In the novel Adjustment Day, Chuck Palahniuc touched on the concept of money with a limited “shelf life.” One of the heroes of the work wrote in his book:
“That’s why it’s so important that money has an expiration date. Power passed down from generation to generation in an abstract form of wealth leads to inequality and corruption. You can’t save money for the sake of saving. Money must constantly work for the benefit of society.”
Palahniku’s novel was released in 2018, and just a few years later, governments had a tool in place to make the idea come to life.
We are talking about CBDC, the programmable functions of which will allow central banks not only to effectively manage monetary policy, but also to monitor and censor transactions, as well as mass surveillance.
CERP researchers consider one of the main risks of the introduction of national digital currencies to be the concentration of power in the hands of monetary regulators. For this reason, it is difficult to understand why even democratic countries are exploring this possibility.
- Tech companies and banks have long been collecting user data — there’s nothing new about such “surveillance.” Monetary regulators are also interested in this information, as they use it to manage monetary policy.
- CBDCs will not only enhance the ability of central banks to collect data, but will also allow them to directly influence consumer spending patterns. At the same time, thanks to programmable capabilities, digital currencies can become a real weapon.
- Experts believe that China, one of the leaders in the CBDC race, can use programmable money in conjunction with the social rating system to strengthen the power of the CCP. If successful, other authoritarian regimes may learn from this experience.
New Oil
If bitcoin is called digital gold, then data can rightly be considered digital oil. Back in 2006, British mathematician Clive Hamby said:
“Data is the new oil. Like oil, they are valuable, but not by themselves, but because of products based on them. Data must be processed and analyzed in order to extract value from it, to increase the profitability of the business.”
Therefore, it is not surprising that technology companies are actively collecting information about their users. To understand the scale of what is happening, it is enough to recall the scandal around Cambridge Analytica.
In 2018, it was revealed that a British analytics company was collecting user data through its Facebook app. The incident affected about 50 million users – the information obtained from their profiles was used to place political advertising, in particular during the presidential race in the United States, when Donald Trump won.
Cambridge Analytica denied guilt to the last, but eventually lost almost all customers and was forced to declare bankruptcy. Facebook founder Mark Zuckerberg admitted the mistake, but before that, he twice for five hours answered questions from the US Congress.
The federal trade commission also drew attention to the misconduct of the social network, which initiated an investigation. To settle the conflict with the regulator, the corporation paid a fine of $ 5 billion.
After that, Congress summoned the owners and leaders of the American bigtech to the “carpet”, and EU regulators expressed concern about the growing influence of these players and began to develop bills designed to curb them.
In my mind no doubt that platforms — and the algorithms they use — can have an enormous impact on the way we see the world around us. We need to know why we are shown what we are shown. https://t.co/5FHSXQlPBQ
— Margrethe Vestager (@vestager) October 30, 2020
The tech giants, in turn, have also unveiled a number of initiatives. For example, Apple forced developers to demonstrate what user data their products collect.
At the same time, the company planned to introduce a function to scan photos of iPhone users for child abuse. Having received an avalanche of negative reviews, Apple postponed the introduction of the mechanism indefinitely, but did not completely abandon it.
According to Security.org,corporations continue to aggregate user data in colossal volumes. For example, Google collects not only obvious information such as IP addresses or browser history, but also more personal information, such as the content of emails, geolocation and payment details.
Such companies claimto work with anonymized data, but the public has questions about the veracity of these statements. Especially when there are precedents for the use of this information in law enforcement investigations.
According to court documents that fell into the hands of Forbes journalists, the US authorities secretly ordered Google to track and provide data on users’ search queries for keywords.
“Keyword warrants” is a thing for Google, apparently. This was X-Files conspiracy theory stuff a decade ago. https://t.co/UbDU6Ec08D
— Matthew Green (@matthew_d_green) October 8, 2021
According to the publication, law enforcement agencies sent requests demanding to find information about alleged criminals involved in human trafficking and violence against minors.
The corporation analyzed traffic, identifying users who entered queries of interest to the authorities into the search box. The information provided in response included, but is not only sure, IP addresses and cookiescollected. This data allows you to identify a person.
Players in the financial technology sector, as well as their traditional competitors – banks, in this regard are not much different from the representatives of big tech. Except that they have much more opportunities for “surveillance”, especially in terms of payment data.
If Google and Apple see only those transactions that are made using Google Pay and Apple Pay, respectively, as well as operations directly or indirectly related to their services, then a full range of financial information is available to credit institutions.
Your bank knows pretty much everything about your spending model, knows where you live, who you work for, and which store you prefer to buy groceries on Mondays. He is well aware of your financial situation and health status. Knows what devices you use, and in some cases even has biometric data.
All this information opens up great opportunities for analysis, including behavioral analysis.
However, information about consumers is of interest not only to the private sector, but also to the state. And central banks are among the first to queue for user data.
SUERF economists noted that the majority of monetary regulators (~80%) use big data to achieve the goals of monetary policy and financial stability, as well as analysis and development of strategies.
According to experts, the interest of central banks in this segment is only growing, and the main obstacles in their way are the imperfection of the IT infrastructure and the “outflow” of data to commercial institutions.Data: SUERF.
Regulators are requesting information from private sector players or developing their own technology platforms. Both approaches work, but it is obvious that the second is preferable.
For example, the Chinese authorities have obliged local fintech companies to provide data on customers and borrowed funds to state credit agencies. Ant Group has already agreed to comply with this requirement.
The Bank of Russia has completely monopolized the collection of biometric data, and the Fast Payment System, the volume of transactions through which in some credit institutions has already overtaken transfers from card to card, allows the regulator to collect information about the operations of citizens.
And if commercial banks and technology companies need “digital oil” to increase business profitability, then monetary regulators have much more ambitious plans for it.
The “evil double” of bitcoin
The BIS calls CBDCs “digital banknotes” that, as the economy digitalizes, will preserve consumer access to the “most secure form of payment.” The latter, according to experts, are the requirements for central banks.
A similar definition is given by the Bank of Russia. According to the regulator, the digital ruble will become an additional form of the Russian national currency, which will be issued in virtual form. It is assumed that it combines the properties of cash and non-cash money.
According to the Atlantic Council,the central banks of 81 countries are engaged in the development of such tools. Together, they represent over 90% of global GDP.
The IMF cites other figures. According to the executive director of the organization Kristalina Georgieva, 110 countries are at one stage or another of studying CBDC. She stressed that the only state that has implemented a national digital currency is the Bahamas.
The approach to CBDC design may differ – it is not necessary that the basis of each project is blockchain technology. Models of distribution of digital money are also different – their distribution can be handled directly by the central bank or commercial structures to which this function has been delegated.
In any case, this form of money offers a number of undeniable advantages, including:
- financial inclusion;
- improving the efficiency of payments;
- expanding the fiscal policy toolkit;
- reduction of settlement risks and reduction of costs for participants of the corporate sector;
- increased competition in the financial services market.
At the same time, CBDCs can become a tool for suppressing freedom. Monetary regulators will gain the ability to directly, rather than indirectly, influence consumers’ spending patterns and gain access to a huge amount of data.
Human Rights Foundation’s Chief Strategy Officer Alex Gladstein wrote:
“The displacement of cash and the ability to instantly analyze financial transactions will allow for surveillance, government control and, ultimately, the use of social engineering on a scale that was previously impossible to think about.”
Author of Bitcoin: The Future of Money? (Bitcoin: The Future of Money?) Dominic Frisby shares a similar opinion. He noted that the main disadvantage of CBDC is its programmable capabilities.
According to Frisbee, while fiat currency implies a certain freedom, digital completely eliminates it. Governments will also have direct access to users’ wallets, which will make it easy to collect taxes or fines – for this you will just need to change a couple of lines of code.
“An all-seeing government will see every deal,” the writer added.
In his opinion, the programmable functions of money can be used against individuals who do not like it or as a weapon in economic warfare. Integration with social rating systems opens up even greater opportunities for punishment or rewards.
It can reasonably be noted that payments are subject to a strong network effect,and transactions with CBDC are no exception. No one may be banning people from continuing to use banknotes or traditional electronic money, but the reality is that with the advent of a more sophisticated tool, it will inevitably win a significant market share from the more archaic.
The trend of abandoning cash is already noted by many countries. According to the Central Bank of the Russian Federation, in Russia the share of non-cash payments has reached 75%. In Switzerland, only 43% of citizens use banknotes for settlements, although in 2017 the figure was at the level of 70%.
Many assume that physical money will not disappear because of the so-called “cash paradox”. However, this phenomenon is largely due to the fact that against the background of the crisis, consumers withdraw money from banks and keep savings at home – there is no real turnover of banknotes.
Another illustrative example is the legalization of bitcoin in El Salvador. The population was not familiar with cryptocurrencies, and many questions arose about the actions of the authorities, but this did not prevent the Chivo wallet from quickly becoming popular.
President Nayib Bukele said in September that the app was “actively used” by the country’s 2.1 million people. Skeptics believe the real numbers are much smaller at around 784,000. However, given that the law on the recognition of bitcoin as a legal means of payment came into force only on September 7, 2021, the result is still impressive.
The dollar is king in El Salvador. A survey conducted by Fusades found that 87.9% of Salvadorans have not used #Bitcoin in transactions. Yet, @nayibbukele claims that Salvadorans are in love with bitcoin, and of course, the fearless authoritarian Bukele. https://t.co/LTaJOsQJ8o
— Steve Hanke (@steve_hanke) October 11, 2021
Electronic money that is used now is records in the databases of commercial banks and payment systems. Their value is due to one simple fact – these bits of information can be exchanged for paper banknotes, which are a requirement for the central bank.
CBDC will adopt this feature, so the need for the above tools will disappear.
To avoid the collapse of the traditional banking system, regulators will almost certainly impose certain restrictions. For example, the Central Bank of the Russian Federation will not accrue interest on balances in wallets with digital rubles. This will allow credit institutions to retain part of the income from deposits.
However, players in the financial sector foresaw the coming digitalization of money and are already transforming their business to meet future realities. Payment systems can become a link between CBDCs of different countries, and banks can become intermediaries in the distribution of digital currency.
For convenience, people will have to pay with economic freedom. That is why former NSA and CIA officer Edward Snowden considers the tool “the newest danger hanging over society.”
“CBDCs are something close to perverting cryptocurrencies, or at least their underlying principles and protocols. Crypto-fascist currency, an evil double, clearly designed to deprive users of ownership of their money and make the state an intermediary in every transaction,” he wrote.
Red is the hit of the season
Among developed countries, China leads the CBDC race. Here, the instrument is in the final stages of pilot tests – as expected, the general public will have access to it in February.
Over the past year, china has been systematically preparing the ground for the launch of e-CNY. The authorities developed an appropriate regulatory framework and modernized the infrastructure.
Some experts also believethat part of this large-scale campaign is the actual ban on cryptocurrencies, mining and the activities of organizations related to digital assets.
China’s success in developing CBDCs provides an opportunity to understand how the integration of a digital currency can affect the economy and society in other countries.
The People’s Bank of China (PBOC) began research on the digital currency back in 2014. For a long time, the project was not heard, but after facebook announced the global stablecoin Libra in 2019, the regulator said that the e-CNY prototype is almost ready for launch.
In July 2021, the PBOC published a white paper on the digital yuan. It became clear that the instrument is compatible with existing payment systems, is available even to residents of foreign jurisdictions and is ready for use in cross-border settlements.
The Chinese Central Bank stressed that e-CNY supports anonymous transactions, provided that their volume is small. Transfers of large amounts are tracked. According to the regulator, the digital yuan system collects less information about user transactions than existing payment systems, and does not provide this data to third parties.
The PBOC has also officially confirmed for the first time that its CBDC supports smart contracts and is a programmable tool.
Earlier, testing in the provincial capital of Sichuan showed that the options for using e-CNY can be limited. During the tests, digital money was distributed among the population, which allowed to spend exclusively on paying for transport through the mobile applications Tianfutong and Meituan.
The PBOC document does not specify whether the digital yuan will be integrated with the social rating system (SoCS) operating in China, but experts do not exclude this possibility.
The CNAS think tank believesthe CCP is using e-CNY in conjunction with SoCS to consolidate its power.
“This technological breakthrough is an important step in the expansion of the party’s digital authoritarianism. […] In addition to user information, the transaction [PDA] will receive various metadata related to the movements of people and devices. The PBOC will become the owner of a significant amount of data, which can be combined with tools for censorship and surveillance of people, “experts write.
At the MERICS research institute, the social rating system is called “part of Xi Jinping’s vision of data-driven governance.” Analysts believe that the CCP pursues a very specific goal – to expand the analysis of information coming from existing sources in order to consolidate and strengthen power.
Where does #China‘s Social Credit System stand today? Our new MERICS China Monitor takes a deep dive and introduces the general framework and key mechanisms that have been established to guide the system into the next phase. Read it at https://t.co/RcPBKwqJxw
— MERICS (@merics_eu) March 4, 2021
Despite the name, SoCS is quite fragmented and rather represents a “foundation” with which several initiatives, including the digital yuan, can be integrated.
47 government agencies under the leadership of the NBK are involved in the formation of this “system of systems”. The direct involvement of the latter is another argument in favor of the reality of this bundle.
The social rating system is focused on compliance with existing laws, but state bodies can abuse such power. When Beijing made Mandarin compulsory in Schools in Inner Mongolia, parents who took their children from those institutions were threatened with blacklisting.
China also has a facial recognition system that allows you to find and detain a person in just seven minutes. All of these components together expand the government’s repressive capabilities. To make matters worse, if successful, other authoritarian regimes could learn from Beijing’s experience.
Sustainable money
In 2009, the creator of bitcoin, Satoshi Nakamoto, wrote that the main problem with fiat currencies is that their work requires trust in issuers – central banks. And the latter have repeatedly proved that they should not be trusted.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
— Satoshi Nakamoto
— Bitcoin (@Bitcoin) March 29, 2020
In the book The Theory of Money and Credit, Austrian School economist Ludwig von Mises emphasizes that sound money fall into the same category as the Bill of Rights.
“It is impossible to understand the concept of sustainable money if you do not realize that it was developed as a tool to protect civil liberties from despotic encroachments by governments.”
In turn, the CBDC is an instrument of monetary control – it does not solve the problem of fiat, but only exacerbates it.
In the current realities, the introduction of national digital currencies by a number of countries is a question of “when”, not “if”. As with fiat currency, their strength will be determined by the strength and influence of the central banks behind the issue.
The experiments of weak economies will probably not have a significant impact on the global financial system. However, the experience of the leading countries, if it is successful, will be adopted by others, even nominally democratic ones.
In a world where CBDCs are a priority means of payment, including cross-border ones, there will be no room for privacy. After all, the tool, which is positioned as a way to increase financial inclusion, will eventually play the role of a noose around the neck of economic freedom.
