Central Bank Digital Currencies (CBDCs) are digital versions of a country’s fiat or paper currency, issued and regulated by the central bank. Unlike cryptocurrencies like Bitcoin, which are decentralised and often operate independently of any state, CBDCs are centralised and backed by the government. They aim to combine the benefits of digital currencies—like speed and efficiency in transactions—with the stability and regulatory oversight of traditional fiat money. In this blog post we aim to identify the potential dangers of central bank digital currencies.
However, the potential implementation of CBDCs has sparked a debate over their risks and dangers. Though we say ‘potential’ it looks very much as though most of the Western democracies are in rather a hurry to push these through. We wonder if we’ll get to vote on such a major change to our way of life? We also wonder if we really need it? It seems to us that the one real benefit of a digital currency is not having to root around in your pocket or purse searching for coins and notes. Haven’t we got that already? This seems more about control than ease of use for us the consumer/governed.
1. Loss of Privacy
One of the primary concerns with CBDCs is the potential erosion of privacy. Unlike cash transactions, which are anonymous, digital transactions leave a trace. With CBDCs, central banks would have the ability to monitor and record every transaction made by individuals. This unprecedented level of surveillance could lead to a significant loss of financial privacy. Citizens might find themselves subject to more scrutiny and control, with their spending habits closely monitored.
This could lead to a scenario where financial data is used to track and control the behaviour of individuals, potentially infringing on personal freedoms and autonomy. It is this that makes them so attractive to governments with large populations to oversee. It is also what makes them so potentially dangerous in the wrong hands.
Everything is fine with a benign, friendly government in place but you don’t have to look back too far to see what the State will do if it wants you to do something you may not be entirely comfortable with. We already have Open Banking and Credit Scoring. Isn’t this just another step along the way to Social Credit and all that implies? A CBDC firmly closes the loop of the circle.
2. Increased Government Control
Closely related to the loss of privacy is the issue of increased government control. With CBDCs, central banks and, by extension, governments could gain considerable power over the financial system. They could, in theory, control the supply and distribution of money with greater precision.
While this might help in curbing illegal activities such as money laundering and tax evasion, it also opens up possibilities for abuse of power. For instance, governments could freeze accounts or restrict access to funds for individuals or organisations that oppose them, effectively weaponizing financial control. This they have already done to some extent, across the ‘liberal democracies’ of the West. Got a political opinion your government doesn’t like? What are you eating for dinner tonight?
It is also very much worth bearing in mind that every single one of the American and European central banks are privately owned already. Think about that for a moment. Just how much power, control and money does one group of people actually need? Don’t they have enough already?
Source: “The Risks of Central Bank Digital Currencies” by the Brookings Institution
3. Cybersecurity Risks
Digital currencies are inherently vulnerable to cyber threats. As CBDCs would be part of a nation’s critical infrastructure, they could become prime targets for cyberattacks. A successful attack could disrupt the entire financial system, leading to significant economic instability. Hackers could potentially steal large sums of money, manipulate transaction records, or even disable the currency itself.
Ensuring the security of a CBDC would require robust and continually updated cybersecurity measures, which could be both challenging and costly. How many times have you logged on to your internet banking only to discover the ‘site is down’ or ‘we are experiencing technical difficulties at present’? Sound familiar? This could really be a case of putting all one’s eggs in a not too trusty basket. One blast from the sun or click of a hacker’s mouse and the financial world could become a very dark place. Literally.
Risk Assessment: According to a study by Pete Riley of Predictive Science Inc., published in the journal Space Weather in 2012, there was a 12% chance of a Carrington-class event occurring in the next decade. As we missed that chance the likelihood has only increased from then to now.
4. Financial Exclusion
While CBDCs could enhance financial inclusion by providing easy access to digital financial services, they also risk excluding certain segments of the population. Individuals who lack access to digital infrastructure, such as smartphones or the internet, or those who are not digitally literate, might find it difficult to use a digital currency. This digital divide could exacerbate existing inequalities, leaving behind those who are already marginalised. Furthermore, in the event of technical failures or outages, people who rely solely on CBDCs might find themselves unable to conduct transactions, leading to potential economic hardship.
Source: “Central Bank Digital Currency and Financial Inclusion” by the World Bank
5. Disruption of the Banking System
The introduction of CBDCs could significantly disrupt the traditional banking system. Commercial banks currently play a crucial role in the financial ecosystem, providing loans and facilitating transactions. With the advent of CBDCs, individuals might choose to hold their money directly with the central bank rather than in commercial bank accounts. This could lead to a reduction in the deposits held by commercial banks, potentially limiting their ability to lend and impacting their profitability. The resulting shift could necessitate a complete overhaul of the existing banking model, with unpredictable consequences for the broader economy.
Source: “How Would a Central Bank Digital Currency Affect the Banking System?” by the Federal Reserve Bank of Philadelphia
6. Economic Stability
While CBDCs could enhance monetary policy implementation, they also pose risks to economic stability. Central banks would have more direct tools to influence the money supply and interest rates. However, this increased control comes with the danger of potential mismanagement. Any errors in the implementation of monetary policy could have more immediate and far-reaching effects on the economy. Additionally, the real-time nature of CBDCs could exacerbate market reactions to policy changes, leading to increased volatility.
7. Innovation and Competition
The presence of a government-backed digital currency could stifle innovation in the private sector. If a CBDC becomes the predominant form of digital currency, it might limit the development and adoption of alternative digital currencies and payment systems. This could reduce competition and slow down advancements in financial technology, ultimately hindering the progress of the digital economy.
Source: “The Impact of Digital Currency on the Future of Payments” by the European Central Bank (ECB)
Conclusion
While CBDCs offer several potential benefits, including improved transaction efficiency, enhanced monetary policy tools, and (in some cases) increased financial inclusion, the risks associated with their implementation cannot be ignored. The loss of privacy, increased government control, cybersecurity threats, potential financial exclusion, disruption of the banking system, threats to economic stability, and the stifling of innovation are significant concerns that need careful consideration. As countries explore the possibility of introducing CBDCs, it is crucial to weigh these dangers against the potential benefits to ensure a balanced and secure financial future.
Finally, as a consumer, do we really need it? Our money is already backed by thin air since coming off the Gold Standard and using fractional reserve banking. The Emperor truly has no clothes on. Wages, salaries, commissions and any other remuneration one can think of are rarely paid in cash these days and government has already done a splendid job of effectively criminalising anyone who does still like to pay in cash. Especially if they want to move it around.
In our dualistic either/or black or white world we tend to think and act in those terms rather than taking the alternative route to finding our way through. Why don’t we try both/and for a change and not the usual either/or. Why not keep cash and have a Central Bank Digital Currency? A little food for thought.
