Baby, It's Cold Outside (the central bank's core ledger)

On CBDCs and 'financial inclusion'

‘Central banks are understandably concerned that people who prefer to use physical cash may be left out in the cold.’

-The Digital Pound Foundation

Central bankers are not well known for their insights into human psychology. When one reads the kind of material they put out, one rather gets the impression that they have been written by a race of aliens (are central bankers from Mars, or Venus?) trying to figure out exactly what it is that makes humans tick.

One sees this most clearly in the arguments which they tend to make when advocating for their shiny new toy, the Central Bank Digital Currency or CBDC (which I have written extensively about, in the UK context, here, here, here and elsewhere). These people are by no means fools, and they can discern that selling a CBDC to Earthlings - though they tend to put this in the mealy-mouthed language of ‘gaining public trust’ - is going to be hard. Ordinary people, bluntly, don’t want it, and CBDC enthusiasts are painfully aware of this.

It is, though, a sign of the times that what ordinary people want, or don’t want, is not generally considered to be a relevant factor in decisions about policy. What the technocrat wants is good by definition, because it is the product of his expertise; the only relevant question to ask is how implementation should take place. Since implementation of a CBDC is thought to need widespread adoption, then people will be made to adopt it. Hence, we see an awful lot of emphasis in the CBDC literature on the question of how it is that people will be cajoled, nudged, persuaded, hoodwinked, or coerced into adoption - given that it must, self-evidently, ultimately be in their best interests.

A phrase that keeps repeating itself within this discourse is, therefore, ‘financial inclusion’. The notion here, as it is always described, is that there are a large number of people in the world who are ‘unbanked’ or who only really currently use cash, and that this results in them being excluded from the financial system at large. (Proportions obviously vary from country to country; you see different figures for the UK, but the Financial Conduct Authority reckons it’s around 3.9 million adults). It would be good to get these people ‘included’, the reasoning goes, and wouldn’t a CBDC be a brilliant wheeze for achieving that? Hence:

A digital pound could provide a secure and accessible means of payment to individuals who may not have access to traditional banking services. It could enable more people to participate in the digital economy without a bank account.

This is, of course, absurd. I hope you realise why it is absurd, but to spell it out: people who are financially excluded are in that position either because they want to be (they don’t trust the mainstream financial system) or - more likely - because they have no choice (due to where they live; due to living in poverty; due to lack of capacity, etc.). A CBDC is a remedy for neither of those things. Indeed, if anything, it is a recipe for deepening financial exclusion, as the UK House of Lords noted in their generally excellent report on the subject:

[A] CBDC could increase financial exclusion, particularly for people currently dependent on physical cash, as a result of being unable or unwilling to access digital services.

More plainly still, one simply needs to exercise one’s own basic human faculties to know that if anybody alive in the world in 2024 is unable or unwilling to avail themselves of a bank account or to make digital payments for things, ‘How about storing what little wealth you have in a completely untested digital currency which only exists online and which can only be transacted on the central bank’s core ledger?’ is somewhat unlikely to be a winning proposition.

All of this is obvious. And serious advocates of CBDCs understand it perfectly well. This is why they tend not to claim financial inclusion is a benefit in its own right. Instead, they say things like ‘for a CBDC to increase financial inclusion, it must address the causes of exclusion…[and] would likely need to be embedded in a wider set of reforms’. The idea here is that the CBDC is the umbrella under which, magically, the problems of financial exclusion will be somehow solved. As the Digital Pound Foundation puts it:

[M]easures will need to be taken [when introducing the digital pound] in order to support those who are heavily reliant on cash today. These include enabling access to the digital money infrastructure, offline capabilities and user education.

Why ‘enabling access to the digital money infrastructure, offline capabilities and user education’ aren’t working now to boost financial inclusion in the old-fashioned sense, and what would be different with respect to a CBDC, is never made clear. If it is open to us to act to improve financial inclusion, and if we are convinced that would be a good thing…well, let’s do it now then. Why are we waiting for the invention of a CBDC?

The truth, of course, is that increasing ‘financial inclusion’ is a platitude. It sounds nice. It is mentioned as a benefit of CBDCs by enthusiasts because it makes their project seem benign, and because they percieve that talk of stablecoins and monetary policy and ‘programmable currency’ and negative interest rates gives ordinary people the heebie-jeebies. If it can also be claimed that CBDCs would be good for little old ladies in benighted rural communities, or for people labouring in desperate poverty in Malawi or Madagascar, this goes some way to scraping off some of the bleak, authoritarian veneer that has already coated itself all over the entire project. It is nonsense, but it is vaguely plausible-sounding nonsense that has a pleasant ring to it at first blush. And that’s really all there is to it.

To come back to psychology, though (and one does not have to be Sigmund Freud to spot this) the curious thing about the frequency of the use of the phrase ‘financial inclusion’ in CBDC literature is that it is what is sometimes called a ‘tell’. Indeed, there is a subtext in the use of the phrase which practically becomes a supertext: the preoccupation with ‘financial inclusion’ seems to really be the manifestation of an inchoate, subconscious desire to ‘include’ any and all transactions, and by extention all of the nation’s wealth, within the CBDC system - everybody’s last penny of disposable income, and everybody’s every purchase, safely performed, recorded and logged within the centrally-owned ledger. (And, by extension, nobody ‘left out in the cold’ to scrabble around with their mean, dirty scraps of paper and filthy, debased coins.)

This is not I think what CBDC enthusiasts imagine their project to be all about - they tend to describe the virtue of this new form of currency to inhere in its provision of ‘diversity’ and ‘resilience’, not to mention choice:

Isn’t it only fair that people have the choice of a digital form of government-backed money if they so desire?

But nonetheless, total ‘financial inclusion’ in the sense I have described it, with every single person’s every financial decision included in the central bank’s core ledger, is clearly the trajectory which these people are on, whether they are conscious of it or not. And this should hardly surprise us. What, after all, was Keynes’ rationale for the existence, and role, of a central bank?

I believe that the cure for [economic evils] is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation…. [And] I believe that some coordinated act of intelligent judgement is required as to the scale on which it is desirable that the community as a whole should save…

Control of the currency and credit, the collection and dissemination ‘on a great scale’ of data, and control over the extent to which people are permitted to save - hence, the more ‘financial inclusion’ (meaning, of course, the more that people’s finances are ‘included’ on the central bank’s core CBDC ledger) the better. And without wishing to belabour this point, because it is one I have made before, the philosophical justification is also plain. If the tyrant is to maintain the population’s loyalty, then he must be seen by them to be necessary. And what more perfect way to appear necessary than to be the very basis upon which any and all transactions are made, and assets exchanged?

All that remains to really be determined is the means by which ‘financial inclusion’, in this wider sense of including everybody’s financial decisions within the core ledger, will take place. How far will we be nudged into adopting our friendly local CBDC? And how far will we be coerced? A clue for readers based in the UK (and something that I will write more about in due course) can be found on p. 45 of the Bank of England and HM Treasury’s recent response to a very widespread consultation paper it released in 2023:

A number of respondents, from academia, the payments software industry and NonGovernmental Organisations (NGOs), envisioned G2P [meaning ‘government-to-person’] use cases as including:

Government subsidies

Stimulus pay-outs

Pension payments

Relief payments during natural disasters, eg Covid-related disbursements

Support for Gift Aid, a scheme that enables charities to increase the value of donations made by reclaiming tax paid on the gift

A small number of respondents noted that the use of a digital pound by the Government for G2P payments could support a sense of trust and encourage its adoption.

Yes, government subsidies (read: welfare benefit payments) and pensions payments - paid mandatorily in digital pounds, so as to ‘support a sense of trust and encourage adoption’. You read it here first. Keep an eye on that little phrase, ‘G2P’ - I rather suspect it has a long career in store.