Zen and the Art of CBDC Analysis (Part 1): 5 ways to focus the mind
before leaping to conclusions on an overheated topic (Original here
https://brettscott.substack.com/p/cbdc-analysis)
Brett Scott
Our economies are held together by three layers of money, with the
government issuing the first layer, the banking sector issuing a second
layer of ‘digital casino chips’, and players like PayPal issuing a third
layer of chips built upon the bank chips (learn more in The Casino Chip
Society https://brettscott.substack.com/p/casino-chip-cashless-society).
The end result is that you and I have a choice between Layer 1
state-issued physical cash, Layer 2 bank-issued digital chips, and Layer
3 corporate-issued digital chips.
The so-called ‘cashless society’ refers to the situation in which the
first option is removed, leaving us captured by the other two, but this
has now been complicated by the arrival of a hypothetical new player
called CBDC - central bank digital currency. If this were introduced, it
would be a form of Layer 1 state-issued digital money, to supposedly
co-exist alongside cash. It would be a bit like having an online account
at your country’s central bank, which is something you can’t have right now.
I’ve been involved in CBDC discussions since 2015, but it’s only in the
last year that I’ve seen it catching on as a hot topic in public. Google
Trends data confirms this, showing that interest in it started to spike
in 2022.
This interest is partly due to the fact that a variety of central banks
have launched research initiatives and pilot projects to experiment with
CBDC (see the CBDC tracker to explore these). Also, since the pandemic,
an army of crypto day-traders has emerged, which has lead to a big
industry of crypto pundits who flood social media with hot takes on
money topics, and CBDC is one of those topics. I could give you my own
hot take, but we don’t need more of those. What we need is a cool-headed
way to approach the debate, so I’d like to offer 5 meditations that may
help you in your quest.
MEDITATION 1: ACKNOWLEDGE YOUR BACKGROUND IMAGINARY
The first step in analysing CBDCs is to not think about CBDCs. Instead,
we should acknowledge that all of us are bound to leap to certain
conclusions about the topic, because all of us are haunted by background
imaginaries that shape how we interpret things. ‘Imaginaries’ is a bit
of a wanky academic term, but think of an ‘imaginary’ as being like a
subconscious mental game-board upon which you play out scenarios in your
head. It’s a game-board that has certain pre-set biases that will exert
a pull on your thoughts, warping them in particular directions. You can
have more than one imaginary competing to warp your thoughts, but here’s
a selection, along with descriptions of what they are likely to make you
think about CBDC.
CBDC in the libertarian imagination
If you’re a person who refers to yourself as a libertarian, your
background imaginary will likely be set up as a battleground between
good and evil. On the good side is a heroic, innovative and productive
entrepreneur class defending against a bad, stagnant and parasitic
government that tries to rob things. In this game-board, regulations are
just an oppressive shackle suffocating innovation, and state enterprises
are inefficient and corrupt drains upon society. Actually, you might not
even believe in ‘society’ (echoing Margaret Thatcher’s belief that
‘there’s no such thing’ as society), and prefer to see the economy as
but a collection of sovereign individuals without obligations to each
other, who only interact to mutually pursue their self-interest. From
this perspective, welfare systems are just one group of people using the
state to leech off the hard work of others.
So how might a libertarian imaginary affect your perception of CBDCs?
Well, it’ll probably bend your mind towards viewing CBDC as a new attack
launched by the evil side of the battle. The state will use its control
over this new digital money to watch you, censor you, and discipline
you. In the socially conservative version of libertarianism, CBDCs loom
as the monetary wing of a terrible new system of woke environmentalist
authoritarian control. It’ll be enlisted to force you to buy green vegan
products and to demote you if you fail to declare your pronouns. CBDCs
may appear as just one more means to unnaturally distort the natural
hierarchy of God and male patriarchs, who would otherwise by striving to
preserve themselves and their family by competing hard in the market
(which is imagined to produce spontaneous natural order when left to run
without interference).
Conservative libertarianism is also very heavily invested in the Tarzan
Suite, a mode of thinking about economies in which the individual is
primary, and which tends to lead - through a number of twists and turns
- to you imagining that money should be akin to a natural commodity.
This may push you towards believing that Bitcoin is the great
dollar-killer, which in turn may push you towards believing that CBDC is
a desperate attempt by a frantic state to fight against the crypto
revolution.
CBDC in the socialist imagination
If you call yourself a socialist, you may reject the idea that the
individual is primary in the economy, because we’re all entangled
together in a huge interdependent mass. Furthermore, you’ll probably
believe that the most vulnerable people in society are not at liberty to
just choose whatever path they want within this mesh. As Isaiah Berlin
put it:
"People are largely interdependent, and no person's activity is so
completely private as never to obstruct the lives of others in any way.
'Freedom for the pike is death for the minnows'; the liberty of some
must depend on the restraint of others."
On this game-board, poorer people often only have a choice between
starving and selling their labour to rich people who have far greater
power. So, within the socialist imaginary the state is seen as something
to be harnessed to protect people against a parasitic capitalist class
(which gets enormously wealthy by extracting surplus value from peoples’
labour). The state can act as a shield to protect the minnows from the
pikes (and in this frame, deregulation efforts are a ‘licence to
exploit’). In the far misty reaches of the imaginary there may be a
dream of a future workers’ state where everyone collectively owns
everything and exploitation is ended forever (this also exists in the
libertarian vision, but as a dark nightmare of totalitarian
communitarianism).
So how might this affect someone’s perception of CBDC? This is a tricky
one, because people on the traditional political Left tend to have an
aversion towards thinking about finance and money, seeing it as a
profane realm of capitalists. But those who are savvy may see CBDCs as a
Layer 1 opportunity to break the power of the Layer 2 private banking
sector (which, alongside Big Tech, is in the midst of privatising the
entire monetary system via its attacks on physical cash). They may see
CBDC as initiating a new era of public digital money for the good all
those crucial workers who lack status in capitalist markets, like
nurses, teachers, exploited minorities and mothers. Rather than CBDC
being something to take over people’s lives, it’s something to be used
in the fight against a banking sector that seeks to take over people’s
lives.
Of course, ‘socialist’, like ‘conservative’, is a broad concept, and
it’s an ecosystem of beliefs rather than a single species. While many
left-leaning groups tend to see society as being like a large family
that should be working together, only some believe there should be a
paternalistic daddy figure on top directing the action. China stands out
as having more of this ‘daddy-on-top’ vibe, and in the Western world
there’s a small but vocal sub-section of the Left, pejoratively called
‘tankies’, who claim that critique of China is just a cloaked form of US
imperialism. For this sub-set, and for anyone else who has bought into
the daddy vision, privacy may appear as a kind of luxury sought after by
bourgeois capitalists (who wish to stall the progress of the overall
family). Digital surveillance may seem like a common sense element of a
good society, to make sure everyone pays their taxes and contributes to
the public good, but this obsequious attitude is rejected by left-wing
anarchists, who are next on our list.
CBDC in the anarchist imagination
If you are someone - like me - who sits more on the left-anarchist (or
libertarian socialist) spectrum, you’re probably not going to make a
clear distinction between states and (large-scale) markets. The left
anarchist game-board has the state acting in concert with large private
sector players to form a kind of ruling coalition (even if the coalition
members might make a big performance of sabre-rattling at each other).
This means people with an anarchist impulse will tend to express
cynicism towards both state and market. Nevertheless, they may see value
in trying to engage with both in order to minimise the destructive
tendencies of the ruling coalition by creating balances of power between
the members (almost like trying to curb the expansion of a malignant
dual cancer by getting one part to attack the other). Against this
backdrop there’s a vague utopian dream of federated anarchy, a future in
which small self-governed collectives flourish by setting up
interconnected networks-of-networks (this vision has found new
expression in the more progressive parts of the crypto world - for
example, it sometimes pops up in the Ethereum and Cosmos ecosystems).
So how does this imaginary interact with CBDC? Hrm. Well, it probably
leaves you with less nightmarish vision of CBDC than libertarianism, but
a less romantic vision of it than the socialist imaginary might give.
Given that state and market are just enmeshed elements of each other,
you’re more likely to recognise the torturous angst that government
officials will go through as they think about CBDC. State officials will
be reluctant to launch one, because it risks disrupting the private
banking corporations that form a core part of the ruling coalition.
Insofar as a CBDC gets launched, it will have its fangs removed in order
to maintain a strong role for the banking sector to continue to dominate
the digital money system. In fact, CBDC may end up just being a ruse to
improve the efficiency of the private interbank payments architecture,
with the goal of accelerating and extending the reach of corporate
capitalism into the furtherest reaches of your soul (more on this in
Part 2).
Anarchisty people will already be concerned by the surveillance in the
existing private sector digital payments system, but will now also have
to be concerned about the potential for payments surveillance via CBDC.
If you’re sitting somewhere between this imaginary and the previous one,
you may be tantalised by the potential to mess with the big banks via
state-issued digital money, but you’ll advocate for a privacy-centric
implementation of it (perhaps along the lines of the E-Cash proposal by
Rohan Grey and others).
CBDC in the centrist imagination
Technically speaking centrism is a middle position that rejects the
extremes of the traditional Left and Right, but as a social imaginary
it’s a pastel-coloured landscape stripped of fiery politics. This is a
crude caricature, and centrism can seep into the liberal Left and
neoliberal Right, but it’s kinda the comfort zone of the apolitical
middle blob. It’s a game-board that assumes the world muddles on in the
right direction, provided we all keep civil, and it also carves out much
space for technocratic governance by experts (rather than by political
ideologues). The world is a steady march towards economic efficiency,
social good and progress, and if things exist it must be a sign that
they serve a purpose for us all, not because they are there to extract
power for one or other group.
Silicon Valley trades quite heavily on this imaginary: new technology
emerges because ‘we’ have desire for it (indeed, its existence is seen
as evidence of our desire), and all that remains is to have a managed
process of transition to make sure nobody gets ‘left behind’ as everyone
gets upgraded. Your individual identity can blossom in this consumerist
landscape, as long as you don’t call for an ethno-nationalist police
state, or for a true socialist revolution against the capitalists
(albeit, you are allowed to call for fake revolutions on Instagram, and
to wear left-wing aesthetics like a brand of clothes). As for states,
they must be background plumbing to help business leaders meet the needs
of consumers.
In the centrist imagination, CBDC has its political content watered
down, and this is the standard mode by which it’s being presented in
most official discussions. The underpaid public sector officials who are
tasked with investigating it seem to be saying: ‘we are not
authoritarian dictators or capitalist illuminati. We’re just
hard-working policy experts working alongside private sector partners
and civil society to serve society in its forward march into ever
greater productivity and automation’. CBDC, in this frame, is just
another step in our broader move towards ‘digital transformation’, which
is seen to be inevitable because it’s part of our unstoppable,
never-ending, and ever-so-exciting enlightenment journey towards ever
more efficiency, convenience, interconnected complexity and SCALE.
CBDC in your imaginary
This isn’t an exhaustive list, and you may disagree with my (somewhat
tongue-in-cheek) categorisation. The point, however, is to highlight
that we may be less in control of our perspectives on CBDC than we may
think, because the topic is often being routed through a series of
pre-installed shortcuts in our minds. There’s no escape from this, but
I’d recommend coming to terms with why you’ve ended up with the
imaginary you have (for example, I grew up in Apartheid South Africa,
where a fascist police state used law to forcibly extract labour from
workers to enrich capitalists, and the existential pain of that
expresses itself in me as an anarchist intuition, duh!) Now onto
Meditation 2.
MEDITATION 2: ACCEPT THAT CBDC ALREADY EXISTS UNDER A DIFFERENT NAME
Meditation 1 addresses fantasies, but this one addresses realities. I
noted that we have access to three layers of money in our society –
Layer 1 state cash, Layer 2 bank-issued digital chips, and Layer 3
corporate-issued digital chips. Cash, however, isn’t the only form of
Layer 1 money. There’s another, but we can’t access it. Only banks can.
The term given to this money is ‘Reserves’, and it’s the digital central
bank money that commercial banks use between themselves. It certainly is
‘central bank digital currency’, and has existed for a long time, but
because we can’t access it we’re often unaware of its existence.
If I’m a British citizen, I don’t have the ability to open an account at
the UK central bank (The Bank of England), but commercial banks do have
this ability. In fact, to be a bank they must open an account at the
central bank. Think of the central bank as being like an exclusive
private club where the state and the banking sector do their own banking
(and which also serves as a regulator and place for them to meet).
Members of the club get access to a premium digital version of Layer 1
central-bank-issued money, while we in the public use cash and Layer 2
commercial-bank-issued digital money (check out my book Cloudmoney for a
deep dive into the interaction between these).
If you have a Barclays account in the UK, you’ll have an app that allows
you to message the bank to ask for your Layer 2 chips to be moved from
your account to another, but in the background Barclays and the other
banks have access to a system where they can message the central bank to
ask for their Layer 1 digital units to be moved between their respective
accounts (albeit, I doubt the Bank of England gives them an app for this).
So, if central-bank-issued digital currency has been used extensively by
the banking sector for many decades, why is it only becoming a hot topic
now? Well, in new popular discourse, the term ‘CBDC’ is reserved for the
hypothetical scenario in which ordinary citizens get given direct access
to central bank reserves to make payments. That would be akin to
allowing you and me to open an account at the central bank, thereby
giving ordinary plebs like us access to the formerly exclusive private club.
When Citibank and Chase Bank message the US Federal Reserve, they may
ask it to move tens of millions of digital reserves between their
accounts, but imagine if you too could stand alongside them and ask the
Fed to move a mere $10 of central bank money to a small-town theatre for
a movie ticket. How do you think that makes the original members of the
club feel? Meditate upon that question.
MEDITATION 3: REALISE THAT EARLY CBDC PROPOSALS WERE ATTACKS ON BANKING
SECTOR POWER
Meditation 3 takes us into some of the hidden political history of (one
version of) the CBDC idea. For a long time it was not a mainstream idea,
but was advocated by quite radical groups who were critical of the
mainstream central banking and commercial banking establishment. Let me
explain.
Big players like Citibank and Chase traditionally dominate the digital
money system, because they issue the Layer 2 digital ‘casino chips’ that
we see in our bank accounts. They create a significant proportion of
those chips through a process called Credit Creation of Money (summary:
they issue new chips in exchange for loan agreements from people, a
process that is sometimes called ‘fractional reserve banking’. See The
Casino Chip Society for more detail). Credit Creation of Money gives
banks a lot of power to direct the economy, because they get to decide
which sectors to activate or deactivate by issuing or retracting
credit). This is why there’s a tradition of monetary reform campaigns
that call for the state to remove this power from the banking sector
(see, for example, the American Monetary Institute in the US).
Such monetary reformers face an uphill battle, because in capitalist
countries the state often acts to protect the banking sector (and
officials may see the sector as foundational part of the Good Society,
helping us achieve our life goals). So, in a country like the UK where
the banking sector has huge political power, it’s politically impossible
to call for legislation to prevent banks creating money (in fact, it’s
far more likely that the state will work with the banks to promote
‘financial inclusion’, a euphemistic phrase referring to efforts to
onboard people into the commercial banking sector, and to make them
dependent on bank credit). Put simply, the idea that the state will work
against the banking sector is out of sync with political reality.
So what is a monetary reform campaigner to do? Well… one possibility is
to use a more oblique strategy. Rather than calling for legislation to
remove money-creation power from the banks, just give the public a new
option. Advocate for us to be given access to the traditionally
limited-access central bank reserves that the banks have exclusive use
of. This is turn will make us less dependent upon the Layer 2 digital
money system run by the banking sector, reducing their political power.
So, some of the earliest CBDC proposals I came across were from monetary
reformers who wanted to knee-cap private banks by getting the central
bank to allow this. Here’s a classic 2016 example of this strategy from
the savvy UK monetary reform group Positive Money
https://positivemoney.org/publications/digital-cash/.
Notice that they frame it as innovative technology rather than a
political move. They know very well that central banks already issue
electronic money, and that the real objective is to open up access to
it, but CBDC gets positioned as a fancy new digital thing. This is a
great strategy, because digital automation is a standard part of
transnational corporate capitalist ideology, which means national
capitalist states - which are subservient to the overarching ideology -
have to take it seriously. In other words, you can disguise a monetary
reform campaign against the banking sector as a technological
innovation, and trojan horse it into the political realm via
politicians’ inability to reject automation.
Monetary reform groups could also hack neoliberal ideology by framing
this as promoting ‘choice’ and ‘competition’. Rather than asking a state
to legislate against banks, you get the state to compete: so, imagine a
person in the UK facing a choice between opening an account at Barclays,
and an account at the Bank of England. Given that the Band of England
issues Layer 1 base money that’s technically safer than Barclays digital
casino chips, they just might outcompete Barclays, weakening our
dependence on the banking sector (and its crisis-inducing tendency to
issue excess Layer 2 money into shit like housing speculation).
MEDITATION 4: ASK THE QUESTION, 'IF CENTRAL BANKS UNDERPIN PRIVATE
DIGITAL MONEY, WHY WOULD THEY COMPETE WITH IT?'
Having noted that some groups see CBDC as a potential weapon against the
banking sector, let us now meditate upon the fact that the average
central banker isn’t that radical. In fact, one of their core mandates
is to maintain the stability of the banks. The monetary reform version
of CBDC asks them to deliberately undermine their banking pals, so it’s
controversial at best.
But how then do we explain the sudden rise in central bank
experimentation with CBDCs? Were they inspired by the monetary reform
movement? No. There’s something else going on. What is it?
Well, one common story goes something like this: private sector digital
money players are growing so fast that they’re leaving central banks in
the dust, and central banks are trying to play catch-up. In this view,
CBDCs are not emerging out of a democratic push to reduce the
undemocratic power of the commercial banking sector. Rather, it’s
because central banks are dinosaurs who are nervous about being outmoded
by new digital players, and who are reluctantly clawing for territory
and relevance by going digital.
Central bank dinosaur gets invaded by space age private sector
Many techy people seem to think this is what drives CBDC development,
but this meditation is designed to cast doubt on that. So let’s dive in.
Layer 2 bank-issued digital money has existed for a long time, and
accounts for over 90% of the money supply in countries like the UK, but
the central bank hasn’t historically felt an existential ‘threat’ from
this. Why not? Just like casino chips derive their power from the legal
guarantee that you can take them back to the cashier to redeem for cash,
the digital ‘casino chip’ money issued by the banking sector derives its
own power from the implicit guarantee that it can be redeemed for state
cash. Layer 1 state money underpins confidence in Layer 2 bank money,
and to suggest that the latter will somehow overcome that dependence,
and transcend the very money that underpins it, is weird.
I’m not saying this can’t happen, but it’s worth dropping naive versions
of the belief that central banks are trying to ‘catch up’ with Layer 2
and 3 private sector money issuers. If anything, new private sector
players are making the central bank even more important. Consider, for
example, PayPal. Every Layer 3 PayPal unit only has power because it’s
backed by Layer 2 bank chips that are partially backed by Layer 1
central bank money. Why would a central bank feel pressure to compete
with an entity that they not only underpin but also have regulatory
power over? It’s like a parent feeling pressure to compete with their
five year old child. The kid might be confident, but they’ll very
quickly lose that without the support of the parent.
One of the most virulent versions of this story concerns stablecoins.
Most people probably realise that PayPal is not about to ‘outcompete’
the US Federal Reserve, but because stablecoins are new and carry the
(dwindling) rebellious aesthetics of crypto, they are sometimes seen as
a feral wild-child that could disrupt everything. In reality though,
most major stablecoins are Layer 3 systems just like PayPal, albeit
implemented on a decentralised network architecture rather than a
centralised IT system. Big stablecoin players like Circle USDC heavily
rely upon the US Federal Reserve continuing to do what it does. So,
meditate upon the fact that central banks are the big franchisor bosses
at the centre of national monetary systems, granting private sector
franchisee players the right to issue units that carry the dollar,
pound, yen or rupee symbol.
MEDITATION 5: MEDITATE UPON MY HOT TAKE
We still have to deal with the inconvenient truth that central banks
seem to be dragging themselves towards CBDC. I told you earlier that we
don’t need more hot takes, but I lied, because we do need this one. Here
it is:
There’s a high chance that central banks are reluctantly experimenting
with (opening up access to) CBDC because their private sector partners
have fucked up by attacking the public money – physical cash – that
underpins confidence in private sector money.
If I was to put a Marxist hat on, I’d talk about the ‘contradictions of
capitalism’: when a bunch of corporations all individually pursue their
individual interests, they often collectively create conditions that
undermine their collective interests.
For example, commercial banks are private profit-seeking entities that
want to automate everything to cut costs. This means they want to get
rid of all their physical branches, which in turn reduces the ability
for businesses to deposit cash, which in turn pushes more businesses
towards ‘going cashless’, which in turn sends signals into the public
that there is something unacceptable about cash. Banks also want to shut
down their physical ATMs, which in turn reduces the public’s access to
cash, which in turn makes cash seem relatively more inconvenient than
before.
This is convenient for the banks, because while they undermine the Layer
1 cash infrastructure, they are also doing everything within their power
to steer people into their Layer 2 digital payments systems that give
them revenues and data. They are helped in this task by the card
companies like Visa and Mastercard, which make all their profits by
getting people to stop using cash, and who have drip-fed the public
anti-cash propaganda for decades (check out Cloudmoney for more on
this). In the background, Big Tech players like Amazon are on board with
all of this, because they want to automate everything, and cash is
resistant to automation.
Each individual bank is privately run, and see an anti-cash stance as
being in their private interest. They are predictably doing what you’d
expect a capitalist corporation to do, and they don’t think about the
broader consequences of that. When I say ‘broader consequences’, I don’t
only mean the ‘externalities’ that are pushed upon us as a result of a
cashless society (like possible mass surveillance, censorship,
exclusion, resilience problems, centralisation of power etc.), but also
things that will come back to bite the banking sector. One of these is
the fact that the power of their Layer 2 digital chips depends on the
public believing they can be redeemed for state money, but the banks are
collectively eroding the state money infrastructure in order to boost
profits.
So, big private sector players have individual incentives to destroy
cash, but collectively that screws them over. For a long time central
bankers didn’t think too much about this, and have allowed it. Since the
pandemic, however, the private sector anti-cash drive was massively
accelerated, because Big Finance, Big Tech and Big Retail weaponised the
public’s temporary fear of physical contact to amplify the anti-cash
automation agenda that they already had. Suddenly central bankers are
more aware of the possibility that the contradictions of capitalism
could undermine financial stability. So, what pops into their head?
Layer 1 money underpins Layer 2 money, but Layer 1 money is being
eroded, so to save Layer 2 money we must give the public access to a new
form of Layer 1 money.
Coming up in Part 2…
The old balance of power between Layer 1 and 2 money depended on a kind
of differentiation in vibe. Cash is public, offline and
privacy-preserving, while digital bank chips are corporate, online,
privacy-invading and require accounts. These differences historically
have given them different spheres of influence: cash is the state money
which is good for small-scale local transactions settled on the spot,
and it also forms the mental image of ‘money’ for most of the public.
Bank chips, by contrast, are easier for large-scale and distant
transactions, but they are invisible and intangible and derive their
power and imagery from state money. But now we’re seeing cash being
undermined in the places where is was historically strongest - the local
and the physical - and the balance of power is getting wrecked.
For central banks, this is creating conflict between their different
mandates. In order to maintain stability, the central bank feels
pressure to create a new alternative - CBDC - but when public money
comes in a digital form its vibe changes, and it suddenly feels a lot
closer to being in direct competition with the banking sector. In a
nutshell, central banks are being pushed towards direct competition with
the private sector players they are supposed to promote. Oh the terrible
irony.
In Part 2 I’ll introduce five more meditations where we’ll reflect on
issues that spring up around this. For example, why is it so politically
unthinkable for the central bank to just promote cash instead of CBDC?
If CBDC causes contradictions for them, what tweaks will they introduce
in an attempt to resolve those? Could CBDC be crafted to promote Layer 2
and 3 systems? We’ll also look at whether Bitcoin has anything at all to
do with this, and the monetary geopolitics of it all.
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