Zen and the Art of CBDC Analysis (Part 1)

5 ways to focus the mind before leaping to conclusions on an overheated topic

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Dear Readers, Part 2 of this piece can now be found here.

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Our economies are held together by three layers of money, with the government issuing the first layer, the banking sector issuing a second layer of ‘digital casino chips’, and players like PayPal issuing a third layer of chips built upon the bank chips (learn more in The Casino Chip Society). The end result is that you and I have a choice between Layer 1 state-issued physical cash, Layer 2 bank-issued digital chips, and Layer 3 corporate-issued digital chips.

The so-called ‘cashless society’ refers to the situation in which the first option is removed, leaving us captured by the other two, but this has now been complicated by the arrival of a hypothetical new player called CBDC - central bank digital currency. If this were introduced, it would be a form of Layer 1 state-issued digital money, to supposedly co-exist alongside cash. It would be a bit like having an online account at your country’s central bank, which is something you can’t have right now.

I’ve been involved in CBDC discussions since 2015, but it’s only in the last year that I’ve seen it catching on as a hot topic in public. Google Trends data confirms this, showing that interest in it started to spike in 2022.

This interest is partly due to the fact that a variety of central banks have launched research initiatives and pilot projects to experiment with CBDC (see the CBDC tracker to explore these). This is leading to a cottage industry of social media pundits that are flooding the world with CBDC hot takes. I could give you my own hot take, but we don’t need more of those. What we need is a cool-headed way to approach the debate, so I’d like to offer 5 meditations that may help you in your quest.

Meditation 1: Acknowledge your background Imaginary

The first step in analysing CBDCs is to not think about CBDCs. Instead, we should acknowledge that all of us are bound to leap to certain conclusions about the topic, because all of us are haunted by background imaginaries that shape how we interpret things. ‘Imaginaries’ is a bit of a wanky academic term, but think of an ‘imaginary’ as being like a subconscious mental game-board upon which you play out scenarios in your head. It’s a game-board that has certain pre-set biases that will exert a pull on your thoughts, warping them in particular directions. You can have more than one imaginary competing to warp your thoughts, but here’s a selection, along with descriptions of what they are likely to make you think about CBDC.

CBDC in the libertarian imagination

If you’re a person who refers to yourself as a libertarian, your background imaginary will likely be set up as a battleground between good and evil. On the good side is a heroic, innovative and productive entrepreneur class defending against a bad, stagnant and parasitic government that tries to rob things. In this game-board, regulations are just an oppressive shackle suffocating innovation, and state enterprises are inefficient and corrupt drains upon society. Actually, you might not even believe in ‘society’ (echoing Margaret Thatcher’s belief that ‘there’s no such thing’ as society), and prefer to see the economy as but a collection of sovereign individuals without obligations to each other, who only interact to mutually pursue their self-interest. From this perspective, welfare systems are just one group of people using the state to leech off the hard work of others.

So how might a libertarian imaginary affect your perception of CBDCs? Well, it’ll probably bend your mind towards viewing CBDC as a new attack launched by the evil side of the battle. The state will use its control over this new digital money to watch you, censor you, and discipline you. In the socially conservative version of libertarianism, CBDCs loom as the monetary wing of a terrible new system of woke environmentalist authoritarian control. It’ll be enlisted to force you to buy green vegan products and to demote you if you fail to declare your pronouns. CBDCs may appear as just one more means to unnaturally distort the natural hierarchy of God and male patriarchs, who would otherwise by striving to preserve themselves and their family by competing hard in the market (which is imagined to produce spontaneous natural order when left to run without interference).

Conservative libertarianism is also very heavily invested in the Tarzan Suite, a mode of thinking about economies in which the individual is primary, and which tends to lead - through a number of twists and turns - to you imagining that money should be akin to a natural commodity. This may push you towards believing that Bitcoin is the great dollar-killer, which in turn may push you towards believing that CBDC is a desperate attempt by a frantic state to fight against the crypto revolution.

CBDC in the socialist imagination

If you call yourself a socialist, you may reject the idea that the individual is primary in the economy, because we’re all entangled together in a huge interdependent mass. Furthermore, you’ll probably believe that the most vulnerable people in society are not at liberty to just choose whatever path they want within this mesh. As Isaiah Berlin put it:

People are largely interdependent, and no person's activity is so completely private as never to obstruct the lives of others in any way. 'Freedom for the pike is death for the minnows'; the liberty of some must depend on the restraint of others.

On this game-board, poorer people often only have a choice between starving and selling their labour to rich people who have far greater power. So, within the socialist imaginary the state is seen as something to be harnessed to protect people against a parasitic capitalist class (which gets enormously wealthy by extracting surplus value from peoples’ labour). The state can act as a shield to protect the minnows from the pikes (and in this frame, deregulation efforts are a ‘licence to exploit’). In the far misty reaches of the imaginary there may be a dream of a future workers’ state where everyone collectively owns everything and exploitation is ended forever (this also exists in the libertarian vision, but as a dark nightmare of totalitarian communitarianism).

So how might this affect someone’s perception of CBDC? This is a tricky one, because people on the traditional political Left tend to have an aversion towards thinking about finance and money, seeing it as a profane realm of capitalists. But those who are savvy may see CBDCs as a Layer 1 opportunity to break the power of the Layer 2 private banking sector (which, alongside Big Tech, is in the midst of privatising the entire monetary system via its attacks on physical cash). They may see CBDC as initiating a new era of public digital money for the good all those crucial workers who lack status in capitalist markets, like nurses, teachers, and exploited minorities. Rather than CBDC being something to take over people’s lives, it’s something to be used in the fight against a banking sector that seeks to take over people’s lives.

Of course, ‘socialist’, like ‘conservative’, is a broad concept, and it’s an ecosystem of beliefs rather than a single species. While many left-leaning groups tend to see society as being like a large family that should be working together, only some believe there should be a paternalistic daddy figure on top directing the action. China stands out as having more of this ‘daddy-on-top’ vibe, and in the Western world there’s a small but vocal sub-section of the Left, pejoratively called ‘tankies’, who claim that critique of China is just a cloaked form of US imperialism. For this sub-set, and for anyone else who has bought into the daddy vision, privacy may appear as a kind of luxury sought after by bourgeois capitalists (who wish to stall the progress of the overall family). Digital surveillance may seem like a common sense element of a good society, to make sure everyone pays their taxes and contributes to the public good, but this obsequious attitude is rejected by left-wing anarchists, who are next on our list.

CBDC in the anarchist imagination

If you are someone - like me - who sits more on the left-anarchist (or libertarian socialist) spectrum, you’re probably not going to make a clear distinction between states and (large-scale) markets. The left anarchist game-board has the state acting in concert with large private sector players to form a kind of ruling coalition (even if the coalition members might make a big performance of sabre-rattling at each other). This means people with an anarchist impulse will tend to express cynicism towards both state and market. Nevertheless, they may see value in trying to engage with both in order to minimise the destructive tendencies of the ruling coalition by creating balances of power between the members (almost like trying to curb the expansion of a malignant dual cancer by getting one part to attack the other). Against this backdrop there’s a vague utopian dream of federated anarchy, a future in which small self-governed collectives flourish by setting up interconnected networks-of-networks (this vision has found new expression in the more progressive parts of the crypto world - for example, it sometimes pops up in the Ethereum and Cosmos ecosystems).

So how does this imaginary interact with CBDC? Hrm. Well, it probably leaves you with less nightmarish vision of CBDC than libertarianism, but a less romantic vision of it than the socialist imaginary might give. Given that state and market are just enmeshed elements of each other, you’re more likely to recognise the torturous angst that government officials will go through as they think about CBDC. State officials will be reluctant to launch one, because it risks disrupting the private banking corporations that form a core part of the ruling coalition. Insofar as a CBDC gets launched, it will have its fangs removed in order to maintain a strong role for the banking sector to continue to dominate the digital money system. In fact, CBDC may end up just being a ruse to improve the efficiency of the private interbank payments architecture, with the goal of accelerating and extending the reach of corporate capitalism into the furtherest reaches of your soul (more on this in Part 2).

Anarchisty people will already be concerned by the surveillance in the existing private sector digital payments system, but will now also have to be concerned about the potential for payments surveillance via CBDC. If you’re sitting somewhere between this imaginary and the previous one, you may be tantalised by the potential to mess with the big banks via state-issued digital money, but you’ll advocate for a privacy-centric implementation of it (perhaps along the lines of the E-Cash proposal by Rohan Grey and others).

CBDC in the centrist imagination

Technically speaking centrism is a middle position that rejects the extremes of the traditional Left and Right, but as a social imaginary it’s a pastel-coloured landscape stripped of fiery politics. This is a crude caricature, and centrism can seep into the liberal Left and neoliberal Right, but it’s kinda the comfort zone of the apolitical middle blob. It’s a game-board that assumes the world muddles on in the right direction, provided we all keep civil, and it also carves out much space for technocratic governance by experts (rather than by political ideologues). The world is a steady march towards economic efficiency, social good and progress, and if things exist it must be a sign that they serve a purpose for us all, not because they are there to extract power for one or other group.

Silicon Valley trades quite heavily on this imaginary: new technology emerges because ‘we’ have desire for it (indeed, its existence is seen as evidence of our desire), and all that remains is to have a managed process of transition to make sure nobody gets ‘left behind’ as everyone gets upgraded. Your individual identity can blossom in this consumerist landscape, as long as you don’t call for an ethno-nationalist police state, or for a true socialist revolution against the capitalists (albeit, you are allowed to call for fake revolutions on Instagram, and to wear left-wing aesthetics like a brand of clothes). As for states, they must be background plumbing to help business leaders meet the needs of consumers.

In the centrist imagination, CBDC has its political content watered down, and this is the standard mode by which it’s being presented in most official discussions. The underpaid public sector officials who are tasked with investigating it seem to be saying: ‘we are not authoritarian dictators or capitalist illuminati. We’re just hard-working policy experts working alongside private sector partners and civil society to serve society in its forward march into ever greater productivity and automation’. CBDC, in this frame, is just another step in our broader move towards ‘digital transformation’, which is seen to be inevitable because it’s part of our unstoppable, never-ending, and ever-so-exciting enlightenment journey towards ever more efficiency, convenience, interconnected complexity and SCALE.

CBDC in your imaginary

This isn’t an exhaustive list, and you may disagree with my (somewhat tongue-in-cheek) categorisation. The point, however, is to highlight that we may be less in control of our perspectives on CBDC than we may think, because the topic is often being routed through a series of pre-installed shortcuts in our minds. There’s no escape from this, but I’d recommend coming to terms with why you’ve ended up with the imaginary you have (for example, I grew up in Apartheid South Africa, where a fascist police state used law to forcibly extract labour from workers to enrich capitalists, and the existential pain of that expresses itself in me as an anarchist intuition, duh!) Now onto Meditation 2.

Meditation 2: Accept that CBDC already exists under a different name

Meditation 1 addresses fantasies, but this one addresses realities. I noted that we have access to three layers of money in our society – Layer 1 state cash, Layer 2 bank-issued digital chips, and Layer 3 corporate-issued digital chips. Cash, however, isn’t the only form of Layer 1 money. There’s another, but we can’t access it. Only banks can.

The term given to this money is ‘Reserves’, and it’s the digital central bank money that commercial banks use between themselves. It certainly is ‘central bank digital currency’, and has existed for a long time, but because we can’t access it we’re often unaware of its existence.

If I’m a British citizen, I don’t have the ability to open an account at the UK central bank (The Bank of England), but commercial banks do have this ability. In fact, to be a bank they must open an account at the central bank. Think of the central bank as being like an exclusive private club where the state and the banking sector do their own banking (and which also serves as a regulator and place for them to meet). Members of the club get access to a premium digital version of Layer 1 central-bank-issued money, while we in the public use cash and Layer 2 commercial-bank-issued digital money (check out my book Cloudmoney for a deep dive into the interaction between these).

If you have a Barclays account in the UK, you’ll have an app that allows you to message the bank to ask for your Layer 2 chips to be moved from your account to another, but in the background Barclays and the other banks have access to a system where they can message the central bank to ask for their Layer 1 digital units to be moved between their respective accounts (albeit, I doubt the Bank of England gives them an app for this).

So, if central-bank-issued digital currency has been used extensively by the banking sector for many decades, why is it only becoming a hot topic now? Well, in new popular discourse, the term ‘CBDC’ is reserved for the hypothetical scenario in which ordinary citizens get given direct access to central bank reserves to make payments. That would be akin to allowing you and me to open an account at the central bank, thereby giving ordinary plebs like us access to the formerly exclusive private club.

When Citibank and Chase Bank message the US Federal Reserve, they may ask it to move tens of millions of digital reserves between their accounts, but imagine if you too could stand alongside them and ask the Fed to move a mere $10 of central bank money to a small-town theatre for a movie ticket. How do you think that makes the original members of the club feel? Meditate upon that question.

Meditation 3: Realise that early CBDC proposals were attacks on banking sector power

Meditation 3 takes us into some of the hidden political history of (one version of) the CBDC idea. For a long time it was not a mainstream idea, but was advocated by quite radical groups who were critical of the mainstream central banking and commercial banking establishment. Let me explain.

Big players like Citibank and Chase traditionally dominate the digital money system, because they issue the Layer 2 digital ‘casino chips’ that we see in our bank accounts. They create a significant proportion of those chips through a process called Credit Creation of Money (summary: they issue new chips in exchange for loan agreements from people, a process that is sometimes called ‘fractional reserve banking’. See The Casino Chip Society for more detail). Credit Creation of Money gives banks a lot of power to direct the economy, because they get to decide which sectors to activate or deactivate by issuing or retracting credit). This is why there’s a tradition of monetary reform campaigns that call for the state to remove this power from the banking sector (see, for example, the American Monetary Institute in the US).

Such monetary reformers face an uphill battle, because in capitalist countries the state often acts to protect the banking sector (and officials may see the sector as foundational part of the Good Society, helping us achieve our life goals). So, in a country like the UK where the banking sector has huge political power, it’s politically impossible to call for legislation to prevent banks creating money (in fact, it’s far more likely that the state will work with the banks to promote ‘financial inclusion’, a euphemistic phrase referring to efforts to onboard people into the commercial banking sector, and to make them dependent on bank credit). Put simply, the idea that the state will work against the banking sector is out of sync with political reality.

So what is a monetary reform campaigner to do? Well… one possibility is to use a more oblique strategy. Rather than calling for legislation to remove money-creation power from the banks, just give the public a new option. Advocate for us to be given access to the traditionally limited-access central bank reserves that the banks have exclusive use of. This is turn will make us less dependent upon the Layer 2 digital money system run by the banking sector, reducing their political power.

So, some of the earliest CBDC proposals I came across were from monetary reformers who wanted to knee-cap private banks by getting the central bank to allow this. Here’s a classic 2016 example of this strategy from the savvy UK monetary reform group Positive Money.

Notice that they frame it as innovative technology rather than a political move. They know very well that central banks already issue electronic money, and that the real objective is to open up access to it, but CBDC gets positioned as a fancy new digital thing. This is a great strategy, because digital automation is a standard part of transnational corporate capitalist ideology, which means national capitalist states - which are subservient to the overarching ideology - have to take it seriously. In other words, you can disguise a monetary reform campaign against the banking sector as a technological innovation, and trojan horse it into the political realm via politicians’ inability to reject automation.

Monetary reform groups could also hack neoliberal ideology by framing this as promoting ‘choice’ and ‘competition’. Rather than asking a state to legislate against banks, you get the state to compete: so, imagine a person in the UK facing a choice between opening an account at Barclays, and an account at the Bank of England. Given that the Bank of England issues Layer 1 base money that’s technically safer than Barclays digital casino chips, they just might outcompete Barclays, weakening our dependence on the banking sector (and its crisis-inducing tendency to issue excess Layer 2 money into shit like housing speculation).

Meditation 4: Ask the question, ‘If central banks underpin private digital money, why would they compete with it?’

Having noted that some groups see CBDC as a potential weapon against the banking sector, let us now meditate upon the fact that the average central banker isn’t that radical. In fact, one of their core mandates is to maintain the stability of the banks. The monetary reform version of CBDC asks them to deliberately undermine their banking pals, so it’s controversial at best.

But how then do we explain the sudden rise in central bank experimentation with CBDCs? Were they inspired by the monetary reform movement? No. There’s something else going on. What is it?

Well, one common story goes something like this: private sector digital money players are growing so fast that they’re leaving central banks in the dust, and central banks are trying to play catch-up. In this view, CBDCs are not emerging out of a democratic push to reduce the undemocratic power of the commercial banking sector. Rather, it’s because central banks are dinosaurs who are nervous about being outmoded by new digital players, and who are reluctantly clawing for territory and relevance by going digital.

Central bank dinosaur gets invaded by space age private sector

Many techy people seem to think this is what drives CBDC development, but this meditation is designed to cast doubt on that. So let’s dive in.

Layer 2 bank-issued digital money has existed for a long time, and accounts for over 90% of the money supply in countries like the UK, but the central bank hasn’t historically felt an existential ‘threat’ from this. Why not? Just like casino chips derive their power from the legal guarantee that you can take them back to the cashier to redeem for cash, the digital ‘casino chip’ money issued by the banking sector derives its own power from the implicit guarantee that it can be redeemed for state cash. Layer 1 state money underpins confidence in Layer 2 bank money, and to suggest that the latter will somehow overcome that dependence, and transcend the very money that underpins it, is weird.

I’m not saying this can’t happen, but it’s worth dropping naive versions of the belief that central banks are trying to ‘catch up’ with Layer 2 and 3 private sector money issuers. If anything, new private sector players are making the central bank even more important. Consider, for example, PayPal. Every Layer 3 PayPal unit only has power because it’s backed by Layer 2 bank chips that are partially backed by Layer 1 central bank money. Why would a central bank feel pressure to compete with an entity that they not only underpin but also have regulatory power over? It’s like a parent feeling pressure to compete with their five year old child. The kid might be confident, but they’ll very quickly lose that without the support of the parent.

One of the most virulent versions of this story concerns stablecoins. Most people probably realise that PayPal is not about to ‘outcompete’ the US Federal Reserve, but because stablecoins are new and carry the (dwindling) rebellious aesthetics of crypto, they are sometimes seen as a feral wild-child that could disrupt everything. In reality though, most major stablecoins are Layer 3 systems just like PayPal, albeit implemented on a decentralised network architecture rather than a centralised IT system. Big stablecoin players like Circle USDC heavily rely upon the US Federal Reserve continuing to do what it does. So, meditate upon the fact that central banks are the big franchisor bosses at the centre of national monetary systems, granting private sector franchisee players the right to issue units that carry the dollar, pound, yen or rupee symbol.

Meditation 5) Meditate upon my hot take

We still have to deal with the inconvenient truth that central banks seem to be dragging themselves towards CBDC. I told you earlier that we don’t need more hot takes, but I lied, because we do need this one. Here it is:

There’s a high chance that central banks are reluctantly experimenting with (opening up access to) CBDC because their private sector partners have fucked up by attacking the public money – physical cash – that underpins confidence in private sector money.

If I was to put a Marxist hat on, I’d talk about the ‘contradictions of capitalism’: when a bunch of corporations all individually pursue their individual interests, they often collectively create conditions that undermine their collective interests.

For example, commercial banks are private profit-seeking entities that want to automate everything to cut costs. This means they want to get rid of all their physical branches, which in turn reduces the ability for businesses to deposit cash, which in turn pushes more businesses towards ‘going cashless’, which in turn sends signals into the public that there is something unacceptable about cash. Banks also want to shut down their physical ATMs, which in turn reduces the public’s access to cash, which in turn makes cash seem relatively more inconvenient than before.

This is convenient for the banks, because while they undermine the Layer 1 cash infrastructure, they are also doing everything within their power to steer people into their Layer 2 digital payments systems that give them revenues and data. They are helped in this task by the card companies like Visa and Mastercard, which make all their profits by getting people to stop using cash, and who have drip-fed the public anti-cash propaganda for decades (check out Cloudmoney for more on this). In the background, Big Tech players like Amazon are on board with all of this, because they want to automate everything, and cash is resistant to automation.

Each individual bank is privately run, and see an anti-cash stance as being in their private interest. They are predictably doing what you’d expect a capitalist corporation to do, and they don’t think about the broader consequences of that. When I say ‘broader consequences’, I don’t only mean the ‘externalities’ that are pushed upon us as a result of a cashless society (like possible mass surveillance, censorship, exclusion, resilience problems, centralisation of power etc.), but also things that will come back to bite the banking sector. One of these is the fact that the power of their Layer 2 digital chips depends on the public believing they can be redeemed for state money, but the banks are collectively eroding the state money infrastructure in order to boost profits.

So, big private sector players have individual incentives to destroy cash, but collectively that screws them over. For a long time central bankers didn’t think too much about this, and have allowed it. Since the pandemic, however, the private sector anti-cash drive was massively accelerated, because Big Finance, Big Tech and Big Retail weaponised the public’s temporary fear of physical contact to amplify the anti-cash automation agenda that they already had. Suddenly central bankers are more aware of the possibility that the contradictions of capitalism could undermine financial stability. So, what pops into their head? Layer 1 money underpins Layer 2 money, but Layer 1 money is being eroded, so to save Layer 2 money we must give the public access to a new form of Layer 1 money.

Coming up in Part 2…

The old balance of power between Layer 1 and 2 money depended on a kind of differentiation in vibe. Cash is public, offline and privacy-preserving, while digital bank chips are corporate, online, privacy-invading and require accounts. These differences historically have given them different spheres of influence: cash is the state money which is good for small-scale local transactions settled on the spot, and it also forms the mental image of ‘money’ for most of the public. Bank chips, by contrast, are easier for large-scale and distant transactions, but they are invisible and intangible and derive their power and imagery from state money. But now we’re seeing cash being undermined in the places where it was historically strongest - the local and the physical - and the balance of power is getting wrecked.

For central banks, this is creating conflict between their different mandates. In order to maintain stability, the central bank feels pressure to create a new alternative - CBDC - but when public money comes in a digital form its vibe changes, and it suddenly feels a lot closer to being in direct competition with the banking sector. In a nutshell, central banks are being pushed towards direct competition with the private sector players they are supposed to promote. Oh the terrible irony.

In Part 2 I’ll introduce five more meditations where we’ll reflect on issues that spring up around this. For example, why is it so politically unthinkable for the central bank to just promote cash instead of CBDC? If CBDC causes contradictions for them, what tweaks will they introduce in an attempt to resolve those? Could CBDC be crafted to promote Layer 2 and 3 systems? We’ll also look at whether Bitcoin has anything at all to do with this, and the monetary geopolitics of it all.

Part 2 of this piece can now be found here.