Digital Dollar Pursued by Fed: This Is Not Good

I have some news for you: Like it or not, central bank use of digital currencies (CBDCs) is coming. How do you feel about a digital economy?

Bloomberg says more than 85% of the world’s central banks, including the Federal Reserve, are now developing digital currencies.[1] China’s digital yuan is up and running. The European Central Bank expects a digital euro in four years.[2]

The Wall Street Journal reports the Federal Reserve is studying potential benefits and risks of issuing a digital version of U.S. currency.[3 ] It may not be all bad for everyone; the Journal notes a digital dollar could help bring into the financial system “people who lack bank accounts and provide an efficient way for the government to distribute financial aid.”

But is financial inclusion really the objective behind development of the potential adoption of a digital dollar? I wonder. Some suggest more nefarious motivations behind the drive toward digital dollars and a digital economy, including giving government the ability to track the spending habits of citizens.

In my assessment, there are a variety of potential implications associated with digital currency issuance, including greater ease of initiating drastic forms of monetary policy. For example, negative interest rates significantly below zero would be easier to implement with digital currency, because we could no longer store physical cash outside of the financial system.

But it does seem to me that concerns over financial privacy are the biggest worry for people who might have to use digital currency. A survey conducted earlier this year by the European Central Bank found that the potential of the digital dollar to help central banks and governments violate financial privacy is consumers’ single biggest concern about digital fiat.[4]

On that note, one policy analyst says China’s real intent behind the digital yuan is a broader effort to constrain personal freedom.

Many potential implications associated with a digital dollar – including ease of implementing drastic monetary policy – are relevant to physical precious metals. But, given overriding concerns of so many people about privacy, I want to spend time this week focusing on that subject exclusively. Physical precious metals ownership might help savers mitigate the potential economic negatives of digital currency, but I believe gold and silver can help us mitigate privacy risks of a digital dollar, as well.

Digital Yuan: “Unprecedented Control” by Chinese Government Says Concerned Analyst 

No, the U.S. is not China. But the potential of the digital yuan to energize China’s citizen-surveillance “machine” in my opinion demonstrates the financial privacy threat posed by CBDCs.

Let’s turn the clock back seven years. In 2014, China began instituting a “social credit system” to monitor citizen behavior. It rewards – or punishes – based on behavior deemed acceptable or unacceptable by the government.

• According to an official 2014 Chinese government document, the social credit system “is an important component part of the Socialist market economy system and the social governance system.”[5]
• The document goes on to say the social credit system “uses encouragement to keep trust and constraints against breaking trust as incentive mechanisms.”
• The government sees the social credit system as an important tool “for strengthening the sincerity consciousness of the members of society…and stimulating the development of society and the progress of civilization,” and will do so by “commending sincerity and punishing insincerity.”

You get the picture. Stunning.

So, how is one’s “social credit file” assembled and ranked in a digital economy?

Orville Schell, a director at the Center on U.S.-China Relations at the Asia Society, has some chilling insight. According to Schell, it’s accomplished by “aggregating police records, political files, financial data, medical records, travel movements, online activity and other information held on individuals to create ‘trustworthiness scores’ designed to rank each citizen’s dependability.”[6]

Enter the digital yuan, which was first researched by China’s central bank in 2014 – the same year the social credit system was introduced.[7] I’ll let you decide if that’s merely a coincidence.

After years of planning and preparation, the digital yuan was rolled out for public testing back in April. And with this, Schell says the Chinese government will enjoy “unprecedented new levels of control over China’s 1.4 billion citizens by allowing it to track their financial transactions.”

The People’s Bank of China – China’s central bank – maintains the digital yuan will improve the country’s ability to fight money laundering, gambling and terror financing, as well as enhance efficiency in financial transactions.[8] But Schell believes it is just the latest tool of the Chinese Communist Party “to fortify China’s one-party state.” 

Government Tracking – How Much Does It Worry You?

Publicly, central bankers such as Jerome Powell declare that citizen privacy concerns must be addressed fully before a CBDC could be issued “since a Fed digital currency system would in theory allow the central banks to see what every user did with the currency.”[9]

It seems clear to me that a digital dollar would not just theoretically but actually allow the central banks to see how citizens are spending money. Personally, my worries about digital currency, a digital economy and financial privacy are in no way dulled by the reassurances. It’s clear the government is moving in the direction of less – not more – financial privacy for Americans.

Three weeks ago, I discussed a government proposal that would initiate a reporting requirement to the Internal Revenue Service on behalf of all bank accounts reflecting balances of 600 dollars or more at any time during the year. The new requirement would also pertain to accounts that evidence gross inflows and outflows of 600 dollars or more per year.

The following week, I detailed efforts being made by Democrats to begin reducing high-earner access to IRAs. Included is the addition of an as-yet undefined new annual “reporting requirement” for employer-defined contribution plans – such as 401(k)s – with account balances of more than 2.5 million dollars.

Why is it so important for the government to know whether an American citizen has saved more than 2.5 million dollars in his or her 401(k)?

Against the backdrop of developments like that, I understand why some people can’t get comfortable with the idea of a currency that would enable tracking of purchases.

To some, it may seem like paranoia to think digital currency could have ominous implications in for privacy and liberty. I might agree if the government itself didn’t seem in favor of tracking the personal financial profiles of its citizens. But it does.

[1] Alberto Gallo, Bloomberg, “Central Bank Digital Currencies Will Fix Bad Policy” (May 25, 2021, accessed 10/14/21).
[2] Aziz Abdel-Qader, Finance Magnates, “ECB-Backed Digital Euro Could See the Light by 2025” (March 31, 2021, accessed 10/14/21).
[3] Andrew Ackerman, Wall Street Journal, “Fed Prepares to Launch Review of Possible Central Bank Digital Currency” (October 4, 2021, accessed 10/14/21).
[4] Scott Ikeda, CPO Magazine, “European Central Bank CBDC Survey Finds Privacy Is The Number One Concern For Digital Euro” (May 5, 2021, accessed 10/14/21).
[5] Chinese State Council Notice, “Planning Outline for the Construction of a Social Credit System (2014-2020)” (June 14, 2014, accessed 10/14/21).
[6] Orville Schell, Financial Times, “Technology has abetted China’s surveillance state” (September 2, 2020, accessed 10/14/21).
[7] James T. Areddy, Wall Street Journal, “China Creates Its Own Digital Currency, a First for Major Economy” (April 5, 2021, accessed 10/14/21).
[8] Jonathan Cheng, Wall Street Journal, “China Rolls Out Pilot Test of Digital Currency” (April 20, 2020, accessed 10/14/21).
[9] Ackerman, “Fed Prepares.”

[r1]https://www.bloombergquint.com/opinion/central-bank-digital-currencies-will-fix-bad-monetary-policy
[r2]https://www.financemagnates.com/cryptocurrency/regulation/ecb-backed-digital-euro-could-see-the-light-by-2025/
[r3]https://www.wsj.com/articles/fed-prepares-to-launch-review-of-possible-central-bank-digital-currency-11633339800
[r4]https://www.cpomagazine.com/data-privacy/european-central-bank-cbdc-survey-finds-privacy-is-the-number-one-concern-for-digital-euro/
[r5]https://chinacopyrightandmedia.wordpress.com/2014/06/14/planning-outline-for-the-construction-of-a-social-credit-system-2014-2020/
[r6]https://www.ft.com/content/6b61aaaa-3325-44dc-8110-bf4a351185fb
[r7]https://www.wsj.com/articles/china-creates-its-own-digital-currency-a-first-for-major-economy-11617634118
[r8]https://www.wsj.com/articles/china-rolls-out-pilot-test-of-digital-currency-11587385339
[r9]https://www.wsj.com/articles/fed-prepares-to-launch-review-of-possible-central-bank-digital-currency-11633339800