Central Bank Digital Currencies: An Introductory Privacy Warning

You may listen to the podcast version of this essay here:

Dear privacy seekers,

Did you catch the recent cover of The Economist from May 2021? It says “Govcoins: The digital currencies that will transform finance.” That’s right ladies and gentlemen. Central bank digital currencies (CBDCs) are here. And these are not cryptocurrencies. “Crypto” means hidden, and government-issued digital currency will be entirely the opposite. In fact, let me start by quoting Agustín Carstens, head of the Bank of International Settlements, who said in late 2020 that "In cash we don't know who is using a one hundred dollar bill today. A key difference with the CBDC—central bank digital currencies—is that the central bank will have absolute control under rules and regulations that will determine the use of that expression of central bank liability. We will have the technology to enforce that."

Let’s not mince words here. The Economist says that these CBDCs are to “be treated with optimism, and humility.” Instead, let’s treat them with fear and aversion. CBDCs will limit our privacy and our freedom. They will not transform finance in any good way. They will not progress humanity in any good way (remember that Edmund Burke once said that “no discoveries are to be made, in morality”). They will not make the world a better place or the market more efficient or any of that nonsense.

But let’s start with the basics. What is a Central Bank Digital Currency? It is a digital currency unit issued by a central bank. Let’s break that down. A central bank is a powerful institution, which many countries have, that has a monopoly on creating government-approved currency such as dollars or euros. It also usually determines interest rates and has a number of other coercive financial tools that it can use. The most well-known central bank is the United States Federal Reserve, which was established in 1913. If you look at a dollar bill it says not that it is a US Dollar but that it is a “Federal Reserve Note.”

It’s not my intention to get too confusing with economic or monetary terms. We’re mostly interested in the privacy consequences of CBDCs. But it is important to clarify a few things. When I say “currency” instead of “money” I am simply acknowledging that currencies are government-created and money has intrinsic value. This is not a minor point, because it points out that we don’t have to use this government stuff. Dollars are not money. Gold and silver could be considered money, as could other things. A money has value in and of itself. We’ll use the word “currency” throughout this discussion partly to be accurate—CBDCs are government creations—but partly also on principle. We have to speak the truth if we want to have access to it.

If you’re curious like me you might be asking: why do central banks exist at all? Well, they shouldn’t, but they do. They’re largely a product of the early twentieth century and its desire to plan everything out. This was a period in human history where specialization became the norm, where objects of human life previously not subject to scrutiny (such as psychology—the brain studying itself—economics, sociology, literature, myth, biology) were put under a microscope and dissected. Everyone was trying to figure things out, whether it was Darwin and the post-Darwinian sciences or Freud, or Karl Marx and his utopian economic world. Economics, we should note, was not something that throughout most of history had to be “studied.” What was there to study, after all?

Inevitably studying something awakens a new desire, a latent desire, and that is to improve and control that thing that you have just studied. After all, if we can apply the scientific method to the economy and develop an idea of how it works, why shouldn’t we desire to improve it, to tweak it a bit, for fairness and efficiency? It only makes sense. As Karl Marx, writing Das Kapital in the British Library during this era would famously note: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” Marx, for example, was a big proponent of this vision of planning out society so as to be equitable and, not surprisingly, a central bank is the fifth entry in his ten steps toward the communist state in The Communist Manifesto. I quote: “Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.”

This idea of central planning has become the untranscendable horizon of our understanding of the world to the point where we cannot really imagine what it is like to live in an unplanned society anymore. Americans, for example, supposedly in the land of the free, pay more than 50% of their earned money on taxes when all is said and done. In other words, Americans work until July to pay the government and only after that can they plan their own financial lives. Today the only thing I hear people say about politics is that “We need X,” or “The government should do Y,” and myriad politicians go around saying those controlling words: “we need to do something.” As H. G. Wells said in The World Brain when reflecting on the planned economies of the twentieth-century: “We’re all socialists now.”

But I digress—though I don’t apologize for it.

How does a central bank digital currency work? Well, we don’t know every detail at this point, but we can make reasonable assumptions. First, it will very likely be internet-based, but might work for short stretches disconnected from the Internet, such as in card form. A Central Bank Digital Currency is likely to be as simple as possible if it is going to be used by hundreds of millions of people. Second, it will likely be simple because the more lines of code a program has the more likely it is to be hacked and exploited. Imagine when a bad actor discovers a vulnerability in a central bank digital currency app. For most tech companies today, even the big ones, bugs are so numerous that Google and Apple and everyone else releases monthly, weekly, or daily updates. Those who don’t update are vulnerable.

I suspect governments will say that to access CBDCs one must download the application on their phone and the application will consist of little more than a QR code (you know, the black and white checkered box that you can scan), a balance, and maybe one or two other pieces of information. Think Venmo or Apple Pay. There’s going to be a lot of bellyache over which phones are compatible, whether less standardized Android phones (perhaps ones made by Chinese companies) will be allowed for Western CBDCs. Keep this in mind because you might be able to use it as an excuse.

In terms of roll out, there are a few ways this could happen. I think governments will roll out the CBDC application for mobile phones, for certain, since it has to be portable. You will be encouraged to create an account that will require your name and your state ID number. For Americans that would be your Social[ist] [In]security Number. China, interestingly, has rolled out their digital yuan on an actual card that looks like a credit card, for those who don’t have phones. In the future some governments could require a fingerprint or an iris scan or even an embedded chip in one’s body connected to one’s central bank account. This kind of technology already exists today and is used in various ways, and many cybersecurity experts are even advocating for biometics as “safe” alternatives to text-based passwords, since passwords are much more hackable.

However one uses one’s CBDC, it will connect directly to the central bank with many millions (or billions) of dollars of taxpayer money to support its cybersecurity. The central bank will be able to see the balances and purchases of everyone, and run all kinds of searches to figure out all the things one can tell about a person based on their purchase history. Don’t worry though: it will all be for your safety.

Alright, so the functions of a CBDC app will likely be straightforward. How then will it be marketed?Here’s the language you can expect when being sold on a Central Bank Digital Currency.

1. It will be convenient. Like all tech, it will tell you that you don’t have to pull out your wallet, or fiddle with a card. You don’t have to go through a bank anymore. It will all. Be. Just. So. Easy.

2. It will be clean. I saw in a store the other day a small plastic tool whose entire purpose was to help you interact with your phone and other objects without actually touching them. In the era of germophobia, you can expect politicians to play up how sterile a digital currency is. Expect signs in the future such as “Do your part to prevent the next pandemic: pay by phone.”

3. It will be “inclusive.” This one is cute, and taps into one of the most popular, misunderstood, and hypocritical words in use today. There are a ton of talking heads who are saying that CBDCs will do the following:

• “A digital dollar could also boost financial inclusion in the United States, where transaction fees impede the access of many Americans to mainstream financial services.” – Christopher Giancarlo, co-founder of the Digital Dollar Project

• “Too many Americans don’t have access to easy payments systems and banking accounts, and I think this is something that a digital dollar, a central bank digital currency, could help with.” – Janet Yellen, US Secretary of the Treasury

Oh how nice of them! Of course, the reality is that CBDCs will be exclusive, and that is what 99% of people mean these days when they say “inclusive.” CBDCs will exclude people who want privacy, or want to use cash, or want something closer to ownership of currency. CBDCs will be the opposite of inclusive.

1. And of course it will be mandatory. We talk a lot about governments trying to sell people on things, but the truth is that since government is monopolized coercion, they don’t have to sell anything. They say, and people do. They give, and people take. When your government says that your cash will be illegal in two months and that you have to pay with everything via CBDCs after that time or be arrested, what are you going to do? Protest? Like people protested COVID lockdowns in Germany? Oh wait, right, that is now illegal too.

What to do

Okay now let’s get to some of the “so-what” about these CBDCs. There are obviously a lot that can go wrong here, and we’ll only know more as the systems get implemented. But let’s start with the basics.

1. Everything you buy will be tracked. Surveillance is control in and of itself. There’s a great book called Childhood’s End by Arthur C. Clarke where an alien race simply parks their massive ships above earth cities. They do nothing else. Soon everyone on earth starts complying with what they believe to be the dictates of the aliens: to organize, to globalize, to give up war, etc. Surveillance has that power. It’s called the chilling effect and it is very very real. Now this is where the critics come in and say, “But if you’re not doing anything illegal, you don’t have to worry.” That’s putting the cart before the horse. I discuss in my privacy guide the things that are illegal today that weren’t illegal yesterday: protesting government lockdowns, suggesting in places like Canada that there are only two sexes, having a church service, posting rap songs with the “n” word in them on social media (a lady was arrested in Britain for doing this). People have and continue to be arrested for doing all of this. What will be illegal tomorrow that you do today? Remember, there is no innate correlation between what is legal and what is moral. And in bad times, the correlation tends toward the negative.

2. The central bank writes the rules. There are many problems with this. We could talk about how central banks such as the Federal Reserve are not governmental, and thus non-elected people would be making decisions about your finances. We could talk about how central banks use crackpot theories such as Keynesian economics that they could use to manipulate CBDCs. Let’s say a central bank says that they want to “stimulate” the economy. They could give everyone a small amount of currency and make it expire in thirty days. Or allow it to be used only at certain kinds of store. Or increase interests rates for those who make healthy food buying decisions. The sky is the limit.

3. It would expose your finances to the whims of politicians and central planners. No doubt taxing agencies would love to work with central banks to make sure income tax is taken out immediately. It would be taken first and you would have to justify getting it back later. If this doesn’t irk you at all, recall that the American Revolution was started over a few-cent tax. Our ancestors had a better sense of the importance of freedom than we do today. I’ll bring your attention also to the case of Cyprus, as well, which during a financial crisis (and there would be many financial crises if the morons at central banks started controlling currency), the government stole half of the money that Cypriots had over 100,000 euro in their bank accounts. No joke. You can look that up. What if more communistic politicians got into office and say that, as a matter of emergency, anyone with more than 100,000 dollars, or euros, or pounds, would have it transferred to those who need it more. There’s nothing stopping them from doing that in an instant. Such are the morals of our age. Things that are digital you don’t own, but at least traditional banks provide some separation from governmental and money-creating authorities. Final example: imagine being fined for speeding and that money being taken out of your wallet immediately. Start using your imagination.

4. It would lead to broader tracking. Christine Lagarde, technocrat and former managing director of the International Monetary Fund (IMF), gave a speech in 2018 called “Winds of Change: The Case for New Digital Currency” where she planted the seed that digital currencies could be used to encourage people to buy “broccoli and spring water” instead of “beer and frozen pizza.” She also hinted at the other possibility of a government digital currency: to use all of these small purchases and decisions (perhaps Internet browsing history) to create a kind of credit score. China already has this, a social credit score, or something like it. Let’s say a Chicago resident who is twenty years old and is thus forbidden to own a gun in Chicago steps foot in a gun shop in Iowa. The CBDC app might note the living location of the owner, compare it to other government data about the person, and block the transaction. Perhaps it might also automatically notify police in the area, or have them waiting when the person gets back home for attempting to commit this crime.

These are just a few ways that CBDCs can be used. As a conclusion for our analysis section let’s talk about when these things are coming out. Soon, but not necessarily tomorrow. China is rolling out its digital yuan. The United States is testing its digital dollar. Dozens of countries are exploring their options. This is not going to happen suddenly, I think, since there will be serious growing pains and in countries like the US serious push back. This gives you some time to prepare. Don’t be complacent.

Okay, what can we do about it now?

1) Protest and spread the news. Forget the useless nonsense you’re protesting now. Make it clear to your rulers that you do not want this, and will not use it. Do whatever you think works: call your representative and tell them that you will not accept even a cent of your tax dollars going toward exploration of digital currencies. Spread the news widely. Share this essay.

2) Choose your next home wisely. Not all countries will have CBDCs—and certainly not at the same time. Some countries might hold out for a long time, as well. It is within your power to choose where you live. International nomadism is a key to a privacy lifestyle. You might even be able to use multiple CBDCs against each other—it’s a possibility. Check out the website CBDC Tracker to figure out what stage each country is at, and stay tuned to Watchman Privacy as we report on this in the future.

3) Start to work on your supply lines. Currency is only a vehicle for buying things. So start reminding yourself how you create or buy goods. You can be more self-sufficient. Grow food, make your own clothes, start learning again how to do without. For all other things remember that alternatives exist to Amazon, and even to government currency. Start practicing bartering and community sharing. There are today, and certainly will be in the future, websites that connect someone who has X item with Y item. Stop waiting and start learning how to do this today, or start your own.

4) Build communities. This is more extreme but might be necessary if the world is going in this direction. Find people who you agree with and set up shop with them. There are all kinds of examples and models that you can follow. Money is any commonly accepted valuable commodity among a group of people. As long as your little community accepts it as money and can provide things you want, you can survive and thrive.

5) Think about alternative monies. Gold and silver have served as money for a long time. They might be money in the future. Cryptocurrencies are another option. Start learning how to buy them and use them. I have a detailed chapter about buying them privately in my book and offer a course on the topic. Summary: don’t go through crypto exchanges. Go to ATMs, buy them from acquaintances, mine them, go to a crypto meet up. Actually own them as opposed to having theoretical and highly-monitored acquisitions in an online exchange.

6) Remember there will always be loopholes. How will homeless people handle CBDCs? I assure you that by the time CBDCs come out, and as they’re rolled out, there will be more and more homeless people. In fact there will be a correlation. What if you don’t have a phone, or claim you don’t have a state ID number? What if you paid someone else to buy something for you? There are a lot of possibilities to circumvent any system. This is not encouraging you to be complacent, but to be the kind of person who comes up with these ideas ahead of the curb.

7) Learn to get free things online. Understand what torrenting is and otherwise how to acquire things online. This is not immoral, and might just save you serious trouble. I have an episode of my podcast and an essay on torrenting. Also, free software exists such as Linux and LibreOffice (both of which I’m using right now to make notes about this episode). Start learning how to find and use this stuff. Stop participating in rental culture and always-online software.

8) Buy things before CBDCs come about. Is there something you would prefer people don’t know about? Buy it now before CBDCs become the norm. You have the warning, you know you have some time. Now act.

This is just the beginning of our coverage of CBDCs. Consider it an introductory warning. Please subscribe, sign up for the newsletter at watchmanprivacy.com, and buy a copy of The Watchman Guide to Privacy for more detailed instructions about how to escape these kinds of surveillance systems.

Yours in peace and privacy,

Gabriel Custodiet
https://watchmanprivacy.com/