CBDCs are coming but should you be worried?

The UK is looking for a new Head of Central Bank Digital Currency in order to accelerate the development of the digital pound. His Majesty’s Treasury revealed just last month that the chosen candidate will be in charge of its work on a digital pound in a new job advertisement. The Bank of England and the Treasury have been collaborating on the CBDC (BoE). In order to carry out that goal, the chosen candidate “will be responsible for setting strategic direction within Treasury to deliver on that plan.” The chosen applicant for the Treasury position will supervise the CBDC team’s expansion and assess CBDC-related policy issues for government ministers.

It is clear that the United Kingdom is getting closer to the adoption of a CBDC. Should U.K. citizens and citizens of countries considering CBDCs be worried?

What are CBDCs?

Governments all over the world are looking into the prospect of introducing their own digital currencies in light of the expanding use of cryptocurrencies and blockchain technology. Central Bank Digital Currencies (CBDCs) are digital tokens that a central bank issues that resemble cryptocurrencies. However, the main characteristic distinguishing CBDCs from cryptocurrencies like Bitcoin are that they would be backed by the government that issues them and are pegged to the value of the fiat currency of that nation. Digital currencies are considered one of the latest great innovations that could change the face of the global financial system.

Why Do Governments and Central Banks Want CBDCs?

Governments, central banks and proponents of CBDC adoption generally want this because it can accelerate the move to a cashless society.

Governments that want to lower financial crime consider CBDC adoption to be desirable

Due to the convenience of using cards, apps, and contactless payments for purchases, cash use is declining dramatically. The expense of minting cash means that a CBDC-based cashless society will save money for central banks. Cash is the favoured method of payment for tax evasion, money laundering, and criminal activities since it is untraceable and uncontrollable by governments once it is in circulation. Law enforcement would find it simpler to track money being moved for illegitimate purposes since CBDCs use a digital ledger. As a result, governments that want to lower financial crime consider CBDC adoption to be desirable.

More significant is the fact that cash can make the government’s negative interest policy less effective. Bank customers may begin paying interest for keeping money in their accounts when there are negative interest rates. Customers have little motive, as a result, to keep money in banks; instead, they withdraw it and keep it in cash at home. Negative interest rate policies are important when economic growth of a country is slow. Negative interest rates tend to mean financial firms are more likely to charge lower interest rates on loans to customers. Customers will then spend this money on goods and services, which helps boost growth in the economy. In a society where a CBDC is fully adopted it would be impossible for people to withdraw cash and store it at home in response to negative interest rates.

There are also other important reasons why governments want to adopt CBDC.

The obvious advantages, such as this, of decentralized crypto when compared to fiat currency has birthed a generation disillusioned by the current fiat system

Firstly, CBDCs would improve the efficiency retail payment systems digital currency can speed up online and peer-to-peer transactions at the point of sale. Secondly, by connecting customers with central banks directly, CBDCs can reduce third-party risk. Thirdly, developing nations with sizable unbanked populations might benefit from the implementation of CBDCs as giving individuals immediate digital access to money would facilitate the development of the modern banking infrastructure that these nations find challenging to establish. Finally, in light of the conflict between Russia and Ukraine, CBDCs could contribute to the stabilisation of areas hit by conflicts, natural disasters, and economic downturns because they could be airdropped into peoples’ digital wallets.

Secret Ulterior Motive of the Governments?

I believe that there is a risk of governments implementing CBDCs for a more sinister reason.

The adoption of CBDCs is an attempt to steal the spotlight of decentralized cryptocurrency. The rise of decentralized cryptocurrency has highlighted the many issues with government fiat currency such as its backing by faith in governments that have over the years caused inflation through excessive money printing. In contrast, Bitcoin is backed by faith in its blockchain which is not owned by one entity and so an issue like excessive inflation cannot happen to Bitcoin. The obvious advantages, such as this, of decentralized crypto when compared to fiat currency has birthed a generation disillusioned by the current fiat system and aware of the need to reform the global monetary system in a way that decentralizes the power over the system. This greatly threatens governments who want control over the system. However, governments cannot simply make decentralized crypto illegal for fear of being accused of stifling innovation. CBDCs would solve central banks and governments problems as they can claim to be for innovation by adopting a CBDC, then regulate decentralized crypto until it loses its purpose. This way, central banks and governments would still have good control over the global monetary system whilst killing off decentralized cryptocurrency.

In nations that are infamous for not respecting human rights, CBDCs might be utilised as a political tool

Central banks have some degree of power under the fiat currency system, but not as much as they would in a CBDC system. This is due to the fact that the Bank will essentially be monitoring every transaction made in the country. The Bank would also control the servers and, in principle, be able to change who owns what money. This is dangerous since CBDCs lack censorship resistance and can be readily taken by the government, leaving you without money when cash loses its legal tender status. In nations that are infamous for not respecting human rights, CBDCs might be utilised as a political tool. Putin would have much more control over who owns money if Russia adopted a CBDC, thus in the hypothetical case that he wanted to silence the voices of Russians opposed to the war, he could more easily threaten to take possession of all of their money.

However, it is possible that countries with human rights imbedded within their constitutions such as England would find ways to limit their own governments from using CBDCs as political weapons.

The Future

Although we are getting closer to CBDC adoption, there is still some way to go and so many questions to answer. U.K. citizens should not be too worried about the implementation of CBDCs yet. We do not know how it would be rolled out, the extent to which it would improve our quality of life or diminish it. All the pros and cons of CBDCs are not confirmed as the world’s superpowers have not yet adopted them or done trial experiments. It is however, important that we pay attention to the developments as this could change the global financial system forever.