By 2017, the Federal Reserve of the United States in New York held over $3.3 trillion, half of the world’s dollar reserves at that time belonging to the assets of other Central Banks in the international system of States[97]. But who really owns those colorful pieces of paper we call bills? A Central Bank? Its citizens? This question is more interesting than we think if we consider that through various economic sanctions, the United States government, under the Biden administration, not only froze almost half of the resources of the Central Bank of Russia[98] once the war in Ukraine began, but also froze over $7 billion belonging to Afghanistan, deciding to split that fund in two, creating one to compensate the victims and families of those affected by the terrorist attacks of September 11, 2001, and another fund to send humanitarian aid to the Afghan people[99]. In other words, the money of the Afghan people is no longer really theirs. If this does not perfectly depict the classic sitcom scene where the bully takes another student’s lunch money, I don’t know what will.
With this information on the table and knowing about the development of new information technologies, it is not surprising that different Nation-States begin to evaluate other ways to manage their monetary system. In this regard, since 2017, China has been developing its own digital currency, known in the jargon as CBDC (Central Bank Digital Currency). We are referring to the digital yuan, which is already being tested in many cities of the Asian giant. A fully centralized digital currency controlled by the Chinese government, which, if used massively, would give that government unrestricted control of the economy at a level never seen before in history. This would give the central authorities the ability to see every transaction of their citizens in real-time. Is this the end of freedom? Could they block our access to our money if we are opponents and live in an authoritarian government? The risk of this currency, and similar ones, is extremely high for society. The digital yuan has nothing to do with Bitcoin, the most popular cryptocurrency to date. Bitcoin is understood as a decentralized cryptocurrency or crypto-asset that does not depend on any company, government, or central entity, but its future is in the hands of its users, freely giving people control and monetary freedom, which no Nation-State likes as they see their sovereignty undermined. Consequently, there have been many failed attempts by state actors who have sought to regulate or ban the use of this technology, which was precisely developed with the premise that no central entity can censor it. Thus, beyond recent common positions among the Finance and Economy Ministers of the G7 or G20 calling for a standard regulation of this industry, there have been very few advances in the matter.
That said, for several years now, many central banks of the most advanced economies have been investigating the benefits of blockchain. China has already made progress in its development, and since the end of 2020, it has been testing it in more and more transactions and businesses.
This digital yuan has cryptographic technology like that seen in Bitcoin, with its blockchain – a kind of accounting ledger where all transactions are stored – but implemented privately, enclosing it in a centralized environment controlled by the Chinese government. Thus, only the Central Bank of the People’s Republic of China can issue the digital yuan, which has a value equivalent to the physical yuan. How is it used? With an app or digital wallet, similar to those offered by your home banking or Mercado Pago in Argentina, Apple Pay in the United States, or WeChat in China. Put this way, it seems that our current money is already digital, or at least that is the impression given by the aforementioned services. The same probably happens when we make transactions with our debit or credit cards. In reality, these are just ways to move our current money electronically, while what China is doing, and other countries will soon do, is transforming computer code, that is, bits (zeros and ones), into a fully traceable currency. This transforms the digital yuan into a new tool for the Chinese government to control its people and its economy.
What are its benefits? It offers its users faster, cheaper, and apparently more secure payments[100], and even the possibility of paying without an internet connection. This, in turn, would allow the State to practically eliminate tax evasion and money laundering, also eliminating the costs associated with printing paper bills or metal coins and their subsequent circulation.
Just as Bitcoin and other cryptocurrencies offer anonymity or pseudo-anonymity to their users, state cryptocurrencies will do the opposite. The remaining question is whether this undermines the freedom and privacy of individuals. This will take state control and its Big Brother figure to unprecedented levels. That the State can access all our transactions in real-time gives it the ability to create a complete profile of each of us. What technology giants like Google, Amazon, or Facebook know now will also be available to States. In fact, they will know more because they will be able to monitor not only our online transactions but even more common transactions like the gum we buy at a kiosk. If you ask me, I no longer believe in privacy at this point, and a moralist might affirm that those who have nothing to hide have nothing to fear. My concern is that we don’t know who will govern us in the future, and therefore, how this data will be used. What happens if all that information falls into the wrong hands of an authoritarian or dictatorial government? What happens if in an economic crisis, the money is programmed to self-destruct or lose value on a specific date, thus seeking to accelerate the circulation of that money to boost a battered economy? Does this not undermine your ability and willingness to save? Does this not undermine your freedom? This is nothing new; it already happened in 1932 with the Schilling of the Austrian town of Wörgl, which at that time implemented a local oxidizable currency. Oxidation established that every month, the bills would lose a certain portion of their value on the last day of the month unless the holder bought the corresponding stamp for that month and pasted it in the appropriate box on the bill.
Schilling from 1932 in Wörgl, Austria
In this way, no one wanted to be the last holder of the bill at the end of the month, so people preferred to spend it rather than pay to hoard their money and ensure it maintained its value. This accelerated internal consumption, reactivated the economy, and even some people decided to pay municipal taxes in advance[101] just to avoid being responsible for paying the corresponding stamp. This experiment was canceled by the intervention of the Central Bank of Austria, which saw its monopoly on money issuance challenged. Anyway, I estimate that it would not have been possible to maintain this system indefinitely, as, under equal conditions, it is logical to think that people would prefer to have a currency that generates positive interest rather than being forced to spend their money or pay to avoid its oxidation.
Another thing a government could easily do with a centralized and state-controlled cryptocurrency, besides automatically collecting taxes from your account, would be to limit your purchasing power at certain stores or also limit the quantity of goods you purchase, for example, rolls of toilet paper, as happened at the beginning of the COVID-19 pandemic when people feared shortages of essential products. China is only the first actor to bring this technology to practice, but without a doubt, since according to the International Monetary Fund (IMF), more than 100 countries are already studying the application of local digital currencies[102]. In this regard, Pedro Magalhaes reported that the code behind the Digital Real being developed by the Central Bank of Brazil would allow the entity to freeze funds in accounts and modify their balances[103], as the current system legislation allows. At the end of the day, all States will end up issuing their digital currencies that will give them total control over their economy and population. Imagine if physical money disappears from the streets, even criminals will have to change their modus operandi! In fact, we already saw how cybercrimes and bank fraud through the Internet skyrocketed during the pandemic. As the saying goes, with great power comes great responsibility. We don’t wait for something bad to happen to correct it.
[97] Spicer, J. (2017). Special Report: How the Federal Reserve serves U.S. foreign intelligence. Reuters. Viewed November 1, 2021, at https://www.reuters.com/article/us-fed-accounts-intelligence-specialrepo-idUSKBN19H198.
[98] Rappeport, A. (2022). U.S. Escalates sanctions with a freeze on Russian central bank assets. New York Times. Viewed March 2, 2022, at https://www.nytimes.com/2022/02/28/us/politics/us-sanctions-russia-central-bank.html.
[99] O’Keefe, E., & Cook, S. (2022). Biden splitting frozen Afghanistan funds in two. Here’s how it would be divided. CBS News. Viewed February 16, 2022, at https://www.cbsnews.com/news/biden-afghanistan-funds-911-families-humanitarian-aid.
[100] The doubt lies in the fact that since it is a centralized blockchain, it differs little from a classic centralized database, so by altering a few nodes it might be possible to rewrite the information stored in it and thus benefit or harm people.
[101] The P. (2012). New Austrian. Viewed February 10, 2023, at https://www.austrianinformation.org/summer-2012/2012/8/21/austrian-places-the-woergl-experiment.html.
[102] Georgieva, K. (2022). The Future of Money: Gearing up for Central Bank Digital Currency. IMF. Viewed March 25, 2022, at https://www.imf.org/en/News/Articles/2022/02/09/sp020922-the-future-of-money-gearing-up-for-central-bank-digital-currency.
[103] Solimano, P. (2023). Brazilian CBDC Allows Government to Freeze Funds, Developer Finds. Decrypt. Viewed July 17, 2023, at https://decrypt.co/148786/brazil-cbdc-allows-central-bank-freeze-funds-adjust-balances.