For the past several months the news has been full of reports about Central Bank Digital Currencies. CBDCs as they are called are the flavour of the season especially since the International Monetary Fund (IMF) called on all member nations and central banks to explore the roadmap to issuing CBDCs. This is because the IMF considers CBDCs to be a good idea whose time has come. Also, it makes it almost certain that every central bank will eventually issue their CBDCs thus shaking the monetary world to its foundations and sounding the death knell for paper currencies. Central banks will at last switch off their printing presses and turn to their digital equivalent instead.
What really is a digital currency?
For the uninitiated, a digital currency is a currency that uses blockchain technology just like bitcoin.
Wikipedia defines the blockchain as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”.
Blockchains can be described as decentralized, distributed, and public electronic ledgers made up of blocks of data that document transactions. The blocks grow as the number of transactions increases and each block is linked to the previous block by the military-grade cryptography that is considered impossible to hack. Each of the blocks contains a cryptographic hash of the immediately previous block along with a timestamp and transaction data. As a result, the blockchain cannot be hacked and a block cannot be tampered without tampering with every later block down the chain. This also means audit and verification of each block is possible at very low cost. Therefore, worries about data security are zero and it also ensures that each unit of currency cannot be transferred more than once. In other words, it eliminates the double-spending problem which otherwise plagues digital currencies. The blockchain consistently documents title rights to each currency unit in such a way that current ownership of the digital currency cannot be questioned.
The blockchain was first invented by Satoshi Nakamoto in the year 2008 as the public digital ledger of the bitcoin cryptocurrency. Its invention was particularly remarkable since it was the first digital currency to eliminate the double-spending problem without a centralized server managed by trusted authorities.
Why bitcoin?
Satoshi Nakamoto was a monetary revolutionary with the benefit of the people of the world in his heart. His motivation for inventing bitcoin was to provide an alternative currency that the public could use that was not under the control of central banks and governments. He was sure that central banks and governments would never wean themselves away from value-destroying activities such as excessive money printing to bail themselves out of the results of their incompetence. Any examination of monetary history will convince us that central banks and governments in every country without exception have always resorted to such quantitative easing because it is the easiest way to pick the pockets of their citizens without their citizens being aware that their pockets are being picked. Governments everywhere repeatedly get themselves into unsustainable debt which becomes easier for the government to repay if money becomes less valuable, i.e., inflation is the antidote to government debt addiction.
Ultimately the public and particularly the poor pay for every such action by central banks and governments and the public had little choice in the matter since there were no other currencies available other than fiat currencies. Enter Satoshi Nakamoto and bitcoin which provided an alternative currency to the public that would not lose value. Why? Because the total number of bitcoins that can ever exist is restricted to 21 million. There can thus never be an expansion in money supply and bitcoin quantitative easing is out of the question.
The broadband revolution
One important infrastructure issue that can stand in the way of the use of digital currencies is the availability of broadband internet across the country. There are two problems that need to be solved if broadband internet is to reach every citizen in India – bandwidth and smartphone usage.
Prime Minister Narendra Modi in his Independence Day 2020 speech from the ramparts of the Red Fort has promised the country that broadband would be made available to every one of India’s six lakh villages within the next one thousand days. Therefore, the first problem can be considered to have been addressed and since Prime Minister Narendra Modi has a habit of fulfilling his promises, we can assume that broadband will be available at every location in India quite soon.
As if this was not enough, Elon Musk who at the time of writing is the world’s richest man is in the process of obtaining clearances from the Government of India for introducing his Starlink satellite internet service which will provide high-speed, low latency broadband internet all over India.
According to the company, users can expect to see data speeds vary from 50 Mbps to 150 Mbps and latency from 20ms to 40ms in most locations.
It is estimated that about fifty percent of the cell phones in India are feature phones and not smartphones. The main reason for a relatively high preference for feature phones over smartphones is because broadband availability has been patchy on a pan-India basis and because of the high price of smartphones which make them unaffordable to the average Indians. Reliance Industries and Google are already working to introduce smartphones in India at a price range of Rs.3000-4000 which will make them only as expensive as feature phones thus making them easily accessible to India’s feature phone users.
The day will soon come when every Indian will be armed with a smart phone and a broadband connectivity thus removing any barriers to the roll out of CBDCs.
Central Bank Digital Currencies (CBDC)
Understandably the historical relationship between central banks and bitcoin especially in India has been on a “he loves me, he loves me not” basis with the forlorn lovers recently deciding that “he loves me not” better describes the relationship. As a result, the Reserve Bank of India and the Government of India have moved resolutely towards preventing citizens from investing in bitcoin. This prevents its citizens from escaping from what is commonly called “financial terrorism”, a situation where the riskless rate is less than inflation – a relatively common occurrence in the Indian economy.
More importantly, banning bitcoin prevents leakage of capital from the Indian economy which has perhaps the biggest informal sector in the world which some estimate to be as high as seventy percent of GDP. Bitcoin provided an easy, anonymous, international, liquid, and profitable way for squirreling away untaxed income – a sort of digital equivalent to brick-and-mortar tax heavens.
What is the difference between CBDCs and bitcoin?
Both CBDCs and bitcoin use blockchain technology and both have all the advantages of the blockchain in equal measure. The only difference will be in their ability to expand the supply of digital currency.
Bitcoin cannot be quantitatively eased since Satoshi Nakamoto took the precaution of irrevocably fixing the maximum number of bitcoins at 21 million, i.e., it is not possible for the bitcoin issuer to engineer bitcoin inflation.
However, CBDCs will retain the ability to be quantitatively eased by allowing central banks who are their issuers to expand the supply of the CBDCs thus retaining their power to unlimitedly expand the money supply, i.e., central banks and governments will retain the ability to pick citizen’s pockets without the citizen being aware that his pocket is being picked.
Farewell to Black Money
Every year trillions of dollars of untaxed money flood across the world’s offshore banking centres, tax heavens and Eurocurrency markets. and governments seem either unwilling or unable to do anything about this tsunami of ill-gotten income being laundered every day to the detriment of honest tax-paying citizens.
This phenomenon is arguably the biggest cause of economic injustice all over the world and contributes in no small measure to the biggest problem of modern-day capitalism – the rich get richer while the poor get poorer. The rich get richer because they evade tax, and the poor get poorer. After all, because they cannot evade tax and they are also forced to pay more than their fair share of tax because the rich evade tax.
CBDCs present the possibility of a solution. One beauty of the blockchain architecture is that it enables instantaneous tracing of every single unique unit of digital currency throughout its life cycle from the point of the first release by the central bank through every single transaction it has ever experienced on its journey into the current owner’s digital wallet. CBDCs can never be hidden and its ownership at any instant of time is fixed and never in doubt. No bribe can ever be taken, and no income can ever be hidden on the blockchain. Another way to look at it is that the moment you make a digital buck the central bank and the government are instantaneously informed that you have made that digital buck. Big brother is always watching.
In other words, we have a requiem for black money.
Written By:
Prof. Jacob Chandy
Associate Professor
Alliance Ascent College