The dangers of CBDCs

According to the Bank of International Settlements (BiS) about 24 central banks around the world will have their own Central Bank Digital Currency (CBDC) in circulation by the end of this decade. The BiS surveyed 86 central banks late last year and found that 93% were engaged in some stage of CBDC development. Some countries that have been pushing their CBDC have encountered a public backlash against the digital money. Despite offering a variety of sticks and carrots to support the use of its CBDC, Nigeria has seen demonstrations against it. Nigeria's central bank governor has said that the aim is to "achieve a 100% cashless economy"; but the Nigerian experience shows how difficult it is to impose a change in behavior. CBDCs are popular among central banking technocrats - but money is a tool for people, and people have yet to be convinced of the utility of CBDCs. Given a recent revelation about the developing CBDC of the Brazilian central bank, people will certainly become even more wary.

It has emerged that the coding of Brazil's pilot CBDC contains features that permit the freezing and/or confiscation/destruction of funds. Understandably, this revelation has deeply alarmed some observers. Handing control over one's money to a government-backed central bank has always seemed a perilous idea and the revelation about Brazil's project only reinforces that view.

People are nervous that oversight of a CBDC by a central bank can shift into control by government. One of the beauties of cash (and this is also a gift to criminals) is that its use is anonymous. Get rid of cash and it's a stone's throw to an Orwellian dystopia in which your privacy has disappeared. That is many people's fear about a CBDC and that has come to pass in China. China has forged its own CBDC path, developing the e-Yuan since 2014. A 2021 white paper published by the state-owned and managed Chinese central bank, the People's Bank of China (PBOC), promises a range of benefits from the e-Yuan, such as financial inclusion, lower transaction costs, and greater security - all of which can be true. What it does not mention however is the much enhanced scope it gives Beijing to monitor and punish those who disobey rules, by sanctioning people where it hurts most - in their pocket.

CBDCs and cryptocurrencies

The are two types of CBDC, wholesale and retail. As its name suggests, wholesale CBDCs are designed to be used primarily by financial institutions such as banks; they would use the CBDC to settle inter-bank transactions. The retail version is primarily for individuals, who would use the CBDC as a form of digital cash, substituting for or supplementing cash. The digital currency is a digital form of a government-issued currency backed by nothing at all except the word of the government; in that respect they are merely a blockchain-created version of fiat money. Fiat means no more than authorization or decree; our fiat money has value simply because the government decrees it.

Why have CBDCs been invented? Technology has a lot to answer for. The speedy advances made in blockchain technology - blockchain is a distributed database shared among a network's nodes - have given rise to an explosion of cryptocurrencies. It's estimated there now are around 23,000 different cryptocurrencies, although the first, Bitcoin, is dominant, with a 58% share of the market. While Bitcoin's original impetus was to challenge (and replace) fiat currencies in the drive for a more stable form of money, it has since become more a form of gambling, with many Bitcoin buyers hoping to get-rich-quick. The growth of cryptocurrencies and the anonymity they provide is highly attractive and not only for criminals. In their privacy cryptocurrencies resemble cash - and that's a big reason why central banks and governments dislike them. Control of money is power, and governments everywhere take a dim view of anyone or anything that tries to usurp that power. So to reassert their control of what is considered money governments are using the technology to invent CBDCs. Whatever one thinks of Ron DeSantis, the Republican hopeful for next year's Presidential election and current Florida governor, he has grasped the dominant political attitude to Bitcoin. "The only reason these people in Washington don't like [Bitcoin] is because they don't control it...Bitcoin represents a threat to them" he said recently.

Not all central bankers are fans of the CBDC. Christopher J. Waller, a member of the board of governors of the US Federal Reserve, said in August 2021: "After exploring many possible problems that a CBDC could solve, I am left with the conclusion that a CBDC remains a solution in search of a problem." He added that there are "potential costs and risks associated with a CBDC..."

"After exploring many possible problems that a CBDC could solve, I am left with the conclusion that a CBDC remains a solution in search of a problem."

Costs and risks

While the use of cash is in decline globally, the use of credit and debit cards is going strong. The pandemic blitzed cash transactions as people were (mistakenly) encouraged to regard notes and coins as possible carriers of the virus. No such stigma attached to plastic cards.

So what might be some of the risks and costs that Waller had in mind? All the obvious ones associated with the digital world to start with: cyber-security and the possibility of hackers breaking into the CBDC system - which would be an enormous temptation. Not just bank robbery, but bank robbery on a gargantuan scale, clearing out the accounts of millions of people. Before becoming deputy chair of the Fed, Lael Brainard, said "putting a central bank currency in digital form could make it a very attractive target for cyber-attacks..." The potential loss of anonymity in transactions is another; even if we have nothing to hide and if we get reassurances from the government and central bank that our digital 'wallet' will not be peeked at, can that be trusted? The onward march of the CBDC also speaks to a creeping authoritarianism in our societies; have voters anywhere been consulted about such a colossal social change as the imposition of a digital currency in place of their fiat money? Brazil's CBDC pilot is a warning.