IMF Offers a Glimpse at the Perils of Central Bank Digital Currencies

Government-controlled digital money could mean the end of financial privacy and independence.

With Bitcoin climbing over $100,000, both investors and government officials are taking a closer look at digital money. The problem is that there's a huge difference between an independent currency designed to resist surveillance and control, and one crafted by a central bank to enable exactly that. A new handbook from the International Monetary Fund embraces the potential of cryptocurrency while highlighting the dangers inherent in state dominance of the means of storing and exchanging value.

The IMF handbook's opening chapter discusses how central bank digital currencies (CBDC) could keep government financial institutions relevant. "With digitalization and falling cash usage in parts of the world," the authors write, "central banks are considering CBDC to ensure a fundamental anchor of trust in the monetary system." Also discussed is the potential for CBDCs to "potentially help lower barriers to financial inclusion in countries with underdeveloped financial systems," to "channel government payments directly to households," and "to help reduce frictions in cross-border payments."

The IMF and the central banks it serves see cryptocurrency as the wave of the future and want in on the action. But central banks are government entities, and what officials want is not necessarily what is desired by people needing reliable means of making and receiving payments. Putting it bluntly, government officials generally regard those they nominally serve as subjects to be monitored and controlled.

Following the CBDC Digital Trail

In a chapter on data use and privacy protection, the authors note that CBDC "may allow for a 'digital trail'—data—to be collected and stored. In contrast to cash, CBDC could be designed to potentially include a wealth of personal data, encapsulating transaction histories, user demographics, and behavioral patterns. Personal data could establish a link between counterparty identities and transactions."

That stands in stark contrast to Bitcoin, whose users often debate whether the digital currency is sufficiently anonymous or if it leaves too much of a data trail that sleuths can follow. For fans of Bitcoin and its competitors, privacy is considered a desirable trait. They want to conduct their financial lives relatively free of scrutiny by using an online version of cash.

By contrast, for the IMF authors, "CBDC data use could allow for increased traceability" that would permit authorities "to track or prevent illicit and fraudulent activities." They acknowledge that "CBDC data use, however, could pose risks to privacy, which, in turn, can undermine the trust in central bank money" and that "CBDCs could be perceived as an instrument for state surveillance." They point out that existing payment systems—think credit cards or PayPal—also lack privacy. But they admit that, in most countries surveyed, people generally "trust commercial entities more than government institutions."

Governments Could Control or Restrict Payments

Also of concern to many people is the ability to make transactions as they please without interference from third parties. That's an issue with intrusive governments that might want to restrict trade in disfavored goods and activities, or block donations to political opponents as Canada did with the bank accounts of Freedom Convoy protesters.

But private payment systems can also be a problem. Under government pressure, GoFundMe refused donations to the Freedom Convoy. PayPal disallows a whole range of transactions, including purchases of cigarettes, drug paraphernalia, some sexually oriented materials, and just about anything gun-related.

People trying to make use of their own money hate such meddling. But for government officials, this is all a feature, not a bug.

"Some may worry that the government or the central bank could use it to control or restrict payments users can make with CBDC, thereby undermining public trust in central bank money," concede the IMF authors. Nevertheless, a separate chapter on capital flow management (CFM) discusses all the different ways CBDC can be manipulated to implement policy, and the data collection needed to do exactly that.

"Different types of CFMs require varying amount of information," they write. "For instance, prohibiting the purchase of more than 1 million dollars of foreign assets per transaction requires less information than prohibiting the purchase of 1 million dollars of foreign assets by the same person, each year, for a specific purpose."

Among CBDC characteristics, according to the handbook, is programmability that restricts where and how digital money can be used: "Several central banks have either launched or piloted CBDCs that have digital wallets with different caps on how much CBDC can be stored in them and how many transactions can be made within a specific period." But they warn that "alternatives without such constraints, for instance, potentially unregulated crypto assets, could be seen as more attractive to some users."

Framed in dispassionate language, the IMF discussion of the potential benefits and risks of CBDC reads like a fulfillment of every warning about letting government expand its control of this sector.

The Power To Record and Monitor Everyone's Transactions

"A government with the power to record and monitor everyone's transactions is powerful enough to impose its own version of morality on those transactions," Paul Jossey of the Competitive Enterprise Institute warned in 2022. "Curtailing them, banning them, stopping them, erasing them, denying the ability for a company or individual to send or receive funds for disfavored people or causes."

The same year, the U.K. House of Lords Economic Affairs Committee warned in a report that "government might use a CBDC as an instrument for state surveillance."

In the U.S., the Federal Reserve remains on the fence about implementing a CBDC and says it is "committed to hearing a wide range of voices on these topics."

Among the voices it has heard is that of the House of Representatives, which earlier this year voted to prohibit the Federal Reserve from issuing a CBDC.

"My legislation ensures that the United States' digital currency policy remains in the hands of the American people so that any development of digital money reflects our values of privacy, individual sovereignty, and free market competitiveness," claimed Rep. Tom Emmer (R–Minn.).

Unfortunately, the bill stalled in the Senate. And so, an important element of freedom remains up in the air as government officials around the world consider the temptations of digital money that allows them to monitor and control people's financial lives.