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Finance is experiencing rapid evolution, with Central Bank Digital Currencies (CBDCs) at the forefront. With over a hundred nations currently in different stages of CBDC adoption, the signs of a global monetary system transformation are evident. It's critical to keep in mind, however, that changes in our monetary system should not merely reflect technological advancements, but also the principles of privacy and individual freedom that underpin our society.

Earlier this year, the Bank of England (BoE) launched a series of technical and consultation papers regarding a prospective 'Digital Pound.' With the consultation period on June 30th now closed, it is crucial that we are aware of the suggested changes and their potential implications on personal freedoms and privacy. It's worth reflecting on the 'Digital Pound' not just as an operational innovation, but as a societal change that could alter our understanding of private property and individual autonomy.

CBDCs, positioned as the digital counterpart of central bank money, promise to reshape our financial systems. The proposed 'Digital Pound' could deliver several potential benefits, including streamlined transactions and enhanced financial inclusion. Nonetheless, these perks warrant careful evaluation, with an eye on the potential for economic manipulation facilitated by this advanced technology. We must remember that any technology, while offering potential conveniences, also bears the capacity to restrict or surveil. Therefore, the wider societal implications of these developments need thoughtful contemplation.

CBDCs represent more than mere operational enhancements - they symbolise a fundamental transformation in our monetary framework to align with an ever-increasing digital world. They promise game-changing modifications in monetary flow, ensuring compatibility within the domestic financial system and with international currencies. However, any systemic change inevitably comes with systemic risks. Despite proposed limits on CBDC’s, the long-term impacts on banking and financial stability remain uncertain. In this sense, we need to be wary of over-optimism in the face of such radical change for the sake of ‘innovation’ and remember that such fundamental transformations should not be carried out lightly.

There are two forms of CBDCs, Wholesale and Retail, these serve different financial entities. Wholesale CBDCs are designed for banks and financial institutions, while Retail CBDCs offer a digital alternative to cash for households and businesses. The BoE's consultation primarily revolves around Retail CBDCs. While the 'Digital Pound' is described like a digital equivalent of physical cash, it fundamentally alters the transaction experience. Unlike cash transactions, which afford a certain level of anonymity, the adoption of CBDCs could set the stage for a financial system where every transaction is potentially traceable and permanently logged onto a digital ledger.

Essentially, we are looking at a system that doesn't merely modernize our transactions but redefines the very concept of money, along with its relationship to personal freedom and anonymity. Although assurances have been made about the anonymization or use of pseudonymisation personal data, it has been shown in various studies that pseudonymised data, given enough data points, can be identified. The task of identification will likely be made easier with the use of artificial intelligence (AI) and machine learning (ML). Considering we live in an increasingly digital age, there is a vast amount of data available for analysis. From this rich trove of information, it's possible to derive a plethora of insights about an individual - their social circles, political inclinations, and health, to name a few - just by examining the everyday spending habits of each person. This level of transparency might deter fraud and other illicit activities, but it also provides institutions with unprecedented access to personal financial data. The ability for institutions to scrutinize every transaction inevitably raises questions about personal privacy and governmental overreach. The government's close watch on cash usage within the economy is implicit. They are undeniably aware of studies from other countries, such as Sweden, where it was projected, that retailers will stop accepting cash by 2025. Similarly, we've seen a declining trend in cash usage in our own market, which the pandemic has only accelerated.

The consultation documents mention, 'The decline in the use of cash is expected to continue as commerce and payments become more digital, even though UK authorities are committed to keeping cash available as long as there is demand for it.' This phrase seems to hint at an eventual phase-out of cash. If cash gradually becomes obsolete, the only bearer instruments left in the economy would be bullion coins, which today, are rarely used as a medium of exchange. One must consider what we lose in the transition from tangible to digital - the anonymity and direct control over our own money.

The proposed 'Digital Pounds' would be stored in digital 'wallets'. These are provided by private-sector banks and financial institutions acting as Payment Interface Providers (PIPs). Accessible via smartphones and cards, these wallets would necessitate personal identifiers to comply with Anti-Money Laundering (AML), Know Your Customer (KYC), and Combatting the Financing of Terrorism (CFT) regulations. Some of these are outlined in the consultation papers like: • Knowledge (something you know) – A Personal Identification Number (PIN) or password, either validated on the device or online. • Possession (something you have) – Most commonly, this would be the smart device or card used for the transaction. • Inherence (something you are) – Biometric authentication methods such as facial or fingerprint recognition.

These requirement aligns with the notion of digital ID’s, which is convenient given the consultation of ID’s earlier this year, potentially paving the way for a holistic digital infrastructure. Of particular concern is the use of biometric data. When paired with the increasing integration of biometric surveillance, the outlook can be rather unsettling. It's important to acknowledge that this could escalate concerns surrounding surveillance and civil liberties. The compilation of financial data necessitates robust data protection and privacy laws to prevent potential misuse. Nonetheless, it's worth remembering that even the most comprehensive laws can have loopholes, and they are also subject to change.

Project Rosalind, a collaborative venture between the Bank for International Settlements (BIS) and the Bank of England (BoE), has been focusing on the application programming interface (API) for retail CBDCs. This project involves prominent companies such as Amazon, Barclays, and Mastercard and is developing use cases with both public and private sectors. It is worth noting that the project does not favour non-custodial wallets—those that permit direct custody of private keys.

Instead, they advocate the use of custodial wallets, which relegate the control of private keys to a third party. This practice has proven to be problematic in the world of cryptocurrencies, as demonstrated by the case of FTX. When this crypto exchange went under, those who did not transfer their crypto assets to non-custodial wallets lost access to them.

The consultation suggests a deposit cap for these digital wallets, set between £10,000 and £20,000. This restriction serves a dual purpose. Primarily, it seeks to prevent disintermediation of bank deposits to maintain the stability of commercial banks. Secondly, though not explicitly stated, it aims to guard against dollarisation from other CBDCs, which refers to the domestic circulation of a more robust foreign currency.

Certainly, the 'Digital Pound', akin to other CBDCs, can be programmed with smart contracts, a point underscored in both current and previous Bank of England discussion papers. Smart contracts, essentially self-executing contracts with the terms directly written into lines of code, can promote various applications, build system trust, and eradicate the need for expensive intermediaries. Nonetheless, they also introduce fresh challenges. The inherent inflexibility of smart contracts might not adequately accommodate the nuanced demands of real-world financial agreements. Moreover, their functionality heavily relies on the quality of the foundational code, making them vulnerable to both coding bugs and potential manipulation.

Consequently, the topic of smart contracts is primed for debate in future design phases. A thorough evaluation will be crucial for successful implementation and prudent regulatory decisions. The issue of technological control is not new and has been previously observed with the use of smart meters and the Internet of Things.

Interestingly, the BoE acknowledged this in a 2020 paper where it stated, 'More advanced smart contracts could be used (for example) to automatically initiate payments upon the confirmed receipt of goods, or routing tax payments directly to the tax authorities at the point of sale. Transactions could also be integrated with physical devices, or the ‘Internet of Things’. For instance, code could be written such that ‘when £X is transferred to account Y, device Z switches on'. Such a level of control can potentially be problematic if abused. This has been recently illustrated in the case of an American citizen who was locked out of his Amazon smart home devices due to an unfounded racism allegation. Another instance is the recent patent by Ford titled ‘Systems and Methods to Repossess a Vehicle,’ where driverless cars can be disabled and redirected when payments fail to come through. These examples underscore the delicate balance between technological innovation and the safeguarding of individual freedoms and rights.

As we delve deeper into the realm of CBDCs, we encounter a trade-off between convenience and privacy. The prospect of every financial transaction leaving an indelible digital mark heightens the tension between the allure of a tech-forward future and potential risks. The 'Digital Pound' may promise benefits like seamless transactions and better financial inclusion, but significant trade-offs, most notably in terms of personal privacy, come with these benefits. The 'Digital Pound' might reveal our personal expenditures unlike anonymous cash transactions. While such transparency may deter financial crime, it simultaneously transfers an unprecedented amount of personal financial data, tilting the balance of power towards surveillance.

The widespread adoption of CBDCs could provide governments and central banks with exceptional insights into citizens' everyday lives. While they deny any intent to misuse this information, the scenario could be exploited, with financial access potentially being used as a control tool. As we advance towards this digital frontier, it is paramount to advocate for solid legislative and regulatory protections that prioritise privacy and individual freedom.

Governments worldwide, particularly in places like China but also alarmingly in countries such as Canada, have demonstrated their ability to leverage financial power to influence their citizens. For instance, during the recent Canadian truckers' protests, individuals discovered themselves locked out of their bank accounts for making donations as small as $20. Intriguingly, it's not only governments; private corporations also play a role. The practice of 'debanking' has also been increasing, where individuals and businesses holding dissenting views find themselves excluded from the financial system. Governments may not need to act directly if regulators and third parties can enforce their agenda. This notion is evident in the potential consequences of the proposed 'Online Harms Bill.' If passed, it carries the risk of high fines and even criminal prosecutions if not complied with, compelling social media companies to set stringent standards in their terms of use to avoid potential repercussions.

Despite the apparent innovation that CBDCs bring, their necessity is debatable. Many of their proposed features are already present in our existing financial infrastructure and through advancements in the private sector. Industry-led solutions continue to refine systems, addressing security and privacy concerns without the complexity brought by CBDC proposals.

This interest of central banks in CBDCs is conspicuous, given the unparalleled control they offer over monetary policies, efficient transaction processing, and a potential competitive edge in global currency markets. However, we must not allow the urgency to adopt CBDCs to overshadow potential pitfalls. A sense of competitive anxiety permeates the discourse surrounding CBDCs, with no central bank wanting to be left behind.

One could delve into the implications of this competitive urgency. This could be a manifestation of a kind of technocratic arrogance, which forgets that human institutions exist to serve individuals, not the other way around. Technological advancement doesn't necessarily equate to human progress, and the obsession with being at the forefront may neglect the moral and ethical implications of such advancements.

The technical documents provided often avoid specific details, making sweeping statements that lack clear explanations. These 'innovations' and 'features' are presented as unquestioned benefits without providing tangible justification or examples for this seismic shift in our financial system and technological structure. There is no consideration of the adequacy of existing infrastructure, that works day-in day-out, with this all smelling like the central banks using this digital upheaval to give itself comprehensive control over the monetary system. This is not just domestically, but internationally also.

Considering that countries exploring or already implementing CBDCs represent about 95% of global GDP, CBDCs seem almost inevitable, regardless of consultation outcomes. Even if the initial implementation appears to be a diluted version of some CBDCs, once introduced, it is here to stay, leaving room for gradual and potentially unnoticed changes over time.

Considering the significant transition proposed towards this brave new digital world, it's quite fitting to question who holds the mandate or authority to initiate a Central Bank Digital Currency. Consultations like these, not unlike others of similar nature, are often hidden in the deep recesses of government or banking websites, leaving the average citizen none the wiser. For decisions that could bring about such foundational changes, it's crucial that these matters be more readily accessible to the public, even possibly by referenda. This type of governmental organization can make the administration seem more like a group of Vogons, rather than people trusted to run a nations monetary system.

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