by Teresa Kuhn, JD, RFC, CSA

Living Wealthy Financial

The concept of centralized global currencies has been around for some time now. However, this idea has raced from concept to reality as cash usage in the United States and globally continues to drop.

Many people are eager to find alternatives to physical cash. Widespread support for a cashless society hasn’t gone unnoticed by central bankers, governments, and corporations. As we know from history, these entities may have less than noble purposes and are usually eager to exert greater control over people’s lives, including their financial lives.

Proponents of centralized digital currency (CDC) tout its advantages over traditional money, claiming it is easier to access, safer, and more inclusive than cash. Those pushing for CDCs paint them as the logical next step in restoring faith in the monetary system and equalizing economic opportunities. On the other hand, those favoring freedom and personal responsibility posit that central bank-issued digital currencies will ultimately lead to the loss of privacy and self-determination, putting us on what economist Friedrich Hayek called “the road to serfdom.”

Many countries, including the United States, have jump-started their development of centralized digital currencies CDCs. The goal is to design a more secure and efficient way to store and transfer value.

CDCs may indeed have some advantages over traditional fiat currencies. For one, they may be more secure than conventional money since they are not subject to the same risks associated with physical money, such as counterfeiting and theft. CDCs are also immune to exchange rate fluctuations that can challenge the trading of traditional currencies.

From an efficiency perspective, CDCs have a slight edge over cash in that you can use them to make payments and transfers more quickly and securely, with greater transparency. CDCs are typically subject to more stringent regulations, and their associated activities are easy to track and monitor. Such oversight can make it simpler and less expensive for governments and financial institutions to identify and prevent fraudulent activities.

Unfortunately, the levels of regulation and control inherent in CDCs also increase the potential for government control and manipulation of the economy. With a centralized digital currency, the government would have direct control over the money supply, which it could then use to manipulate the economy and create inflation. The government could also wield this power to change the currency’s value, possibly even devaluing it. Devaluation of a country’s currency can have devastating consequences, making it difficult for people to buy and sell goods and services and leading to economic instability.

In theory, if we all had CDCs instead of cash, it might be possible for central banks to implement negative interest rates by shrinking the balances in every CBDC account. Since everybody will have a CBDC account, the central bank can increase the balance with the click of a mouse when sending stimulus payments or other government benefits.

Another potential danger associated with a centralized digital currency is that it compromises individual privacy and security. With a centralized digital currency, all transactions are recorded and stored on a single server that hackers or other malicious actors could target. Since CDCs create volumes of data about a person’s spending habits and additional financial information, the government or other organizations could use this data to track purchases, investments, donations, and other transactions. A justifiable fear is that, in the wrong hands, CDCs would lead to the tracking of individuals who disagree with government policies and punishing them monetarily. Conversely, rewards, incentives, and perks would go to those deemed by a computer algorithm to be “good citizens.” If this sounds like an episode of Black Mirror or some way-out conspiracy theory, you should consider that so-called “social credit” scoring systems have been developed and tested in China over the past few years. These digital “naughty or nice” reports proved highly effective in changing individual behaviors and gathering valuable data. In 2022, over 80% of China’s cities and provinces had some form of social credit score reporting, and nearly 33 million businesses in China have corporate scores. Social credit scores are then linked to a person’s digital currency, so it becomes quick and easy to penalize those who oppose the government, cheat on taxes, jaywalk, or clean up after their dogs.

Adopting a centralized digital currency could lead to a concentration of power in the hands of a few technocrats and bankers, giving them free rein to manipulate the market for their personal gain. Instead of creating a more inclusive, fair monetary system, digital currency could exacerbate any current economic inequality, leading to a situation where most people cannot access its benefits.

The bottom line:

Centralized digital currencies, while they offer tantalizing possibilities, are also laden with potential pitfalls and unintended consequences. Their attractive elements of ease, efficiency, and speed could also lead to rampant manipulation of the economy by banks and governments. The lack of anonymity inherent in digital currencies also creates numerous privacy and security concerns.  When money exists in electronic form only, there are no limits to the amount of control that can be exerted by a government and its army of bureaucrats over its citizens. Such a level of government control is fundamentally incompatible with economic and political freedom. Instead of making banking and financial services more accessible to more people, CDCs have the potential to concentrate power in the hands of a few elite individuals. While it may be impossible to turn back the tide when it comes to CDCs, you and your financial advisor should discuss how you will deal with the transition to digital currency when it occurs.