The International Monetary Fund (IMF) says it aims to “promote financial stability and monetary cooperation”. It has “three critical missions: furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity”. Given that it has such a broad remit, it’s perhaps inevitable that sooner or later it would turn its attention to the thorny question of Central Bank Digital Currencies (CBDCs). The Bank of International Settlements (BiS), the central bankers’ bank, has already thrown its weight behind CBDCs and now the global lender of last resort, the IMF, appears to have done the same. The technology supporting the development of CBDCs and cryptocurrencies has rapidly advanced in the past couple of years; but their thrust and motivation are completely opposed. Cryptocurrencies aim to decentralize the control of money, enable anonymity, remove control over money from governments that have lost trust; CBDCs centralize the infrastructure of a digital currency and enable greater control, inspection, and a reinforcement of state supervision. The battle lines are not just over what money will be; they are between growth in state power and the right of the individual to use money anonymously. Cryptocurrencies are regarded by central banks and governments as dangerous, uncontrollable buccaneers. They may have to live with them, but they hope to police them out of existence. No better way to do that than to steal the ocean they sail in. CBDCs have got another powerful ally in the form of the IMF; but that doesn’t mean they should be welcomed.
The spread of CBDCs
We are accelerating towards a cashless world. The development of digital forms of money and greater use of credit and debit cards have led to a decline in the use of cash, which has fallen by some 15% a year since 2017. CBDCs have come a long way since 1993, when the Bank of Finland (BoF) launched what is considered the first, the Avant smart card, an electronic form of cash. According to 2020 analysis by the BoF, Avant “didn’t gain enough traction to survive… debit cards gained wider acceptance”. Currently just two CBDCs have launched – the e-naira in Nigeria and the Bahamian Sand Dollar. China’s CBDC, the e-yuan, has been operational in selected cities. As of today there are an estimated 97 CBDCs under research or development.
A CBDC is a digital version of a country’s currency created by the central bank, and which is available for households and businesses to use for payments or storing value – to use as fiat money. CBDCs are backed by the government and pegged to the value of the national currency – unlike cryptocurrencies, which are backed by no asset or institution. Like cryptocurrencies, CBDCs use Distributed Ledger Technology (DLT) to facilitate supply of money and transaction monitoring. Also, central banks may integrate permit payment services with the ledger to facilitate easier transactions. Yet CBDCs share with cryptocurrencies and all forms of money one critical thing –trust from their users that this money will keep its value, or at least not lose much.
CBDCs have gained in popularity with central banks for several reasons: they can simplify and speed payments (and reduce costs) for individuals and businesses. In 2020, there were around $23.5 trillion cross-border transactions, costing $120 billion in fees and taking an average two to three days to complete. That would be cheaper and faster with a CBDC, so long as it was recognised and accepted across borders. They’d also promote financial inclusion by allowing unbanked individuals to conduct transactions more easily. CBDC supporters say they can also help governments implement monetary policies by, for example, allowing the destruction of currency ‘tokens’ in circulation, thus reducing money supply and tackling inflation. Increased surveillance of money flows in an economy, such as would be possible with a CBDC, could help prevent tax evasion, reduce corruption, and disrupt the funding of illicit activities, like drug trade or terrorism.
The novelist Fyodor Dostoevsky wrote that money – cash in his day – was “coined liberty”. Cryptocurrency was invented to reinforce that claim. And all the advantages of CBDCs need to be set against the some drawbacks – which can be boiled down to giving greater power to ‘Big Brother’. Governments which can centrally monitor currency – which would be one implication of a CBDC – would mean every single payment could be subject to government oversight and possible disruption if a transaction annoyed government. While no-one wishes to facilitate illegal activities by permitting anonymous financial exchange, as a society we accept the possibility of such exchanges for the sake of mass privacy.
And while a CBDC would enable cuts to the money supply by the simple means of destroying an amount of the CBDC ‘token’, the reverse is also obviously true. Any government that felt itself strapped for cash would be able simply to issue new ‘tokens’ to any desired amount. Rather than promoting “financial stability” the IMF’s embrace of CBDCs might usher in greater instability.
Then there are other worries about CBDCs – unlike cryptocurrencies, which run on public blockchains that are decentralized, CBDCs will be fully centralized and hosted on private or permissioned blockchains; malicious hackers need only to breach a few servers and they might be able to control a nation’s whole money supply. The implication for the expanded role of Big Tech is concerning; CBDCs will probably need to expand to already existing digital payment systems such as Apple Pay, giving those systems the power to gather and potentially misuse personal data and enable hackers to steal your money.
To be fair to the IMF, in the latest edition of Finance and Development, the IMF’s magazine, the academic Eswar Prasad writes (in a personal capacity) that a CBDC “has disadvantages…Societies will struggle to check the power of governments as individual liberties face even greater risk”.
In the US, there has been much speculation about the ‘digi-Dollar’, a CBDC from the Federal Reserve. That now looks less likely to see the light of day – all the talk now is of FedNow, a “modern and reliable instant payment system” that will be launched between May and July 2023, according to Lael Brainard, the Fed’s vice chair. The Fed hopes that FedNow achieves a couple of things – making available for all its users cheap, reliable and irreversible payment settlements within seconds, and simultaneously killing off some of the attractions of cryptocurrency. FedNow promises to enable the processing and settlement of “individual payments within seconds, 24 hours a day, 7 days a week, 365 days a year”. It apparently will use a blockchain developed by a company called Cypherium. Cypherium is of course secure – until it isn’t. Both individuals and businesses will be able to use FedNow, with an initial transaction limit of $25,000, although that limit is forecast to grow. It promises to adhere to ISO 20022, which is an open global standard for electronic data exchange between financial institutions. Faster payments should make it harder for fraudsters to intercept payments.
The Fed describes FedNow as a modernization of the national payment system; if it’s widely adopted it will spell the end of the Automated Clearing House framework which currently settles interbank transactions. A modernization it may be; it’s possibly also groundwork preparation for a full-on CBDC. But even if the US decides it doesn’t need a CBDC, the movement towards CBDC adoption by the rest of the world may force its hand, especially if it wants to retain the financial hegemony of the Dollar.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
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