When Money Meets Tech
When governments acquire a new source of power, they rarely give it back. And the trend we’re on right now (which has been accelerating post 9/11) is ceding more oversight and control into the hands of the government.
An example of our government getting power and finding ways to keep and expand that power is with the federal income tax. The first American income tax came during the Civil War in 1861 where Congress placed a 3-percent tax on incomes over $800 (about $24,000 in today’s dollars). Congress did repeal the income tax in 1872 after the war, but the idea of being able to derive tax revenue from a citizen’s income did not disappear.
Many more attempts to reenact an income tax were tried until finally, in 1913, Congress ratified the 16th amendment which encoded Congress’ ability to collect taxes on income.
I find it interesting that income taxes, which are a fundamental part of our society, did not exist in this country for more than half of its existence. It’s so easy for us to become accustomed to what is instead of what’s best.
I don’t say this because I believe we need to abolish income taxes. I’m sharing this to outline my lens through which I view how our government makes decisions.
Once our government receives some new power and creates bureaucracies around it, it rarely gives that power back to the people. Instead, it finds ways to expand that power into new areas.
While that can be both a negative and a positive, it’s also a framework that makes looking ahead to what might happen in the future more predictable. If we know that institutions (and governments in this example) are always looking to acquire new powers and expand existing powers we can make a better prediction on what direction we’re moving.
Where I think the government is going to move over the next five years is towards Central Bank Digital Currencies (aka CBDC). Money will be one of the next major arenas where governments acquire more control, and my prediction is that they’ll do it through a digital currency issued through the Federal Reserve.
Simply put, a central bank digital currency (not cryptocurrencies) is a purely electronic version of an existing national currency. And, because it’s digital, that means it’s programmable. Programmable money is a powerful tool for incentivizing and deterring specific behaviors as well as rewarding or compensating specific groups of people with a click of a button.
Once governments realize that they can quickly respond to crises with direct cash payments and create desired behavioral responses through targeted payments, taxes, and loans they’re going to move fast to distribute this system far and wide.
How it could all work is the Federal Reserve will create a “wallet” app that you can have installed on your phone or access through the internet. This wallet will be unique to you, and, just like an Apple Pay wallet, you’ll be able to hold digital dollars inside of it.
But, what makes this different from your Apple Wallet or Venmo is that the Federal Reserve can, with a click of a button, issue and remove dollars from your account, offer you loans with interest rates based on your personal demographics, tax certain kinds of spending, issue negative interest rates, and much more.
The Federal Reserve will be able to target individuals and small groups with fine-tuned monetary policy for more granular outcomes.
Is a certain part of the economy going through a rough patch? Let’s issue everyone $100 digital dollars that they can only spend in that sector of the economy and these dollars disappear from their wallets in a week.
Did Santa Cruz just suffer from a huge fire that destroyed millions of dollars in property? Everyone affected can get issued a specific amount of currency and also receive preferential loan and tax treatment. And it all happens directly inside of the wallet.
If we had a CBDC already issued and set up, the COVID stimulus could’ve been sent out within minutes and with greater accuracy making sure that the people who actually needed the money got it.
And while all of this does sound great and helpful, there is a potential cost (there’s always a cost). That cost could be giving up more individual freedom and privacy. With a CBDC, the Federal Reserve could see all of your spending, all of your money transfers, and deposits if it isn’t anonymous or encrypted.
Now, I don’t believe that a CBDC will be bad for society. In fact, I believe that a CBDC (with proper separation of powers and encryption*) can be used to create more fair monetary policies and more equal access to financial products by removing control from bankers on who gets a loan and what the terms are.
But, the most important aspect of all of this is we do not cede more control and power to the government in the name of progress without having a process for checks, balances, and expiration.
Because we know that at the end of the day once the government tastes the power of using money to incentivize and coerce certain behaviors, they won’t let go easily.