In a recent op-ed for the Financial Times, former Bank of England economist Andy Haldane has exposed what he calls a "stealth tax scandal" at the core of central bank digital currency (CBDC) design choices. Haldane highlights a significant issue with the decision by central banks not to pay interest on citizen CBDC holdings, a move that he argues reinforces a regressive tax on cash-reliant consumers.
CBDC, or central bank digital currency, is a digital replacement for physical cash that more than 130 countries worldwide are currently considering issuing to their citizens. In the UK, a consultation document was issued earlier this year, sparking tens of thousands of people to petition against the introduction of CBDC.
Haldane's critique goes beyond the technical aspects of CBDC and delves into the social implications of cash as a public good. He argues that cash represents more than just a payment technology; it symbolizes identity and sovereignty. Therefore, decisions about its future should lie in the hands of citizens rather than central bankers or cryptographers.
The crux of Haldane's concern is the concept of "seigniorage," which he defines as a stealth tax that is both large and highly regressive. Seigniorage arises because physical cash is an interest-free loan to the government, effectively becoming a direct tax on citizens proportionate to their cash holdings at the prevailing interest rate. The regressive nature of this tax stems from the fact that cash is predominantly held by the poorest and least advantaged members of society.
The former economist points out that central banks have decided not to pay interest on CBDC holdings due to fears of potential financial instability and deposit flight from commercial banks. However, Haldane argues that such concerns are no longer valid, given the technological possibilities of paying interest on CBDC.
He makes a compelling case for leveling the monetary playing field by remunerating cash through CBDCs. This move, according to Haldane, could benefit all citizens by reducing the fiscal burden of the regressive stealth tax. Nevertheless, the current design choices of CBDCs have foreclosed on this option, leading to a continuation of the large, stealthy, and regressive tax on cash.
Haldane contends that CBDCs should be a subject of public debate and citizens' decision-making, rather than a privilege enjoyed solely by banks and financial institutions. By reinforcing and raising the stealth tax instead of addressing it, governments and central banks risk perpetuating a CBDC scandal.
As the debate around CBDCs continues, the fate of cash as a public good remains uncertain. The petitions and expressions of concern seen across the UK signal the importance of involving citizens in shaping the future of money and its social impact on all members of society.
AML/CFT Measures
Considering the news, Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) measures become even more critical in many aspects, such as:
Preventing Illicit Use of CBDC: With the potential introduction of Central Bank Digital Currencies (CBDCs), it becomes essential to have robust AML and CFT regulations in place. Criminals and terrorists may attempt to exploit CBDCs for money laundering, financing illegal activities, and evading detection due to the anonymity and borderless nature of digital currencies. Implementing stringent AML/CFT measures can help deter such illicit activities.
Addressing Regressive Tax Concerns: The news highlights the regressive nature of the current tax on cash holdings, disproportionately affecting the poorest and most vulnerable segments of society. Illicit financial activities, including money laundering, can exacerbate this wealth disparity. Effective AML/CFT regulations can help curb illicit financial flows and contribute to a fairer distribution of wealth and resources.
Protecting Financial Stability: The fear of financial instability and deposit flight from commercial banks to CBDCs has influenced the decision not to pay interest on CBDC holdings. AML/CFT measures play a crucial role in safeguarding financial systems from risks associated with money laundering and terrorist financing. By detecting and preventing illicit financial activities, AML/CFT efforts contribute to the overall stability of the financial ecosystem.
Enhancing Public Trust: The debate surrounding CBDCs underscores the need for public trust in the financial system and monetary policies. AML/CFT regulations can instill confidence in the digital currency ecosystem by ensuring that it is not misused for criminal purposes. When citizens feel that the financial system is secure and well-regulated, they are more likely to embrace innovative financial technologies like CBDCs.
International Cooperation: Given the global nature of digital currencies, international cooperation in AML/CFT efforts becomes crucial. Money laundering and terrorism financing often transcend borders, making collaboration between countries essential to combat these threats effectively. News reports like this one can prompt discussions and encourage governments and central banks to collaborate on establishing consistent AML/CFT standards for CBDCs.