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Can CBDCs Be used against you? 💣
In December 2022, The Free-Range Technologist is exploring Central Bank Digital Currencies.
Fusing Monetary and Social Policy
Western democracies may be uncomfortable with their government having quick and easy access to a central database of every transaction in the economy. In theory, citizens in democratic countries would be able to exert control over how their government accesses and uses such data. But what happens when an authoritarian government uses programable money?
In some areas of China, the behavior of individuals is monitored closely via smartphone applications, point of sale registers, and cameras enabled with facial recognition. All this data is poured into an algorithm that generates a social credit score for each citizen. That score is used to punish those whose behavior is not up to par, via restrictions on purchases, travel and even entrance into educational institutions.1
Consider two individuals—Mark and Scott—in a society where a social credit score is combined with a Turing-complete CBDC.
GPS data from Mark’s phone shows that he attends all the “party approved” political rallies and is always home by 8 pm sharp. His activity tracker shows that he exercises regularly and gets eight hours of uninterrupted sleep (a sign of little or no alcohol consumption). Facial recognition cameras confirm that he crosses streets at the crosswalk, often while helping a frail older adult make the crossing. His purchase history shows that he eats healthy foods. Mark has a high social credit score.
On the other hand, Scott is never at the right rallies, stays out to 3 am in the wrong part of town, never exercises, and facial recognition cameras catch him jaywalking and littering. Scott's purchase history indicates that most of his money goes to beer and cigarettes. Scott would have a low social credit score.
How does this look when we combine a digital Yuan with a social credit score? Perhaps the first six-pack of beer Scott buys is $10, the second within a span of four days is $15, and the seventh within four days is $5000. Thus, we see a dynamic pricing system that is not based on market demand but on a particular buyer's demand and a government’s judgement of the social value of that purchase.
Programmable money can reward the righteous and punish the sinful in real-time.
Tax rates could also be adjusted based on a social credit score. Even if Scott started with more assets than Mark, his marginal tax rate might increase if his score stays low, eroding his finances. In contrast, Mark 's tax rate might be significantly lower, allowing him to move up the housing ladder, etc. This social meritocracy would elevate Mark and reduce Scott’s status, based on their behaviors in society.
In China, a social credit system is already in place in several regions. Below is a short clip from “Coded Bias” about how this system works.
The Weaponization of Money
Authoritarian governments could adopt CBDCs as a means of control over citizen behavior and a further extension of the surveillance state. It is probably not a coincidence that, in addition to China, many other authoritarian governments are researching or piloting CBDCs, including Venezuela, Turkey, Iran, Saudi Arabia, Singapore, and Russia.
It might seem far-fetched that a government could use a digital tool like CBDCs against its people. Still, after the Arab Spring, we saw dictators like Erdogan and Duarte weaponize and use social media to control their citizens and hunt down dissidents. The only downside for dictators is that the transparency of the system might make it difficult for these strong men to hide their own corruption and side-dealing.
Once you go CDBC, you won’t go back.
Many voices are calling for a slowdown or a ban on CBDCs. Nacha, the organization responsible for the development, administration, and governance of the ACH Network, responded a recent Federal Reserve by urging the Fed to instead work on the existing proposals for improving the interbank exchange network.2 In the US congress bills have been introduced to ban a retail CBDC or require anonymity to be baked into any US issues retail CBDC.3
While the scenarios presented in this post might see exaggerated and far-fetched for something as simple as a digital dollar, they are all technically possible. Like many digital transformations, moving to a CBDC might be a one-way trip. And once implemented, future governments might decide to apply this technology in ways we may never have considered.
…..Next Week: CBDC and Crypto world Roundup: What does the future hold for digital dollars, cryptocurrency and NFTs?
Continue the Conversation: Join Live Zoom on Dec 28th at 12pm Noon CST
Robert Mowry and I will be on zoom to talk about about CBDCs, the past year and the future of crypto assets (and his recent interview with Sam Bankman Fried, below).
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Kobie, Nicole. "The complicated truth about China's social credit system." Wired, July 6, 2019.
Marek, Lynne. “Go slow on a CBDC, Nacha says.” Payments Drive, September 2, 2022. https://www.paymentsdive.com/news/Nacha-cbdc-digital-dollar-federal-reserve-payments/631144/
"U.S. legislators publish multiple CBDC Bills with privacy emphasis." Ledger Insights. April 1, 2022. https://doi.org/https://www.ledgerinsights.com/u-s-legislators-publish-multiple-cbdc-bills-with-privacy-emphasis/