The Ugly Side of CBDC

Faster stimulus, but at what cost?

chandarani bonypk009
16 min readDec 12, 2020

Image by Gerd Altmann from Pixabay

In recent weeks, there’s been a sharp uptick in the number of headlines about Central Bank Digital Currencies (CBDC’s). In reading those articles you might see one or two of the potential downsides of CBDC’s mentioned — but I’ve read the white papers and the research papers and I think it’s important to air out all of the dirty laundry before a new version of the dollar gets foisted upon us. Below I include many excerpts from these documents for reference, (emphasis mine) because it’s important to acknowledge that these are actually being discussed and considered.’re living in a time when it’s never been more critical for the average consumer to better understand the economy and financial system — and our place in it — because CBDC’s are coming, and they will ultimately affect you. I believe if consumers knew what may come down the road, we would think twice before accepting CBDC into our lives.

From June 2020 Senate Banking Committee Hearing:
“The U.S. needs a digital dollar,” said Sen. Tom Cotton (R-Ark.). “The U.S. dollar has to keep earning that place in the global payments system. It has to be better than Bitcoin… it has to be better than a digital yuan.”

Digital Dollar Project/Accenture, May 2020, Exploring a US CBDC
“If the US dollar is to remain the world’s primary reserve currency in the unfolding century, it cannot remain an analog instrument and unit of account for things increasingly denominated as digital tokens. It must itself become a digital tokenized currency that measures, supports, and transacts with the world’s digital tokenized things of value.”

If you’re still not convinced, understand this: since 1945 the United States has had significant control over the global financial system. Some countries are quite frankly tired of US control and sanctions. Even Europe, our ally, is bypassing US sanctions by trading with Iran — something Europe feels it has a right to do. Other nations like China and Russia have steadily been building a new financial network around the US.

With the increased digitization of everything including money, countries that the US has placed economic sanctions upon are beginning to see a way out of, or around, being punished by US sanctions.

Right now, 80% of the world’s central banks are modernizing the global financial system, both through their currency (CBDC’s), and the trade interlinkages between them. China, having begun to launch their digital yuan — also a CBDC — has set off alarm bells in the US to get our ass in gear with our own updates.

CBDC’s are not a brand-new idea; digital currency at the central bank level was proposed quite some time ago, and there is a fairly adequate amount of documentation on it going back to 2015 referenced below. One can see in the documents that virtually every aspect of CBDC design and implementation has been thought through quite thoroughly, and we simply need to make CBDC a reality — lest we get left behind in the global financial order, which is a very real threat:

Digital Dollar Project/Accenture, May 2020, Exploring a US CBDC
“If payment systems could bypass Western banks heavily linked economically and geopolitically to US dollar reserves, the effectiveness of economic sanctions as a central and unifying tool of our foreign policy would be at serious risk. It would mean US global leadership, particularly in the exercise of soft power, would be at risk as well. Furthermore, if foreign central banks no longer need to maintain US dollar reserves to fund purchases in dollars, demand would decline for US government bonds, resulting in greater constraints on US fiscal policies and higher interest rates for the government and consumers.”

Deutsche Bank, Future of Payments part III:
“…we see the transition to digital payments as having the potential to do no less than rebalance global economic power.”

For a primer on what CBDC is, please read this article.

In a nutshell, CBDC will be another form of money in the US that we’d be able to use just like today’s dollars. The main difference between a CBDC and the digitized version of money that we already use is that CBDC comes directly from the US central bank — the Federal Reserve. As such, for consumers to hold CBDC, they would need an account directly with the Federal Reserve instead of their current bank.

Typically, only financial institutions deal with the Fed in this way, but CBDC changes that, for better or worse.

What are the upsides to CBDC?

I’ve seen the phrase “CBDC’s are solving a problem that doesn’t exist” several times recently, and I’d like to address. There are multiple reasons why a CBDC could be beneficial to the US, outlined below.

There are also potential incentives that will be offered at first, because the Fed will need us to adopt CBDC (though I personally believe those benefits will ultimately be outstripped by the potential downsides of such a transition in the long run):

Benefits & Incentives

A new monetary policy tool for the Fed

Greater financial inclusion (see Banking for All Act)

No account maintenance fees

Faster receipt of direct economic stimulus payments

Minimal to zero fees for money transfers and payments, possibly even across borders/Int’l

Real-time (or near-real-time) money transfers and payments

Possibility of being paid interest on our deposit balances in CBDC

Access primarily digitally via phone app or website

Potentially additional locations where Fed Account can be accessed such as US Post Offices

Streamlining of potential future UBI payments

A Monetary Policy Tool

One of the above benefits must be unpacked and discussed in more detail, because what’s good for the Fed and the economy as a whole might not be great for individual consumers like you. A new monetary policy tool for the Fed via CBDC would provide a structure for more overall control by the Fed, and they may choose to take actions that could adversely affect consumers.


What makes CBDC different from today’s currency is programmability. This is a feature that’s really only found in digital-only currencies. Although the programmable aspect of money can offer some benefits, such as possibly targeted stimulus (a struggling city, neighborhood, or even a people group) or automatic stimulus (depositing CBDC for consumers if a state unemployment rate goes above a certain percent), CBDC also gives unprecedented control over the money itself, which really opens up a can of worms on what we might end up with later down the road.

From the Fed’s perspective

Looking at the US economy and the opportunity CBDC offers from the perspective of the Fed basically boils down to which factors can be influenced in the economy. They’ve had very few tools overall, essentially they can either print more money or change the interest rate. Low interest rates stimulate borrowing and hence can sometimes boost the economy with more growth, whereas higher rates put businesses and people off from borrowing, so the economy “cools down”. QE or bank stimulus is really just providing liquidity to the banks by increasing the amount they are allowed to lend.

What we have seen recently is sending checks directly to citizens, which is part of modern monetary theory (MMT), but since that comes from the government instead of the Fed, it really just equates to creating more money.

The promise offered by a programmable CBDC is that interest rates can be adjusted as frequently as needed with near-immediate effects, because it would impact the CBDC in your digital wallet — the Fed would no longer need to wait the approximately 18 months that it takes for such policy changes to filter down through the economy to regular consumers and businesses.

What they desire are tools to cause stimulus, and aside from the impact made by their current tools, one aspect of monetary policy that has seemingly eluded the Fed is trying to have stronger influence over the velocity of money — how quickly and frequently money gets spent.

All of the following possibilities were not merely conjured up by me in an effort to frighten people — they have all either been discussed overtly in various white papers and research documents on CBDC, or expounded upon by well-respected economists and analysts reading between the lines. There are some supporting excerpts (emphasis mine) below as well.

Potential Downsides to CBDC

Heavily monitored/tracked transactions

Loss of anonymity of cash

Restrictions/limits on savings

Restrictions/limits on what it can and cannot be spent on

Negative interest rates

Real-time monetary policy effects of inflation

Automatic tax collection

Automatic collection of govt fines, tickets, child support, student loans, etc

Commercial bank disintermediation (i.e., banks could go away)

Expiration dates on the currency (i.e., must be spent within a period of time)

Eventual elimination of physical cash

The ability be to be shut off from the system without the recourse of cash

Economic Growth and Inflation

How items 3–6 and item 10 from above could impact monetary velocity essentially comes down to this:

  • They need you to spend money rather than save it
  • Saving money and/or paying toward debts does not cause economic growth.

For example, the stimulus we were given under President Bush in 2008 had minimal effect because this is what citizens did with that stimulus check:

2008 Stimulus Results:
— 20% spent it
— 32% saved it
— 48% paid off debts

If they provide us a stimulus but it all gets saved or it all gets paid on debt, it accomplishes absolutely nothing according to the Fed’s measurements. They want you to spend it, they want you to spend it on certain things, and they want you to spend it quickly, while offering little to no incentive to save it.

This starts to get terrifying in my opinion.

Perhaps the rationale is that we wouldn’t have gotten the money if it weren’t for the stimulus (or perhaps UBI in the future), therefore we can’t completely control how we use that money. In other words, it’s about control via behavioral economics.

Economist and Fund Manager Daniel Lacalle:
“Central banks basically seem to want spending and control of monetary transactions at any cost. Issuing a central bank digital currency is not more efficient. It is another means of financial repression.”

Anonymity, Negative Rates and more

From the Bank of International Settlements (BIS), 10/10/2020 report “Central Bank Digital Currencies: Foundational Principles and Core Features” Section 2.1.6:
“Full anonymity is not plausible. While anti-money laundering and combating the financing of terrorism (AML/CFT) requirements are not a core central bank objective and will not be the primary motivation to issue a CBDC, central banks are expected to design CBDCs that conform to these requirements (along with any other regulatory expectations or disclosure laws)”

From Deutsche Bank Sept 2020 report “Central Bank Digital Currencies — Money Reinvented”, section 3:
“With very negative interest rates on offer on their bank accounts, and no ability to hold back cash for future purchases, investors could find it more desirable to spend money now, so stimulating economic activity, or to invest in (non-deposit) financial assets and thereby create a wealth effect. On the other side, deeply negative interest rates would incentivize consumers and business to borrow money to spend now.”

From Philadelphia Fed June 2020 report, CBDC: Central Banking for All?
“The introduction of a CBDC can represent an important innovation in money and banking history. Besides its potential role in eliminating physical cash, a CBDC will allow the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits (and, likely, engaging in some form of lending of those deposits). In other words, a CBDC amounts to giving consumers the possibility of holding a bank account with the central bank directly.”

From the Bank of International Settlements (BIS), 10/10/2020 report “Central Bank Digital Currencies: Foundational Principles and Core Features” Section 2.2:
“Beyond bearing interest, there has also been public discussion about CBDC use to stimulate aggregate demand through direct transfers to the public (so-called “helicopter drops”), possibly combined with “programmable monetary policy” (eg transfers with an “expiry date” or conditional on being spent on certain goods). However, a key challenge for these transfers is identifying recipients and their accounts.”

From Deutsche Bank Sept 2020 report “Central Bank Digital Currencies — Money Reinvented”, section 3:
“Aside from broad interest rates, CBDC would give policy-makers more options to combat undesirably high savings rates, possibly through individual allowance limits (comparable to the existing ECB tiering system for banks’ excess liquidity). Money in the form of CBDC could also have a designated shelf-life, making real the idea of “depreciative money”, first articulated by Silvio Gesell (1862–1930, a German economist) more than 100 years ago. Negative interest rates directly imposed on CBDC would have a similar effect as they reduce the value of money over time”

From the IMF “A Survey of Research on Retail Central Bank Digital Currency”, June 2020:

CBDC could also be designed to amplify money velocity by incentivizing specific types of consumer consumption (Copic and Franke, 2020). CBDC holdings could incur a fee to incentivize people to quickly spend it.

When CBDC is initially launched, they will need consumers to adopt it as rapidly as possible, despite the competition with banks and FinTech providers’ services.

Deutsche Bank (same document as above, section 4):
“For individuals, CBDC must quickly fulfil cash-like functions — but there will be a trade-off between privacy and convenience”

Loretta J. Mester of the Cleveland Fed, at 9/23/20 Keynote, Chicago Payments Symposium speech “Payments and the Pandemic”
“Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency.”

And so we must be aware that what we’re being sold on day one is for the primary purpose of control. I would not at all be surprised if they offered to pay us interest, tell us there are no fees at all, everyone can get an account, and possibly even offer a discount by paying with CBDC over regular dollars. Possibly even offering UBI to get us to buy in.

In the current economic conditions, people are quite frankly desperate, as the two parties childishly drag out this much-needed stimulus. If in the near future, such stimulus payments must come via CBDC only, it would not be difficult for the Fed to gain a relatively high amount of acceptance of CBDC.

And while in the long run we may not have a choice as to whether to use the new currency, consumers must be aware of the downsides mentioned above — because at least some of them will come. Negative interest rates in particular have been heavily, heavily discussed in many documents, and the possibility of negative rates seems like one of the primary motivators for not just the Fed — but many Central Banks around the world to pursue ever-lower interest rates.

Deutsche Bank (same document as above):
“But uncertainty is not a reason to avoid this issue — CBDC, if implemented, will have major and profound implications for all economic actors which should not be underestimated.”

CBDC’s will be different than Cryptocurrency

Daniel Lacalle again:
“That is why a central bank digital currency is an oxymoron, a contradiction in terms. The reason why citizens demanded cryptocurrencies is precisely because they were not controlled by central banks that constantly aim to increase the money supply and generate depreciation of money, inflation.”

The very reason for the existence of Bitcoin — why it was created and why it was designed like it is — was to offer a way out of the financial system. Not merely a way out of physical dollars — but to break away from the entire centralized system, because the current system is unsustainable in the long-term by design.

In this way, the key factor of decentralization makes cryptocurrency as different as it could possibly be from any national, centrally-managed, government-issued currency.

All of the excerpts above have legitimate, authoritative sources linked, and I encourage readers to read the documents for themselves to get a full picture of what CBDC will mean, and why some actions that we would perceive very negatively are favorable to the Central Banks.

Here’s the thing-the economy, and many American citizens, are in bad shape. At the launch of the CBDC “Digital Dollar”, it’s not too difficult to assume that the public may latch onto it just fine, eagerly even, if things are this bad or worse. In other words, what is palatable will vary, but we may be desperate, and willingly accept this change with no real pushback.

It is important to understand at least these things, because CBDC — new US digital currency — is coming, and though we may not have a choice about ultimately accepting it, there are significant aspects of CBDC you should be aware of, because they will not be evident to the average consumer at first.

I believe that if the public knew what is possible with a new programmable Digital Dollar, and what changes might follow, we would not so eagerly accept this new form of money.

Changes are happening fast across the financial system and some will impact you. Stay informed about all that matters with the economy and banking system by reading the other articles in this series “A New System” using the links below. Don’t forget to clap and follow to get the upcoming articles as soon as they come out!

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