Are CBDCs Good or Bad?

At the time of writing, there aren’t actually any CBDCs fully implemented. Sure, the Chinese are gradually rolling out the Digital Yuan, but this is still in the trial phase. It may be because there is a lot of fear about CBDCs.  Many experts feel that CBDC’s would be prohibitive to many and absolutely evil to the rest. They have received some very bad press as of late.

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Let’s begin by defining what we currently understand by CBDCs.  A CBDC is a Central Bank Digital Currency. We should appreciate that the vast majority of money in the world is already digital and centralised. These are created and baked by a government controlled central organisations or equivalent commercial institutions such as the United States Federal Reserve in the USA or the Bank of England in the UK.  The paper and coins we see every day account for between 3% and 5% of all the money in circulation – the rest is digital and non of it is crypto!  

CBDCs share some characteristics of normal digital money in that they are:  

      • represented in digital form
      • centralised and controlled by the designated government monetary authority.
      • aimed at promoting use and financial inclusion for all citizens and which will simplify the implementation of monetary and fiscal policy.
      • unable to be used/operated anonymously (for tax and other legal reasons (e.g. money laundering etc.).

CBDC Pic 2CBDCs may help the adoption of other cryptocurrencies because blockchain technology is not yet integrated into banking financial systems.  CBDCs would change this.  If the banking system begins to use blockchain technology, it would be very easy to include other cryptocurrencies in the range of services they offer to customers.

It can actually help take banking to the next level!  A lot of people remain unbanked – particularly in third world or developing countries –  actually even in developed countries – it can be difficult to get a bank account if you have no credit, are a new resident, have no fixed address, are young etc.  If you are such a person and only able to access financial services through banks, you are at a severe disadvantage.

A CBDC would be able to include people who don’t have to rely on the banking services as it can be stored on a person’s phone in the form of a digital wallet and be digitally used to pay for goods and services.  This could actually help out the government who could include more of the population in the rollout of its fiscal policy. It would be more able to identify problems with its financial services more quickly and efficiently – possibly even in time to do something about it!

On the other hand the money could be programmed to keep track of your spending and your whereabouts. Government could do this continuously since you would not be able to spend your money without proving who you are. A good example of this occurred recently in china when citizens, wanting to travel to a demonstration, refused to pay for transport with their debit or credit cards, they purchased tickets with cash so that the government wouldn’t be able to trace who was at the demonstration (i.e. by analysing all the card names of people who purchased tickets to the demonstration venue on that day and time).  This wouldn’t be possible with a CBDC.

Government buildingCBDCs are an absolute boon to all governments who want to genuinely help their citizens with a better financial way of doing things.  They can also limit citizens’ rights of privacy and their ability to spend their own money the way they want to.

One of the best, worst examples I have heard of how CBDCs could be used is the following scenario: Imagine, in the not too distant future, a country which is trying to encourage its citizens to stop taking money out of circulation (by saving) and to spend more of their money on purchasing goods and services to help boost the economy. As an incentive, this fictitious country passes a government bill to program the CBDC to expire after 90 days unless it is spent! Some might think that this is a great idea, some of those with large pensions might not. The point is, it shouldn’t be up the the government to decide how you spend your money. 

Let’s look at a list of risks and benefits:

Risks of using CBDCs

    • Inflation – A CBDC can be increased in monetary units. As we have seen with Quantitative Easing during the COVID pandemic, governments can always find ways to create money to spend – A CBDC makes this easier to do.
    • Compare CBDC's with Bitcoin“Not your wallet, not your crypto” is irrelevant when it comes to CBDCs.  Even if you hold the money in your wallet, the Central Bank will have/be able to program it so that they can do whatever they want with it.  You are at the mercy of the controlling Central Bank.  US citizens were forced to sell their gold at a fixed price to the government in the 1930’s. Some of you remember what happened in Greece when the government literally stole money from its citizens bank accounts. CBDCs would make this very easy to do.
    • Central Bank Cyber attack.  The currency would be at risk (because of its centralised nature) from a cyber attack.  Even a small disruption may be catastrophic for some organisations and businesses. Warring countries would be disrupted by financial cyber attacks.  Technologically advanced countries may even be able to ‘influence’ those less technical to ‘protect’ their financial infrastructure – a World Bank sponsored protection racket! A whole range of scary possibilities are suddenly possible?  
    • There could be a wide spread misallocation of CBDCs because of incompetence or corrupt officials.  Or, simply the fear that this could happen.  It’s not like we have 100% trust in our government organisations to begin with!  The provision of a sovereign currency managed by a few government individuals and/or their hired help is a recipe for disaster to many of us.
    • CBDCs could result in higher lending costs. The recent discussion paper, “New forms of Digital Money” by the Bank of England explored the likely possibility that such a currency would be more difficult to lend out. This would result in increased lending costs and an increase in expensive market-based financing.  
    • Loss of privacy.  ‘The Man’ would know where you are and what you are doing at all times because of the way you are spending your money.  

Benefits of using CBDCs

    • Extremely efficient. Instantaneous, immutable, transparent and granular.  All these things would be evident (hopefully) in a CBDC.  You would be able to track funds, rely on payments being made without problem and see each stage of the transaction.  Much of crypto transactions are performed by smart contract and not a bank – this is (or it’s expected to be the case) with CBDCs.
    • Less Intermediaries.  Lets face it, with a CBDC, there is less need for a bank.  For the most part, you would be the custodian of your currency and only you would be able to access it.
    • One of the big myths about bitcoin is that criminals like to use it because it is anonymous.  It certainly isn’t.  Crypto is absolutely traceable and it is hoped that if someone steals your CBDC digital coins, that you would be able to trace and recover them.  
    • Instant money transfer. One of the biggest hassles that people face is transferring money between countries. Sending Fiat money (at the moment) to my friend in Australia is difficult.  It’s very much easier if my friend lived in El Salvador (which accepts Bitcoin as legal tender).
    • Easier to add services and benefits onto the money instantly.  For instance, A state lottery could be set up and the winner wouldn’t even need to claim, the money would simply be transferred into their wallet! I appreciate that this is a frivolous example but you can see how there is more opportunity for fiscal innovation using CBDCs than ‘regular money’.

There is a lot of information on the internet if you are interested.  But remember, there aren’t any CBDCs yet so everything you are reading here is speculation.  Other worthwhile reading is available here:

Bank of England logoThe Bank of England produced a terrific CBDC discussion paper (Central Bank Digital Currency: opportunities, challenges and design).  It is relatively unbiased.  The YouTube webinar related to the report was almost interesting to watch.  The  UK Central Bank Digital Currency discussion paper was very informative too. They concluded, somewhat reassuringly in their Responses to the Bank of England’s March 2020 Discussion Paper on CBDC that it is, as yet, too early to tell if CBDCs are possible.  They were unable to conclude if the world is yet ready for them.  That’s my interpretation – these are balanced and impressive papers and you should consider reading them in your own research about CBDCs.

BIS report for the G20You should also look into the venerable report of the Word Bank Group and the International Monetary Fund. Alas, it too is somewhat conclusion-less.  

Not surprisingly therefore, I think it’s too early to decide on the benefits of CBDCs.  There is so much hype about them (negative from the population and positive from the institutions) that a CBDC would have to address the following  issues before adoption:  

      • Use case: Why will people use a CBDC rather than bitcoin, Litecoin, stablecoins etc.?
      • Privacy concerns: Can the CBDC be as private as Fiat currency?
      • Ownership:  Who owns the currency thereby determining how it is spent? 

Until governments can address these, and other issues, they may find it difficult to implement a CBDC.  China is currently rolling out its CBDC (e-CNY). In April 2022, it launched an app wallet for Chinese citizens in 23 of the largest cities and is trialling the coin.  China has been developing its CBDC since 2014 and it is considerably further ahead than other countries regarding implementation.  

I’m quite happy for the Chinese to be the first to try this. I’m personally convinced that it will be disruptive to the population – it’ll certainly be interesting to see what happens.

So now we have an understanding of what cryptocurrencies are and how they can be used.  In the next section we will look at how to purchase crypto. Section Thirteen: How to Buy Crypto Coins and Tokens.


This article is copyright 2022 by Tony Fawl, CryptoNET.

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