Colombia is an amazing country. I moved to Medellín, its second largest city, this year – and I really cannot say enough good things about it.
The weather is perfect. The people are friendly and ever-so-patient with my rag-tag attempts to pick up Spanish. And those mountains….
Today, however, news has circulated that is concerning.
Central Bank issued digital currency
Luis Carlos Reyes, the head of the Colombian Tax and Customs National Authority, announced that Colombia is primed to create a digital currency in order to rein in financial crimes such as tax evasion.
By all accounts, Colombia is struggling to police tax evasion. While Medellín has established itself as somewhat of a tech hub in the last few years, cash remains the dominant medium of exchange around the country. Reyes estimates that tax evasion is equivalent to between 6% and 8% of GDP annually.
“That is equivalent to six or eight tax reforms that have been made in the country, with which a maximum of 1% or 1.5% of GDP is obtained,” Reyes said in an interview. The hope is that an introduction of such a government controlled currency can keep a tighter eye on payments and increase tax revenue. Additionally, cash payments above 10 million pesos ($2400) will be banned.
The punchline followed shortly after – “This is important to improve the traceability of payments made in the economy”.
And therein lies the problem with central bank-issued digital currencies (CBDC’s). The potential outcome here is highly dystopian, with the government able to track what citizens’ are spending their money on, what their net worth is, and where they are spending it – as well as holding the ability to freeze accounts at will.
Sure, there are benefits such as tax collection increasing, with corresponding growth benefits. But at what cost? It is terrifying to hand over that amount of power to governments – and I don’t believe you need to be an extreme libertarian to agree with that.
Of course, this comes off the back of the momentous election result in June, when Gustavo Petro became the first leftist leader in Colombian history. The former guerrilla fighter won the second round of voting with a 50.35% share, continuing the recent trend in Latin America of left-wing victories.
And CBDC’s are fast becoming a Latin American trend too, as Colombia joins Peru, Mexico and Brazil in putting together plans to implement one.
Financial overhaul may be needed as, akin to a lot of countries, Colombia struggles amid the current macro environment, however a drastic move to launch a CBDC feels ill-advised, extreme and potentially calamitous depending on how it is carried out.