Cryptocurrencies Are the Next Frontier for the Surveillance State
At first, it might have sounded like manna from heaven. Chinese authorities announced they would be distributing more than $1 million to a select number of citizens, as part of a test of its new currency: a digital yuan that could be easily spent almost anywhere. Reports out of China showed happy recipients using “digital wallets” to buy groceries with their free money and marveling at how “smooth and fast” the system worked.But there was a hitch or two, pointing to the thorny complexities of this new foray into digital monetary policy. First, recipients of the digital yuan had only a couple of weeks to spend their money; otherwise, it would disappear as mysteriously as it had arrived. (The encouragement to spend is considered a way of ensuring the currency quickly enters the market.) And second, the experiment signaled a new advance in digital surveillance, in which the state could potentially track all financial transactions. Recipients got free money, but with a new degree of control attached.Fifty-six central banks are now researching or developing some form of digital currency, according to the Bank for International Settlements. These new entries in the market pit tech moguls against central bankers against Bitcoin bulls—with consumers sidelined, as usual—and along the way, they’ve teed up a battle over sovereignty and monetary authority. The core questions here are about who controls what people get and how they spend it—and about tracking flows of money as never before. With digital currencies, economists and central bankers can coordinate monetary policy and welfare benefits in real time, instantly funneling money into the pockets of those who need it. But these plans also provide a feast of data for technocrats and surveillance-happy police. The risks that come with putting this kind of power in the hands of an authoritarian state bent on social control—or perhaps any state—seem to outweigh the benefits. But it’s happening all the same.Cryptocurrencies, particularly Bitcoin, were developed to be free from the shackles of government, central banks, and mainstream financial institutions, which many cryptocurrency traders believe fuel corruption and contribute to inflation. “What is needed is an electronic payment system based on cryptographic proof instead of trust,” wrote Satoshi Nakamoto in his 2008 white paper laying out the Bitcoin protocol. “Transactions that are computationally impractical to reverse would protect sellers from fraud.”The problems with this model have become apparent in the 11 years since Bitcoin first started trading on the open market, at cents on the dollar. Mining a digital currency involves sophisticated calculations that, by design, require huge amounts of computing power and energy. (Bitcoin mining now consumes more electricity than the entire country of Argentina.) And the concept of cryptographic trust hasn’t been all it’s cracked up to be; theft and fraud still occur.For true believers, these concerns have been easy to shunt aside—especially when there’s the opportunity to strike it rich. The result is a surprisingly frothy cryptocurrency market built as much on hopeful speculation as it is on fears of inflation in places like Nigeria, Africa’s largest user of cryptocurrency. Governments have begun to see this cryptocurrency movement as a challenge to their own sovereignty and authority over monetary policy, as well as a channel for capital flight. Some, such as India, are going so far as to propose bans on mining. Others are trying to regulate the new currencies and bring them in line with the more mainstream banking system. And some countries have pushed forward with digital currencies of their own, or CBDCs, that will, with luck and regulatory pressure, replace cryptocurrency as the digital currencies of the future, providing quick, cheap, and easy digital transactions between practically any two parties. That is, if you believe the technocratic hype emanating from various wonks and some of the world’s finance ministries.China, with its technical sophistication and sheer economic might, was pushing forward with its digital currency as early as 2014, but many countries began to take such proposals more seriously in June 2019, when Facebook caused a scare in economic ministries around the world by announcing plans for its own global cryptocurrency, Libra. While cryptocurrencies like Bitcoin had raised concerns for these governments, Facebook posed a threat of a different order, representing the emergence of a mostly unregulated, supranational monetary authority with the kind of global reach, capital, and technological sophistication that few companies, or governments, could match. That “frightened the central banks,” wrote David Gerard in his 2020 book, Libra Shrugged, causing some to resurrect old CBDC proposals.China, for its part, had less to fear from Facebook than it did from two massive tech companies the country has incubated domestically. Alibaba and Tencent have cornered the Chinese digital payments market, collectively processing 90 percent of mobile transactions—and gathering all of the attendant data, a role the state would prefer to keep for itself. To stop that from happening, China seems to have decided it needs a viable CBDC. (Chinese authorities have also relied on a more traditional cocktail of intimidation and legal threats to rein in these companies, fueling speculation that they had sequestered Alibaba’s Jack Ma, one of the country’s richest and most popular entrepreneurs, when he disappeared mysteriously for several months last winter.)The United States doesn’t seem to have progressed beyond reviewing the literature about CBDCs. But in late February, U.S. Treasury Secretary Janet Yellen seemed bullish on the idea. “We do have a problem with financial inclusion,” she said, using a term that sometimes confuses financial empowerment with getting poor people to establish accounts with big banks. “Too many Americans really don’t have access to easy payment systems and to banking accounts. This is something that a digital dollar, a central bank digital currency, could help with.” But America’s digital banking infrastructure is already far too wrapped up in invasive financial surveillance. The solution isn’t a new digital currency that generates even more data for the government.A calibrated rejection of CBDCs shouldn’t be considered an endorsement of crypto-currencies that exist in their own wildly volatile market. Monetary policy should instead be made more democratic, so that digital banking technologies are available to those who want them, without the attendant surveillance and social control (or the runaway speculation endemic to cryptocurrency). A new digital currency requires new privacy protections enshrined in law. In China, where citizens have few political rights, that’s unlikely to happen. But in the United States, we still have a chance not to screw this up.
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