A recently proposed Central Bank Digital Currency (CBDC) by the Federal Reserve could lead to a loss in individual privacy and autonomy and lack transparency that is implicit in decentralized cryptocurrencies. Limited government, liberty-loving Conservatives should be concerned.
The rise of decentralized finance (DeFi) is on a trajectory to revolutionize the way financial digital transactions are conducted, emphasizing transparency, autonomy, and decentralization. In contrast, the concept of a CBDC represents a centralized approach that would undermine the principles of DeFi.
Decentralized Finance: A Brief Overview
Decentralized finance (DeFi) operates on blockchain technology, allowing users to control their own digital assets without the need for intermediaries like banks or governments. DeFi defies the centralized financial system by enabling peer-to-peer digital exchanges.
There are numerous benefits to decentralized finance. Here a few:
- Individual autonomy, privacy, and security: DeFi promotes transparency, security, and individual autonomy, as transactions are recorded on a public ledger that is immutable and transparent while also maintaining anonymity. DeFi also provides financial security for individuals without physical access or who have lost access to traditional banking systems.
- Improvement to the banking & financial services industry: DeFi has the potential to disrupt traditional banking by streamlining processes, reducing risks, and enabling faster transactions – serving customers cheaper and more effectively.
- Has the potential to enable innovation of new services: DeFi can enable the offering of innovative services via the decentralized exchanges. Examples include smart correct automation via AI and real word assets that are tokenized such as gold, real estate, art, and wine. Still other innovations include self-repaying loans which enables keeping cryptocurrencies and – in a tax efficient way – borrow against an appreciated crypto position.
Central Bank Digital Currency: A Centralized Approach
An CBDC, on the other hand, would be a digital currency issued and controlled by a central authority, such as the US Federal Reserve.
As of 2022, 97 nations are at various stages with CBDCs with 2 countries having launched them (Nigeria and The Bahamas), 15 countries currently piloting CBDCs, and 65 countries are researching CBDCs, which includes the US.
Unlike decentralized cryptocurrencies, an CBDC would be subject to governmental oversight, regulation, and bureaucratic control and every digital dollar would have a unique fingerprint viewable only by government authorities. This centralized control stands in stark contrast to the principles of DeFi, leading to several key concerns:
Loss of Autonomy
In a decentralized system, individuals have full control over their digital assets and transactions. An CBDC, however, would place control in the hands of an the central authority, limiting individual autonomy and potentially restricting access to funds based on governmental policies or regulations.
In 2022, the Canadian government froze the bank accounts of truckers protesting mandatory vaccine mandates who participated in the “Freedom Convoy” that blocked the US-Canada border crossing. The Canadian rule stated that truckers returning from the US were required to show proof of vaccination. In response to the protest, Prime Minister Justin Trudeau froze $3.8 million from truckers and financial supporters across 219 financial products and broadened anti-money laundering regulations to go after crowdsourced websites that were supporting the truckers.
“The freedom to transact is part of freedom of speech because without financing, it is difficult to demonstrate, organize, and speak up.”
Neeraj Agrawal, director of communications at Coin Center, a Washington organization focused on cryptocurrency policy
In the Heritage Foundation article, “The Scary Fed Idea To Turn Your Dollars Into a Digital Power Grab,” a few scenarios were given that should give pause to limited government conservatives:
- “Imagine if a bureaucrat had the power to limit your savings or place a ‘shelf-life’ on money you earn.”
- “Imagine the government creating dollars that can only be used for food, thereby dictating to you how much of your income can be spent that way.”
- “Imagine your purchase of a gun or ammunition gets declined because a government apparatchik doesn’t care for the Second Amendment.”
- Imagine if “Bureaucrats could turn down people for loans based upon things other than their likelihood of repaying. Are you not woke enough? Then no mortgage for you.”
Lack of Transparency
DeFi operates on transparent and open-source software protocols that are visible for anyone who understands the language to see. And the value of cryptocurrencies are driven by market-forces.
Modern centrals banks are no longer speechless black boxes as they once were – instead opting to develop communication strategies to communicate its decisions to the US population. Yet, the Federal Reserve is still making decisions on behalf of the American people – manipulating the federal reserve interest rate to impact inflation or joblessness.
A CBDC would surely be guided by the Federal Reserve as well and there would be limited insight into how decisions are made or how the currency is managed until the decisions are actually communicated.
Beyond the management of a CBDC, there’s the potential for government agencies to abuse the information available to them – for example by secretly targeting political opponents.
This isn’t so far-fetched in the age of cancel culture. Almost a decade ago so before cancel culture, the IRS admitted to and apologized for aggressive scrutiny of at least 40 conservative groups and reached a “substantial financial settlement” with over 400 other groups. In the age of “COVID misinformation,” the White House worked with social media companies to silence opposing opinions on COVID, in the name of “misinformation.”
And in the age of ESG, what financial incentives would be given to selected minority groups in the name of “equity?”
Whichever government agency that would oversee and manage the CBDC would have vaster and more detailed information than even the IRS does. How would these organizations or government bureaucrats not be tempted to scrutinize and limit citizens – especially those with conservative values? And how would citizens ever know? Or give special treatment to certain other groups?
Threat to Privacy
Perhaps the most concerning aspect of an CBDC is the potential loss of privacy.
True anonymity does not currently exist on DeFi blockchains. If people commit online crimes using cryptocurrencies, law enforcement agencies have already proven they will track down criminals using cryptocurrencies. They will follow the money and find fraudulent actors and DeFi does an excellent job of preserving transaction history.
However, with centralized control of a CBDC, the government could have immediate access to detailed information about individual transactions, including who is involved, the amount, and the purpose. This level of surveillance could lead to a significant invasion of privacy, eroding the confidentiality that many users value in financial transactions.
According to the International Monetary Fund, CBDCs can “improve transparency in money flows” which indeed means what it says. Government regulators would have visibility into how, when, on what, and – most importantly – who is spending money at all times.
This level of surveillance would extend to every transaction – “no matter how small, like paying a babysitter or borrowing money from a friend.”
“Lest you think the government would not bother with such transfers, consider that the IRS is seeking to implement a reporting program to tax the tips of bartenders and waitresses. This follows a warning to report any transfers via apps of $600 or more—so much for going after billionaires.”
Heritage Foundation
A Point of Clarification: Custodial vs. Self-Custodial Wallets
Custodial cryptocurrencies (e.g. Coinbase) offer a more user-friendly experience, often with enhanced security measures and regulatory compliance, but at the cost of control and privacy.
Non-custodial cryptocurrencies, on the other hand, provide full control and privacy but require the user to manage their security and may lack the consumer protections associated with regulated entities.
The choice between the two often depends on individual preferences regarding control, convenience, privacy, and risk tolerance.
Final Thoughts
The concept of a Central Bank Digital Currency represents a departure from the principles of decentralized finance, potentially undermining the autonomy, transparency, and privacy that are characteristic of DeFi blockchains.
“A federally controlled Central Bank Digital Currency is the most recent way the Davos elites are attempting to backdoor woke ideology like Environmental, Social, and Governance (ESG) into the United States financial system, threatening individual privacy and economic freedom. Unlike a decentralized digital currency, a CBDC is directly controlled and issued by the government to consumers, giving government bureaucrats the ability to see all consumer activity and the power to cut off access to goods and services for consumers.”
Gov. Ron DeSantis (Florida) on CBDC and Surveillance State, March 20, 2023
As digital currencies continue to evolve, conservatives must continue to be informed about CBDCs as yet another governmental control mechanism that poses risks to individual autonomy, transparency, and privacy. No to Central Bank Digital Currency run by the Federal Reserve and managed by a federal government agencies. DeFi projects are by and large decentralized and transparent and provide the best privacy and autonomy to liberty-loving conservatives.