CBDCs are hot right now. More than 60% of world central banks have indicated plans to launch or are already looking into CBDCs in the near future. A small number have even deployed pilot projects. The European Central Bank (ECB), the US Federal Reserve and the Bank of England have all launched research projects. Experimental projects have been launched by the Sveriges (Swedish) Riksbank and the Bank of Israel, while pilot projects were initiated most notably by the People’s Bank of China (PBOC) and the Bahamas, which announced that its digital “Sand Dollar” was already being used by the public. Other central banks—Australia and Norway—are comfortable with “monitoring developments” from the sidelines.
At first glance, one might think that is merely the banking sector attempting to catch up with a technology that is fast disrupting finance all over the globe. On closer inspection CBDCs appear to be a bit more than that. National own versions of retail CBDCs have the potential to completely alter how we think about money and how consumers interact with the financial system.
First, it is important to distinguish between CBDCs and other digital currencies. While CBDCs and cryptos like Bitcoin may share key characteristics such as their digital nature, they couldn’t be farther apart in terms of purpose.
Ultimately CBDCs and cryptos are different things, designed for different purposes. And, while I wholeheartedly agree with the spirit of cryptos and how they are disrupting finance, I am somewhat sceptical about CBDCs. I feel they go against the spirit of digital currencies that are the foundation of the whole crypto movement; decentralization.
What do I mean by this?
Well to explain what I mean it is important to first understand CBDCs and how they differ from cryptocurrencies.
By definition, CBDCs are a digital version of government-backed fiat money. This means that they are issued and controlled by the government. Cryptocurrencies on the other hand “don’t have a central issuing or regulating authority, depending instead on a decentralized system to log transactions and produce new units.”
The keyword in this distinction is ‘decentralized’, a factor that is key to distinguishing the two currencies. And one that has me totally against CBDCs, for now.
You see, I am a bit of a renegade especially when it comes to finance and economics. I strongly feel that people should be free to buy/sell whatever they want to in the market. This is the central principle of capitalism; “the invisible hand that goes on to create unintended greater social benefits and public good brought about by individuals acting in their own self-interests.”
FIAT currency, in my opinion, goes against the central tenets of capitalism. Instead of being freely traded in the market, these currencies are controlled by a central authority; the government, in form of central banks. I mean even their very value is controlled by the government, in terms of the supply, they allow in the economy. This has not been made easier by the fact that most currencies are not backed by anything. Not gold, not silver. We departed from that model in the 70s thanks to Reaganomics. Instead, we have FIAT which is LATIN for ‘let it be so.’ Sounds a little dictatorial if you ask me.
And what is the result of this model? Inflation and endless debt. These are the hallmarks of the modern economy. The global economy runs on unsustainable debt. Even the gatekeepers of the FIAT model are conceding to this fact. This is mainly due to the 2008 financial crisis which caused a rethink of the whole financial model throughout the world. Many bankers and politicians realized that the model that runs on debt would sooner or later come to haunt them. We need a solution.
In comes digital currencies. They were meant to be the solution to this whole mess. At least that’s what they were meant to be. At the heart of the invention of Bitcoin (the original cryptocurrency) was decentralization. Taking the power of issuance and supply of money away from central authorities to the market, where it belongs.
And years on with literally thousands of currencies invented to compete with Bitcoin, it rages on. Starting from being valued at a few dollars during its launch, today it is worth more than $40,000, albeit with a few swings along the way.
No matter what detractors and critics say, I believe Bitcoin is one, if not, the very best example of what a cryptocurrency should be; digital, limited in supply and decentralized.
CBDCs fly in the face of these principles. They instead stick to the old tradition of centralization, a dangerous idea for the future.
Worse still, governments plan on making these currencies programmable. This means that ‘Use of those funds can be made conditional on attributes of your digital identity.’ The combination of digital identity and a programmable digital currency would give the government the power to control directly how you spend and receive money. A power that they will surely use and not always for the right reasons.
What happens when the government gets despotic? We have a few of them around the world right now. With that much power, citizens will have no power to get out of its control. Programmable CBDCs are the eventual invention of a system that aims to increase its power and control over its citizens via surveillance. We cannot let this happen. CBDCs no matter their good intention may end up creating more harm than good.