Digital dollar or CBDC?
First, it’s worth noting that many tend to conflate CBDCs with digital dollars, but that is a fundamental misunderstanding.
The reality is that dollars are already digital – you can log in to your mobile banking app and make payments digitally. Critically, those dollars are issued not by a central bank such as the Reserve Bank of Australia (RBA), but the bank itself. It is permitted to do so due to ‘fractional reserve banking‘.
This is a system whereby banks are only required to keep a relatively small percentage of deposits on hand. The rest can be lent out to customers and in the process, new money is “created”. This is the traditional financial system as we know it today, with our online payments and transfers representing the movement of digital dollars.
CBDCs are an entirely different proposition. Instead of being created by the commercial banking sector through lending, they are issued by the central bank. They are also blockchain-based with smart contract composability, meaning they can be programmed in any manner so as to achieve a desired outcome. More on that later.
All forms of CBDCs are issued by a central bank and can be either wholesale (used between financial institutions) or retail (used by individuals or businesses).
Most of the concerns that have been raised around CBDCs are focused on the retail kind, with much of the concern directed at the lack of privacy and ability for the government to monitor or potentially censor every transaction you ever make.
Pretty creepy, but CBDCs form the foundation of the social credit score already in place in China.
To be sure, there are certainly some benefits to a retail CBDC including direct monetary stimulus to individuals and vast improvements in efficiency. However, when weighed against the downside, there are relatively few well-informed folks who believe that it is on balance a good idea.
While those “with nothing to hide” may feel comfortable today with the regime in control having complete insight into every transaction in their lives, they’d be wise to consider what their position would be if the “wrong person” got in charge.
If your political worst nightmare got in charge, how would you feel if they could ‘switch off’ your money for having the ‘wrong’ opinion? That’s the crux of retail CBDCs, at least from the position of those who oppose it.
An Australian CBDC and the war on cash
After long saying that it wasn’t looking into CBDCs, the RBA has embarked on an Australian CBDC pilot, the results of which are planned to be released midway through 2023. The RBA’s paper outlined that it will be responsible for “minting, issuing, redeeming and burning eAUD” – in other words, programming it.
Many have viewed this, and all efforts to implement a retail CBDC, as a threat to the continued existence of a cash economy. As per a recent poll, 99 percent of Australians indicated that they want a guarantee that cash will always be available, even if a CBDC is implemented.
“Australians don’t understand the RBA’s trial of a digital currency and many clearly see it as the next step toward phasing out physical currency,” said Jason Bryce, spokesperson for the Cash Welcome campaign. Adding further, Bryce commented that:
“Australians need to be informed about the need for an online currency and the research work now underway.In the absence of clear information, Australians may fear for the future of the physical currency”.
Of those that participated in the survey:
- 63% weren’t aware of the RBA CBDC trial;
- 57% didn’t understand what a CBDC was;
- 95% felt that a CBDC wasn’t needed;
- 99.7% said they wanted to retain physical cash; and
- 95% said they were worried about physical cash becoming harder to access.
Against this backdrop, we now have a petition to be submitted to Parliament titled ‘Disadvantages of Central Bank Digital Currencies (The eAUD)’, which fundamentally seeks to enshrine the use of cash in the Australian economy.
The petition lists the following disadvantages of CBDCs to include:
- “Traceability – where physical cash is eliminated entirely this eliminates the ability to transact in a fully anonymous manner.
- Negative Rates – with CBDCs, you cannot withdraw your digital tokens and hold them under the mattress. If there is no option for physical cash this gives central banks the ability to implement negative interest rates.
- Programmability – CBDCs give central banks a unique opportunity to make money “programmable”. For example, CBDCs could permit a currency expiration policy. Your money could be programmed so that if you don’t spend the $5000 in your account by next Saturday, it will expire.
- Personalised monetary policy –with a bank of Big Data on individual spending habits, coupled with digital identification infrastructure, the central bank will have enough information to tailor its monetary policy personally. For example if it is known that lower earners have a higher propensity to consume, stimulus can be directly delivered to those people. Personalised monetary policy could even become politicised. A government could segment its voters, identify communities where it is behind in polls, and deliver stimulus to these groups”.
At the time of going to press, over 13,600 signatures have signed the petition with its closing date being December 21.
Unlike other jurisdictions such as the UK where 100,000 signatures automatically triggers a Parliamentary debate, there is no minimum threshold in Australia for a petition to be heard in Federal Parliament. In its FAQs, it states that once submitted, the petition will be brought to the attention of the Petitions Committee who would refer the petition to the relevant Minister.
The Minister then usually responds within 90 days and may submit to the House for debate. There are various processes one can follow if you’re unhappy with the result, but it appears to be a fairly long road if one has to go that route. Long story short, it’s not an easy process and it doesn’t guarantee that your elected representatives will bother hearing it at all.
As long as people conflate digital dollars with CBDCs, it’s difficult to see how the petition is going to get traction.
At present it’s unclear if this petition will have any impact. But either way, it’s a space worth keeping an eye on as CBDCs are almost undoubtedly on their way and likely to impact our lives to a lesser or greater extent.
This is an updated post from December 7. The number of signatures have increased since from 13,500 to 77,500 at the time of publication.