January 29, 2023

Electronic Currency: The Fed Techniques toward Monetary Totalitarianism

The end of cash would mean less privacy for people and would allow central banking institutions to maintain a monetary policy of negative interest rates with greater ease.

The Federal Reserve is sowing the seeds for the central bank digital currency (CBDC).

It may seem that the reason for a CBDC is to facilitate transactions and enhance economic activity, but CBDCs are usually mainly about more government  control   over individuals. If a CBDC were implemented, the main bank would have access to most of transactions in addition to being capable of cold accounts.

It might appear dystopian— something that only totalitarian governments would do— but there have been recent cases of asset freezing in  Canada   and  Brazil . Furthermore, a CBDC would give the government the power to determine how much an individual may spend, establish expiration  dates   meant for deposits, and even penalize people that saved money.

The  war   on cash is also a reason why governments want to implement CBDCs. The end associated with cash would mean less privacy for individuals and would allow main banks to maintain a financial policy of negative interest rates with greater ease (since individuals would be unable to pull away money commercial banks to avoid losses).

After the CBDC arrives, instead of a deposit being a commercial bank’s liability, a deposit would be the central bank’s liability.

In 2020, China  launched a digital  yuan   pilot plan. As mentioned by  Searching for Alpha , China desires to implement a CBDC due to the fact “ this would give [the government] a remarkable quantity of information about what consumers are investing their money on. ”

The government could easily track digital obligations with a CBDC. Bloomberg noted in an  write-up   published once the digital yuan pilot system was launched that the digital currency “ offers China’s government bodies a degree of control in no way possible with cash. ” A CBDC could allow the Chinese government to monitor cellular app purchases (which accounted for about 16 percent from the country’s gross domestic product in 2020) more carefully. Bloomberg describes how much manage a CBDC could provide Chinese authorities:

The PBOC [People’s Bank of China] has also indicated that it could put limits on the sizes of a few transactions, or even require an appointment to make large ones. A few observers wonder whether obligations could be linked to the emerging social-credit system, wherein citizens with exemplary behavior are “ whitelisted” for privileges, while those with criminal and other infractions find themselves left out.

(Details on China’s social credit system could be found  here . )

The Chinese government is waging war on cash. And they are not alone. In 2017, the International Monetary Fund (IMF) published a  record   offering suggestions to governments— even in the face area of strong public opposition— on how to move toward a cashless society. Governments and central bankers claim that the shift to a cashless community will help prevent crime and increase convenience for everyone else. But the real motivation at the rear of the war on cash is more government control over the individual.

And the US is getting ready to establish its own CBDC (or something similar). The first step was taken in August, when the Fed  introduced   FedNow. FedNow will be an instant payment system and is scheduled to be launched between May and Come july 1st 2023.

FedNow is practically identical to Brazil’s PIX.   PIX   was implemented by the Central Bank of Brazil (BCB) in November 2020. It is a convenient instant payment system (using mobile devices) without user fees, and a reputation as being safe to use.

Annually after its launch, PICS already had 112 million  people   registered, or just over half of the Brazilian population. Of course , frauds and scams perform occur over PIX, but most are social engineering frauds (see  here ,   here , and  here ) and are not system flaws; that is, they are frauds that exploit the public’s lack of knowledge of PIX technologies.

Bear in mind that PIX is not the Brazilian CBDC. It is just a payment system. Nevertheless , the BCB has entry to transactions made through PIX; therefore , PIX can be considered the  seed   of the Brazilian CBDC. It is already an invasion of the privacy of Brazilians. Plus FedNow is set to follow match.

Additionally , the New York Fed has recently launched a twelve-week pilot  program   with several commercial banks to check the feasibility of a CBDC in the US. The program will use electronic tokens to represent bank deposits. Institutions involved in the program will make simulated transactions to check the system. According to  Reuters , “ the pilot [program] will test how banking institutions using digital dollar bridal party in a common database can assist speed up payments. ”

Banks involved in the initial program include BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank, and Bore holes Fargo. The global financial messaging service provider SWIFT is also  participating   to  support interoperability across the global financial ecosystem. ” (This  video   details the pilot system and how the US CBDC would work. )

The IMF is also thinking of a method to connect different CBDCs within single  system . In other words, the IMF programs to create a PIX/FedNow for CBDCs around the globe:

Things could change since money becomes tokenized; which is, accessible to anyone with the ideal private key and transferable to anyone with access to the same network. Examples of tokenized cash include so-called stablecoins, like USD Coin, and central bank digital currency.

The reception of Brazil’s PIX shows that FedNow will likely be widely followed due to its convenience; however , this particular positive economic and technical element should not overshadow the particular increased control instant transaction systems will give to main banks. The BCB has access to all transactions created by Brazilians through PIX, and this would only get worse should a CBDC be applied. With a CBDC, it would be simpler for the government to carry out expansionary monetary policies (which result in misallocations of resources and business cycles) and exert greater control over citizens’ finances.

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