Transaction tax

The Dangerous Implications of CBDCs – Bitcoin Magazine

Natalie Smolenski is a Senior Advisor at the Bitcoin Policy Institute and Executive Director of the Texas Bitcoin Foundation, and Dan Held is a Bitcoin Educator and Marketing Advisor at Trust Machines.

This article is an excerpt from the Bitcoin Policy Institute white paper “Why the US Should Reject Central Bank Digital Currencies (CBDCs)”, written by Natalie Smolenski with Dan Held.

CBDCs are digital money. Unlike traditional (physical) cash, which can be processed anonymously, digital cash is fully programmable. This means that CBDCs allow central banks to have direct insight into the identity of the parties to the transaction and can block or censor any transaction. Central banks dispute that they need this power to combat money laundering, fraud, terrorist financing and other criminal activities. But as we will see below, the ability of governments to effectively fight financial crimes using existing anti-money laundering and knowing your customer laws (“AML/KYC”) has proven woefully insufficient, at best, while effectively eliminating financial privacy for billions of people. people.

The ability to block and censor transactions also implies its opposite; the ability to require or encourage transactions. A CBDC could be programmed to only be spent at certain retailers or service providers, at certain times, by certain people. The government could maintain lists of “preferred suppliers” to encourage spending with some companies over others and of “discouraged suppliers” to punish spending with others. In other words, with a CBDC, the money effectively becomes a state-issued token, like a food stamp, that can only be spent under predefined conditions. Resource tests could be built into each transaction.

But censoring, discouraging and inducing transactions are not the only powers central banks have with programmable cash. Banks can also discourage saving – the holding of digital money – by capping cash balances (like the The Bahamas have already done it for their CBDC) or by impose a “penalty” (negative) interest rates on balances above a certain amount. This can be used to prevent consumers from converting too much of their M1 or M2 bank balances – credit money issued to them by commercial banks – into cash (M0). After all, if too many people rush to demand cash (hard money) at once, commercial banks will be starved of funding and could cut their lending drastically if they can’t find other sources of capital. Central banks understandably want to prevent these “credit crunches,” which often result in economic recessions or depressions. However, their political interventions also deprive people of access to M0 money – the hardest and most secure form of money under a fiat currency regime – leaving billions of people, especially the poorest, without recourse. in the event of a currency crisis.

Of course, negative interest rates can be imposed by central banks on all cash, not just balances over a certain amount. While the objective of imposing negative interest rates is, again, to prevent recessions by stimulating short-term consumer spending, this objective is achieved at the cost of accelerating the destruction of private wealth. We can take the current global economic situation as an example. Central banks have intervened during the COVID-19 pandemic to stave off recession by monetizing growing levels of sovereign debt, which have flooded markets with fiat money. This resulted in more money chasing fewer assets, a reliable recipe for inflation. The world is therefore experiencing the highest sustained global inflation rates for 20 years, with some countries experiencing rates much higher than the world average. Inflation is already an incentive to spend, because people realize that their money is worth more today than it will be tomorrow. By implementing negative interest rates, central banks further erode the value of citizens’ savings, creating a perverse incentive for them to spend their already dwindling resources even faster. This vicious circle does not end in economic prosperity, but in a currency collapse.

While penalties and widespread negative interest rates are the two methods central banks can use to progressively confiscate money from individuals and private organizations, they are not the only methods at their disposal. Once CBDCs are in place, nothing technically or legally prevents central banks from imposing direct haircuts or repossessing the cash holdings of anyone, anywhere in the world. Central banks could directly confiscate private digital money to pay off their sovereign debt, discourage the use of digital money, decrease the money supply, or for any other reason. Although this possibility has not been openly discussed, it is embedded in the political and technical architectures of the CBDCs.

Finally, central banks can programmatically require the payment of taxes for each CBDC transaction. Some economists have argued that this measure is necessary to recover tax revenue that is sometimes avoided when cash is used and then notes rather optimistically that governments could take advantage of clawed-back tax revenues to lower effective tax rates.76 However, there is no evidence that revenue-strapped governments already incentivized to exploit private wealth would take steps to reduce taxes. Instead, CBDCs will most likely be used to generate additional tax revenue for the state at a costly cost to individuals.

Imagine: with mandatory taxation on every CBDC transaction, you would be taxed for giving your neighbor $20, or giving your kids an allowance, or for every item you sell at a garage sale. A person paying his friend $50 to change a tire or $100 to take care of his house while he was away would be taxed for these activities. This “informal” economy is not only a necessary mode of intimate interpersonal relationships, but a lifeline for millions of people who depend on it for day-to-day survival. It is morally unfathomable to imagine that a homeless person selling flowers in the street is taxed on each transaction.


  • Retail CBDCs are programmable cash.
  • Programmable cash offers central banks direct relationships with consumers.
  • Direct relationships between central banks and consumers enable central banks to:
    • Monitor all financial transactions.
    • Report, block or cancel any transaction at any time.
    • Determine how much money each can hold and trade with.
    • Determine what products and services the money can be used to buy, and by whom.
    • Directly implement monetary policy (such as negative interest rates) at the private cash level.
    • Confiscate cash held by individuals.
    • Apply tax collection on every cash transaction, no matter how small.

To read the full whitepaper, which further explains the relationship between Bitcoin and CBDCs, click here.

This is a guest post by Natalie Smolenski and Dan Held. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.