Editor’s Note: Welcome back to Jeff Brown’s prediction series. Over the next several days, Jeff will share his biggest predictions for the new year. Today, Jeff discusses central bank digital currencies and what it means for financial privacy and the future of money.

Van Bryan (VB): Jeff, I’d like to ask you about central bank digital currencies today (CBDCs). But first, could you just define that term? What is a CBDC?

Jeff Brown (JB): At a high level, we can think of a CBDC simply as a digital version of a national currency. So, a digital version of the dollar, the pound, the yen, and so on. A CBDC would be under the centralized control of a country’s central bank.

From the perspective of a central banker, a CBDC would have several benefits. That’s because the money could literally be programmed.

For instance, until just this year, the Federal Reserve was trying to increase the level of inflation. Normally, the Fed would attempt to do this by adjusting its key rate lower. But these rate changes take time to work through the economy and affect the desired outcome.

But imagine an economy with a CBDC. The Federal Reserve could program the currency to “print” at a specific rate—say, two percent per year—to get to the desired outcome.

That’s just one example. But we can imagine the possibilities—good and bad.

An important prediction that I’m comfortable making is that the Federal Reserve will announce its U.S. dollar-based CBDC within next year. I suspect it will happen in the second or third quarter.

To be clear, that doesn’t mean that it will be employed and rolled out on a national level, but the program will be announced, as well a roadmap for adoption both by the banking community and ultimately by those living in the U.S.

We can absolutely expect that there will be pilots announced first with banks, then with subsets of consumers, ultimately accompanied by media reports about how wonderful the new technology is.

VB: What makes you think that will happen next year?

JB: I’ve been following this trend actively since 2018. But it really wasn’t until the last two years that this entered the mainstream.

In March of 2020, the U.S. Senate approved a $2.2 trillion stimulus package. The original bill contained language regarding a central bank digital currency (CBDC). It talked about creating a digital dollar as a means of moving away from cash and toward “contactless” payments.

The funding to explore a CBDC was dropped from the final stimulus bill. But it certainly caused a stir in Washington. Through my contacts with the Chamber of Digital Commerce, of which I’m an active member, I learned that a digital dollar was a growing priority in some corners of D.C. and branches of the Federal Reserve.

[Editor’s Note: The Chamber of Digital Commerce is a U.S. based blockchain industry advocacy group that helps educate lawmakers on the benefits of blockchain technology. The Chamber advocates for reasonable regulation for the industry that won’t stifle innovation.]

Then, in March of this year, the Biden Administration put out an executive order. It was the “Executive Order on Ensuring Responsible Development of Digital Assets.” Among other things, the order stated that the current administration placed “the highest urgency” on the research and development of a CBDC for the United States.

Then, in November, JPMorgan used a Singaporean version of a CBDC and settled a large multimillion dollar bond transaction on a blockchain. And just a few weeks ago, The Federal Reserve of New York announced a twelve-week CBDC pilot that involves institutions like Citigroup, Wells Fargo, Mastercard, and HSBC.

These are all precursors to what I believe will be a more formal announcement from the Fed and the U.S. Treasury about their plans for digital money on some form of digital ledger that will almost certainly be centralized and controlled.

VB: It’s that last part—centralized and controlled—that worries some readers. In the past, you’ve had a nuanced view on CBDCs. There are benefits, but also areas for abuse. Is that still your opinion?

JB: You know, if you had asked me that three years ago, I probably would have been more optimistic. Because, yes, a CBDC would remove a lot of friction in the financial system that ultimately we, as consumers, pay for.

For instance, this would have been a great technology to distribute stimulus funds during the lockdowns. The Paycheck Protection Program (PPP) turned out to be a money grab. Billions of taxpayer dollars were incorrectly funneled or distributed in the United States. The latest estimates I saw were that 15% of the funds could have been distributed fraudulently.

It was so horrendously managed. It’s such a mess that it’s hard to unwind just how much waste was involved in the stimulus programs. 

This sloppy work came at huge expense to hard working Americans. So, we could see how a CBDC would be useful in a situation like that in terms of reducing fraud and also the cost to implement a stimulus program like that.

But overall, my opinion on CBDCs has really turned quite negative more recently.

VB: Why is that?

JB: What I’ve seen is this increasing rhetoric that is really frightening and very totalitarian. We have entities like the World Economic Forum (WEF) comprised of unelected officials openly advocating for programs that sound an awful lot like the Chinese government’s social credit system.

In essence, the goal is to link transactions and money with certain social behavior. There is very open discussion and active initiatives to create technology applications that are used to track our physical locations and consumption patterns.

The goal would be to “steer” human beings towards desired social actions determined by these unelected individuals. So, perhaps our actions are creating a larger carbon footprint than “they” feel is appropriate. That’s just an example, but it’s brought up a lot.

If the goal is to reduce a person’s carbon output, then you could stop any transactions that results in a larger carbon footprint.

So, maybe you can’t fill up your pickup truck one day. Or you’re limited to how much gasoline you can purchase. Or you’re now prohibited from buying any more meat for the month. That level of control would absolutely be possible with a CBDC.

VB: Some would say that a social credit system might happen in China, but never in places like Europe or North America.

JB: And maybe just a few years ago, I would have thought that too. But just have a look at what’s been happening recently. What happened with the Canadian truckers at the start of the year was really shocking.

The Canadians were protesting peacefully for something that should be commonsense by now: an end to the ineffective pandemic policies like lockdowns and “vaccine” mandates.

And what did the government do? The Canadian government froze their bank accounts. It was an appalling abuse of power. By the way, I thought it was really hypocritical that Canada’s Prime Minister, Justin Trudeau came out in support of the protests by the Chinese people just the other week. That level of hypocrisy is disgusting.

And even if we disagreed with the truckers, it used to be understood that peaceful protests were a cornerstone of liberal democracies. Is anybody really comfortable with a government “de-banking” its own citizens for peaceful protesting as a way to express their opinions and be heard by a government that is not willing to listen?

It’s things like this that make me very worried about the implications of a CBDC.

VB: The solution would seem obvious, just conduct transactions in cash. But I understand you believe that won’t be an option. Is that right?

JB: You’re right that that seems like the obvious solution. But it’s not as realistic as we might think. For starters, more venders are increasingly refusing to accept cash. And for another, it’s just not realistic to pay for some items in cash. Is anybody going to pay their monthly mortgage or their car payments with cash? Most lenders actually won’t allow it.

And I expect that physical money—coins, cash, etc.—will be phased out over the next several years. For one, it just won’t be needed. For another, it would get in the way of this total control, which is really the end goal.

Let’s imagine what’s possible in that scenario. The IRS could literally track and tax every single transaction. So, it would increase tax revenue for any country that employs this technology.

Or if someone at the IRS feels that you’re not “paying your fair share” and decides to withdraw funds from your account automatically, you’re left will little to no recourse. 

You could certainly appeal the decision; but just as it is today, it is the taxpayers obligation to prove to the IRS that the amount that it thinks you owe is incorrect. This is often a high bar and is expensive. It’s also time consuming and complex to appeal its decisions.

Last time, we discussed how regulatory agencies were very antagonistic to some blockchain companies like Coinbase. I think this may have been one of the motivations.

In essence, the U.S. government wanted to “stake their claim” with these CBDCs. They want to build the new financial world to their designs, and then I expect they will let the industry build within this architecture.

This is why the government took such a hard stand against Facebook’s proposed stablecoin, Diem from years back. Facebook originally planned to launch a digital asset that would be backed by a basket of reserve currencies. And because Facebook has nearly 3 billion users worldwide, Diem would have been adopted very quickly.

Facebook—in essence—would have been its own central bank. That was viewed as an affront or an assertion of power against the Treasury and the Federal Reserve.

We’ll probably never know for sure, but I suspect there were some closed-door meetings between government officials and Facebook executives. The message was probably something like: Drop this right now or we’re coming after you.

VB: If you had to conclude your thoughts on CBDCs next year, what would you say?

JB: I would say things are about to get very real in 2023. This is a very frightening direction for governments to be taking. And it will be one of the most contentious topics in the high-tech industry in 2023.

In my view, this is Pandora’s Box. It’s too much power for governments to have over its people. And I’ll be paying close attention to it next year and doing whatever I can to support any initiatives that are working to stop the worst-case scenario from being approved and implemented.

VB: Thanks, Jeff.

JB: Of course.

Editor’s Note: Check back tomorrow for Jeff’s next prediction. We’ll sit down to discuss nuclear fusion. A major fusion breakthrough happened just this month. What are the implications? Check back for all of that and more tomorrow.