast power to a faceless government enterprise, eliminating the buffer that helps insulate individuals and firms from government prying and overreach.
The use of cash and bearer instruments is not traceable by the central government. The use of digital cash is, note Raskin and Epstein. Indeed, even individuals who chose to remain with private bankers will still be monitored by the state, which retains information and control over all transactions between direct depositors and outsiders, domestic and foreign.
The Bank of England has stated that the digital pound would be designed with the goal of combating climate change in mind. However, Raskin and Epstein argue that this introduces a backdoor system of industrial policy, and could lead to the government using its powers to benefit certain preferred energy producers and to punish others through their bank accounts.
The authors suggest that, instead of CBDCs, countries should consider the use of a fixed system like Bitcoin, which has a predetermined supply of no more than 21 million units and offers a powerful protection against the dilution of value. This could offer an added institutional support structure for countries in the developing world seeking to modernize.
On the other hand, relatively prosperous countries that have, until now, not sought to control their citizenry through the financial system, should not start down the dangerous path of a nationalized banking system, conclude Raskin and Epstein.