How Governments Can Do CBDC Right

China has been working on rolling out their Central Bank Digital Currency for some time. It has started as a pilot program in specific provinces. The program has been increasingly rolled out. The intent, as can be expected from China, is the ability to control its people through money. With digital money, they can see where people spend their money. They can incentivize spending on certain things, penalize spending on others, and provide a daily reminder to it citizens that they merely have the privilege of spending money and can lose it at any time. Unlike paper money, a CBDC can cut off the individual from all legitimate commerce. As your wallet is controlled by the central bank, you can be blocked from accessing your account or blocked from buying from certain places. CBDCs are an authoritarian dream.

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Not surprisingly, the European Central Bank and the United States Federal Reserve are also toying with the idea of issuing their own CBDCs. Their stated purpose is to modernize the economy by being able to transmit money directly to individuals rather than have to work through intermediaries or print out millions of paper checks. Having CBDCs is supposed to overcome some of the Cantillon effect, which we saw through stimulus packages that went to banks that were responsible for distributing the money via loans in their communities. Naturally, there are administrative costs to distributing money. Federal money also went out to states and counties to distribute to municipalities. Naturally, states and counties would want to hold on to some of that money by limiting what expenses could be reimbursed.

Although the stated economic reason for issuing CBDCs is sound, the problem would ultimately end up being the same as with China. Just as Facebook and Google found it easy to gather all your data to turn you into their product, the Central Banks and corresponding governments will not be able to resist mining the data and eventually becoming as totalitarian as China.

CBDCs Are Focusing On The Wrong Problem

Rather than issue CBDCs in an attempt to replace printed money, Reserve Banks should focus on the best functions of Government, which are official records and adjudication. The problem of electronic money has already been resolved via credit cards and stablecoins. What the crypto market actually needs is government smart contracts. A CBDC should be able to store deeds, birth certificates, contracts, and titles of ownership. Through the power of Government, these records could be deemed "official" for all legal purposes. By being on a blockchain, they would have a trail that could be followed.

Another advantage of a smart CBDC would be that the Government could have the ability to perform certain actions, such as transfer ownership in the case of a sale or court order. On current blockchain implementations, let's say Ethereum, a tokenized deed would need to be transferred by the owner. But, what if you owned the property for 30 years and have lost your key to transfer that NFT? What could you legally do then? But, if the government is the keeper of the record, storing it as an NFT in your central bank wallet, they could initiate changes through any number of circumstances. For example, if the owner of the deed dies and the key to the ETH wallet is lost, how would the property be conveyed without making up some workaround? Whereas a deceased owner's contracts and documents could be transferred to surviving relatives because the government has a key as well. Business contracts could also have some of the same benefits when it relates to agency and assignments.

Central Bookkeeping

One selfish benefit for me would be if a CBDC would be directly tied in to the IRS. If I could categorize my income and business expenses on the go, the IRS would have an immediate tally of my tax liability. We would no longer have to pay so much for accountants and tax attorneys. Obviously, I'd want to do my personal finances on crypto. But, legal and business dealings I would not mind running on a smart CBDC. It cuts out the middleman. It simplifies tax preparation. Imagine Congress changes tax law and charges the IRS with updating the CBDC bookkeeping system rather than hiring thousands of agents for enforcement. If I ran my business entirely on the smart CBDC system, there would be no need for audits. Business is already highly regulated. There is no incentive for me to try to be sneaky as it would likely cost more to cover it up than to be honest and pay the tax. And, if there is a mistake, then it's there on the blockchain and the IRS can issue me a refund.

Could one run a business "off the CBDC books"? Sure. But, eventually you'd have to settle up with the government with taxes. You'd do twice the work doing your books and then translating them over to the government format. And, if you get too creative, you're more likely to get audited. I'm sure you'd love to have agents visiting your business.

Limited Information

There is very little value in having personal transactions on a CBDC. Your personal money is "disposable income". Since the government would already know your salary and any side business income, because they run centralized bookkeeping, your personal spending data is of little value. Any significant spending, like buying a home, would show up in the record-keeping anyway. If you buy chewing gum at the gas station, the Feds don't really care who bought the gum. All that really matters is the day's sales numbers and sales tax collection. Just like your tax form does not ask you to itemize every single transaction, businesses would really only report daily totals. Perhaps there would be some record somewhere that you purchased something. But, that stuff only is useful if there is an investigation such as "the killer chewed a particular type of gum". Otherwise, that type of information is disposable in the same way video surveillance recordings are periodically erased to make room for newer recordings.

These are the types of applications that a CBDC should be able to do for citizens. CBDCs can function as money. But, more importantly, CBDCs could also function as an interface with the government for reporting and taxation. This is a type of efficiency that is sorely lacking that cryptocurrencies have not yet solved.

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