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Philip Deck: Building trust is essential if central bank digital currencies are to succeed


This past week the U.S. government indicatedBiden takes big step toward government-backed digital currency it would investigate the issuance of digital forms of its currency. Many central banks have mused about this possibility, including in the UK,“We have not yet made a decision on whether to introduce CBDC. In March 2020 we published our Discussion Paper on CBDC, which outlines one possible approach to the design of CBDC and asks for feedback from the payments industry, academics, and other interested parties” but this is the most tangible evidence of their intentions to date. Central bank currencies offer many advantages that cryptocurrencies do not. But recent government actions that sow doubt in their trustworthiness put the trust that is essential to the adoption of central bank currencies at considerable risk.

The idea of a central bank digital currency“CBDC is generally defined as a digital liability of a central bank that is widely available to the general public. Today in the United States, Federal Reserve notes (i.e., physical currency) are the only type of central bank money available to the general public. Like existing forms of money, a CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.” is the virtual opposite of Bitcoin and other blockchain-based cryptocurrencies. The value proposition of Bitcoin is to completely do away with a trusted central issuer and create trust among end-users, effectively replacing trust with sophisticated cryptography. A central bank digital currency would be just another form of its existing currency, based on the full faith, credit, and trust of the central bank from whom it is issued. Its selling point, trust in a central authority, would be exactly the reliance that blockchain-based currencies are built to avoid.

The construction of a centrally managed currency would be far simpler, more efficient, and potentially more secure than those based on blockchain. The presence of a central ledger, as opposed to a distributed one, means that both sides of any particular transaction would be visible to the central counterparty and the processing of the transaction would not rely on any other user in the system. Furthermore, there would be no need for crypto mining, which can place an unacceptable environmentalThe average transaction consumes over 1,700 kWh of electricity, which is almost twice the monthly amount used by the average U.S. home burden on blockchain use.

Depending on the protocol used, a centrally managed currency need not even rely on public key cryptography, which is likely essential to any distributed ledger system. Public key cryptography is the use of an algorithm based on different, but mathematically related, encryption and decryption keys, or more pertinently for blockchain, signing, and verifying keys. Eliminating public key and the other aspects of blockchain protocols could speed processing and reduce the long-term existential risk that quantum computing poses to virtually all public key systems, including the one used in Bitcoin.

The likely use of central bank currencies would also be the opposite of Bitcoin. Bitcoin use as a transaction medium still faces significant challenges. Most holders do so in order to enjoy capital gains or to facilitate large illicit transactions, not make day-to-day payments. Central bank currencies would tend to be used in the same places where physical cash is useful; smaller, essentially anonymous transactions. The lack of interest or prospect for capital gains would likely discourage large balances. The potential efficiency benefits would make it appropriate for small transactions.

Presumably, along with the digital currency, central banks would issue a wallet in which to hold it. This would mean that holders would have an app that they could use to make payments and transfers. Like physical cash, these transactions could be accomplished without the exchange of any personal information. Anonymity between participants in a transaction could be maintained. Of course, there would not be anonymity from the central authority, which could monitor all transactions. More on that later.

Since a central bank currency would be just another form of its existing currency, it would share whatever stability and exchange features that its underlying currency possesses. Modern central banks are focused on maintaining price stability subject to some small amount of inflation and the digital form would inherit the same features. This would remove the major reason why most people hold cryptocurrencies: the prospect of long-term price appreciation. A central bank currency would actually decline in value every year by whatever inflation target is achieved.

The introduction of a digital central bank currency would have systemic implications for the banking system. Currently, the physical form of Canadian currency amounts to about $112 Billion. Those physical notes have been issued over many decades and the funds used to pay for the notes are invested in securities held by the Bank of Canada. The interest on these funds generates seigneurage income for the Bank, last year amounting to over $4 billion, most of which gets paid into government coffers. For holders, that interest represents the income that they forgo in return for having funds that are liquid and spendable. The issuance of a digital currency would undoubtedly increase the amount of currency outstanding, possibly by many times, as many might use their central bank in the way they currently use their bank balances and Interac. The benefits of higher income for the central bank would come at the expense of bank balances and fees by commercial banks and would reduce, possibly materially, their deposit bases.

But lately, trucker protests in Ottawa and the war in Ukraine have placed the trust in governments and central banks in question. That has significant implications on the marketing of digital currencies. The common feature in both these seemingly disparate situations is the confiscation of assets of supporters of trucker protests by the government and the seizing of Russian central bank deposits by central banks worldwide. The obvious question surrounding central bank currencies, and one that will now be asked more seriously, is whether central bank currencies represent unacceptable risks to holders from governments based on their security, policy, or even political concerns. Whether purchases will then be visible to governments may become a serious issue as governments with easy access to spending information could use it in the way the Chinese government implements its social credit system.

If central banks cannot establish a governance and legal framework that will give assurance that the funds held will be above political interference then their rollout will be much more difficult. The central value proposition of central bank currencies is trust. If citizens cannot be assured of trust, then they will be reluctant to use them. The spectacle of the Canadian Minister of Justice warning that Trump supporters might be subject to bank account freezes could not be more toxic to the establishment of this kind of trust and plays into the perceived advantages of cryptocurrencies. The seizure of Russian central bank deposits, for whatever well-intentioned reasons, is a significant departure from the trust in central banks that has been regarded as absolute in the past. Many people don’t see a material separation between governments and central banks, and actions that put deposits at risk without due process will erect significant barriers to trust.

Sean Speer: Why conservatives are so keen on cryptocurrencies


Why are Conservatives increasingly interested in cryptocurrencies? 

It might seem like an odd fit at first blush. Conservatism, after all, is something of a backward-looking persuasion. It starts from a premise that traditional ideas and institutions should, as a general rule, be protected and sustained. They’ve come through a process of trial and error over the course of history and therefore deserve our deference and respect.

This call for epistemological humility can sometimes manifest itself in an aversion to novelty and even progress. Michael Oakeshott famously described it as: 

“… to prefer the familiar to the unknown, to prefer the tried to the untried, fact to mystery, the actual to the possible, the limited to the unbounded, the near to the distant, the sufficient to the superabundant, the convenient to the perfect, present laughter to utopian bliss.”

The point here is that the conservative instinct tells us that most new ideas are false or wrong precisely because they haven’t been subjected to the rigours of practical wisdom. Conservatism, in this sense, is the political expression of the famous line from Will and Ariel Durant: “Out of every hundred new ideas ninety-nine or more will probably be inferior to the traditional response which they propose to replace.”

That might seem like an odd philosophical basis from which to embrace something as far-out as digital money. Yet there are limits to mere abstractions about conservative ideas and the conservative persuasion. Samuel Huntington tells us that conservatism must be understood in a specific situational context. It’s a contingent perspective that reflects particularistic circumstances. A Saudi Arabian conservative is different from a European conservative who’s different from a North American conservative. What they seek to conserve necessarily reflects their unique culture and intellectual inheritances. 

North American conservatism has long distinguished itself by its unique combination of a deference to tradition and a commitment to change. In his famous essay, “Why I am not a conservative,” Friedrich Hayek attributed this mix of posterity and progress to the fact that what North American conservatives are essentially seeking to conserve is a classical liberal tradition. That is to say, the North American conservative is, at some fundamental level, a liberal. His or her conservatism is dedicated to the preservation of the continent’s liberal ideas, institutions, and values.

It’s worth emphasizing this point: North American conservatism is somewhat oxymoronically committed to preserving a cultural and political liberalism which itself is fertile soil for growth, dynamism, and innovation. It’s a conservative tradition committed to a set of ideas, institutions, and values that are inherently pro-progress.  

David Brooks spoke to this unique amalgam of ideas and intuitions in a 2018 podcast episode with Tyler Cowen. When asked about his own conservative worldview, he answered the following: 

Well, I’m an American conservative. My two heroes are Edmund Burke — and Edmund Burke’s core conservative ethos is epistemological modesty, the belief that the world is really complicated, and therefore the change should be constant but incremental… My other hero is Alexander Hamilton… His conservatism was very different. It’s about dynamism, energy, transformational change. And so a European self-conservatism doesn’t work here. You have to have that dynamic, recreated, self-transformational element.

This applies to Canada too. As Ben Woodfinden and I outline in a forthcoming essay on Sir John A. Macdonald’s own conservatism, the country’s first prime minister personified this unique mix of backward- and forward-looking ideas. He was at once a dispositional conservative as represented in his personal preferences and tastes and something of a futurist with an ambitious vision of the frontier that was manifested in his nation-building agenda. As we write:

“For his part, Macdonald saw entrepreneurial freedom, limited but energetic federal power, and national greatness as inextricably linked. These instincts for national development were actually quite Hamiltonian. Like the father of the American commercial revolution, Macdonald came to represent a business liberalism which was suffused with a Toryism concerned with a ‘virtuous and ordered liberty.’”

I share this abridged story of the North American conservative tradition because it’s important to understand the compatibility of conservative ideas and technological progress in general and conservatism and cryptocurrencies in particular. The conservative persuasion in North America should be generally viewed as sympatico with frontier-like ideas, inventions, and technologies. 

These conceptual points bring us back to the more practical question at hand: why are conservatives increasingly pro-crypto? 

The first point is to establish that they are indeed showing growing interest in digital currencies. There are various examples, including, for instance, MP Michelle Rempel-Garner’s recently-tabled legislation that would have the government consult on a framework to encourage the growth of crypto assets in Canada. 

Some have dismissed these developments as merely related to the recent trucker protests in Ottawa. But this critique fails to reckon with the broader movement of conservative intellectuals and politicians that has come to support bitcoin and other forms of crypto-currencies in recent years. 

The highest-profile proponents aren’t themselves politicians. The two biggest are probably Elon Musk and Peter Thiel who are investors and entrepreneurs with significant influence on society and culture in general and the world of libertarianism in particular. 

They’ve both come to be associated with the growing cultural and political movement around crypto-currencies through a combination of their personal investments, public commentaries, and large online followings. The former has frequently talked about how he owns crypto-currencies, including Dogecoin, which he has been instrumental in popularizing. The latter has described bitcoin as the one asset that I most strongly believe in.” 

The appeal of crypto-currencies to Musk and Thiel isn’t merely about the financial upside. There’s also an ideological dimension. Digital money’s decentralized nature conjures up possibilities of new, more libertarian economic and political arrangements. Thiel has even argued that if we want to think about contemporary technologies in ideological terms, artificial intelligence can be thought of as communist and crypto-currencies are libertarian. 

It’s no surprise that in the face of sustained pandemic restrictions, libertarian ideas seem to be resonating more and more these days. In this context, Musk and Thiel have emerged as major figures among a cohort of millennial or Generation Z followers who are drawn to their contrarian rebuke of the stuffy conformity of modern life. Ross Douthat has thus described the rise of “folk libertarianism”—or what others have called “Barstool conservatism”—as one of the key socio-political developments of the pandemic age. 

This movement is less steeped in the tomes of libertarian thought and instead more reflective of contemporary cultural and political trends, including the rise of cancel culture, identity politics, and perceptions of government bossiness. Its followers are more Dave Portnoy than Ludwig von Mises. 

As a cultural and political movement, it’s highly active online, a bit coarse and politically incorrect, and mostly engaged in politics from the periphery using GIFs and memes rather than direct action. It reflects a series of intuitions about individual responsibility, personal expression, a commitment to technology and progress, and an aversion to so-called “wokeism.” Recently, The Hub contributor Ben Woodfinden summed up this worldview and its followers as “crypto bros.” He’s not wrong. 

The key point here though is that there are cultural and intellectual factors behind North American conservatives’s growing interest in new and novel monetary innovations. It’s broadly consistent with continental conservatism’s interest in frontier ideas and technologies as well as the growing appetite for non-mainstream, decentralized models of economic and political organization in the face of perceived top-down conformity. But it also possibly holds out the potential to bring new and different voters—particularly members of Canada’s sizeable non-voter constituency—into the Conservative fold. Crypto has therefore become an ideological and political rallying cry for North American conservatives. 

It’s not to say that there are serious issues with crypto-currencies. The recent volatility raises legitimate questions about whether this is a sustainable market development or merely a hyper-online fad. One gets the sense that the true story is somewhere in the middle. 

But as Matt Spoke recently argued in an essay for The Hub, there may be a case for a country like Canada to make a “huge bet” that the future of crypto is more sustainable than it is faddish. There’s reason to believe that the presumptive, next Conservative leader, Pierre Poilievre, broadly agrees with this perspective. 

To the extent that he does, it shouldn’t be viewed as inherently incompatible with the conservative tradition. North American conservatism has since its origins reflected an intellectual and political persuasion with both a backward- and forward-looking impulse. A careful yet curious view on crypto-currencies is well-rooted in this long-standing tradition.