Looking at Both Sides of the Coin: A Technical Discussion about CBDCs
CBDCs are, at this stage, a broad concept. They come in different shapes, sizes, and flavours, and each central bank’s flavour will ultimately determine whether a CBDC will work for the people.
Here are some standard features:
- CBDCs do not use technology per se.
- Not all CBDCs will be programmable.
- The most cited motivations for CBDC are monetary sovereignty, transactional efficiency, , and the robustness of systems.
- CBDCs are not intended for every citizen using digital wallets instead of bank accounts; one of the most delicate parts of CBDC design is how to avoid deposit migration because central banks know that it could impact financial stability.
- Most central banks are designing intermediated CBDCs, with banks and payment system providers as the distributors of CBDCs; this way, not only are the central banks not willing to crowd out the payments ecosystem, but central banks could have similar (limited) access to data as with payments based on commercial bank and e-money.
The slow adoption of CBDCs in the Bahamas and Nigeria suggests that the use case is unclear and that central banks must work harder to understand consumers’ and merchants’ needs. Likewise, after more than a decade, and alike have failed to turn into money – they remain as assets to invest or bet, with no clear case for the medium of , , or unit of account, even where declared as (e.g., El Salvador).
CBDCs are not a bullet.
CBDCs are not a silver bullet; while they have flaws, they also have significant advantages. I believe it is imperative that when making a case for or against CBDCs, at a time when more than 90 central banks are looking to introduce them shortly, we present a balanced argument for and against them.
The motivations behind the design and adoption of CBDCs must be better understood and clarified. It has been suggested that a prime basis among governments is to inflict ultimate control over societies through social engineering. This could be said of any fiat-based payment system in place today. The CBDC architectures currently being discussed do not necessarily involve having access to all the details of how, when or where people use CBDCs. A tiered anonymity architecture, with anonymity depending on the value of the transaction, could favour privacy while complying with and combating the financing of terrorism (CFT) mandates—similar to what we have today with transactions at commercial banks. If banks and payment system providers are the distributors of CBDCs, this could work even better.
We must focus on championing the responsible and proper design of CBDCs to alleviate the fears associated with the unknown. We need a discussion on technical grounds that outlines the facts rather than makes presumptions based on broad negative sentiment—what bitcoiners usually call spreading FUD (fear, uncertainty, and doubt).
Let’s look at the pros to begin with.
- CBDCs provide a practical alternative to the decreasing use of cash on a global level. The European Central Bank revealed cash was used for 59% of point-of-sale transactions in 2022, down from 72% in 2019. CBDCs will allow people worldwide to use a public form of money if or when cash becomes used less and less.
- Everyone should have an accessible option to use a form of public money for online and offline transactions, as opposed to having no choice but to use private forms of money, i.e., bank deposits, e-money, and stablecoins. CBDCs would ensure that everyone has direct access to , ultimately suitable for the people.
- CBDCs are a way to make local payment systems more robust and secure. It would mean we are not entirely dependent on foreign payment rails (e.g. Visa and Mastercard) and will not be reliant on unreliable, unregulated, and unsupervised infrastructure providers, which includes bitcoin, because we have no guarantee that bitcoin nodes will run forever and that developers will act on behalf of the users.
- Encouraging the increased use of CBDCs will decrease the extent of tax evasion and in sizable transactions. It will allow the enforcement of anti-money laundering (AML) and anti-terrorism regulations, albeit countered by potential implications around consumer privacy, which we will address shortly.
- If properly designed, CBDCs can increase financial inclusion among those who do not wish or can’t have a relationship with banking institutions, e-money issuers, and stablecoin issuers. With transactional cash use declining in several jurisdictions, a CBDC is one feasible way of providing people with access to another form of central bank money to complement (not replace) the use of cash without needing a bank account. This is also a matter of monetary sovereignty and resilience of the payment system.
And the cons
On the other hand, there are some drawbacks to consider.
- One recurrent argument against using CBDCs is the impact on society’s privacy. The key is consumer protection legislation and the judicious work of all authorities, congress, prime ministers, and society. Currently, China is usually portrayed as an example of what to fear when governments could use CBDCs to conduct surveillance and political and social control. To preserve the integrity of CBDCs while minimising threats to privacy, a tiered anonymity model with banks and payment system providers as CBDCs distributors could be convenient.
- Suppose CBDCs become highly successful and widely adopted. In that case, they could potentially crowd out private forms of money, negatively affecting commercial banks and the economy as a whole using disintermediation and higher cost of funding. However, all central banks are attempting to design CBDCs in a way which will ensure this does not happen; central banks pursue a sweet spot between poor adoption and massive adoption that will depend on the design features, the use case, and the intricacies of each jurisdiction.
- There are potential financial instability issues. In addition to the potential impact of CBDC in benign conditions, during crisis periods, a CBDC could be perceived as a haven and thus increase the risk of bank runs. To this, most central banks are studying caps on CBDC balances. Again, no central bank wants its CBDCs to be overly successful to a certain extent.
- CBDCs could speed up the replacement of cash within society—in my view, a negative outcome for society. However, central banks, including the Bank of England and the US Federal Reserve, have publicly committed to ensuring cash’s continued safety and availability, considering CBDCs as a means to expand payment options, not to reduce or replace them. It is the financial industry that has spurred the war against cash–not the central banks–and for their profit, of course; paradoxically, the fight against cash driven by financial firms has pushed central banks to rethink public money provision via CBDCs, which they now fear will affect their business as usual.
- Of course, banks will always be vulnerable to operational failures in the payment system, which would have negative implications both reputationally and for the functioning of the economy. This potential risk isn’t exclusive to CBDCs, however.
The key to the success of CBDCs is the proper design of these digital currencies and the core motivations and use cases behind their implementation. Central banks must clearly understand the pros and cons to alleviate concerns and reservations, backed up by a clear vision of how a CBDC will be adopted based on its multiple design options.
Talking about Orwellian nightmares, it is true that a CBDC could be mismanaged by a government, either democratic or authoritarian. Likewise, it is also true that other forms of money could be misused, including cash–did you know that some ATMs can read serial numbers on bank notes? But bitcoin can be misused for Orwellian purposes too. In the wrong hands, even the pseudo-anonymous and allegedly decentralised bitcoin could turn against the public. Not long ago, a Latin American country gave bitcoin legal tender status and offered U$30 worth of bitcoin to people to download and to Chivo, the government’s mobile wallet; to me, giving a bait equivalent to almost three days’ minimum wage to force people to surrender personal and transactional information to an app that is owned and managed by a government which has been accused of authoritarianism is pretty Orwellian.
Perhaps the or the form of money is not what we should fear.
It is payment instruments’ design and their potential misuse by governments and central banks. Adequate consumer protection, regulation, and oversight of the payment system are always needed for any form of money (or technology!) to work for–not against–the public.