Abandoning traditional caution, the US Federal Reserve and other countries’ central banks are likely to introduce CBDCs (central bank digital currencies) in the near future. Backed by the Bank for International Settlements, 105 countries representing over 95% of global GDP, including the United States, European Union and China, are actively testing or considering digital currencies.
While details remain unclear, CBDCs will likely be based on technology similar to bitcoin BTCUSD,
and other cryptocurrencies, but with important differences, such as:
CBDCs would be a central bank liability, in effect, fully state-backed digital money.
Its value would be pegged to the national currency, unlike real cryptocurrencies whose price is determined solely by demand and supply.
It would function in the same way as existing fiat currency and would allow normal payments to be made and financial or commercial obligations to be met.
The only difference from cash would be the absence of bills and physical transferability, as transactions would be electronic, similar to existing funds transfers through banks. Although initially voluntary, it could easily be made mandatory.
Arguments for CBDCs, as for banning cash itself, are always framed in terms of improving efficiency. However, since most advanced economies have efficient remittance systems and most payments are now electronic in all cases, it is unclear what additional benefits would accrue. To the extent that payment systems, especially cross-border ones, are expensive or slow, better interoperability and clearing systems would provide effective solutions.
Other benefits cited include deterrence of crime or terrorism, increasing the legal economy by reducing the scope of the underground economy, eliminating tax evasion, reducing the cost of printing coins and even preventing contact with bacteria and virus-carrying banknotes. There is little evidence to support either claim.
CBDCs create new problems. If savers abandon bank deposits, funding for the banking system could be reduced, disrupting the flow of credit. This could increase the risk of bank runs (investors switching deposits to CBDCs) during times of financial uncertainty. These risks would require complex workarounds; for example, setting permanent or temporary limits on transfers to central bank accounts and deposit withdrawals. This would divert from the essential idea and fragment the payment system.
Central banks also risk losing seigniorage income (income from issuing currencies at a cost below their face value or income from holdings of securities financed by money creation). Annual US seigniorage revenues, for example, are estimated at around $20-25 billion (0.1% of GDP).
power in the state
In reality, like all restrictions on the use of cash, CBDCs are designed to increase the power of the state:
CBDCs would reduce confidentiality and anonymity allowing the monitoring of consumer habits and indirectly of citizens’ behaviors, as CBDCs are fully traceable.
Negative rates (which have been widely used in Europe and Japan over the past decade) can be avoided by holding cash. Replacing cash with CBDCs allows central banks to trace holdings and charge a negative interest rate for their digital currencies.
Central banks could promote consumption by placing a time limit on digital currencies in which they must be spent or lost forever. It can channel spending to specific areas through incentives or penalties.
As with electronic transactions in general, there are familiar cybersecurity issues and disruptions to operations due to technology or power outages.
“There are fears that cryptocurrencies could threaten the dominance of the US dollar.”
The real motivations of CBDCs are complex. Governments fear losing the state monopoly on currency creation, monetary control and falling behind the demands of changing markets, de facto ceding control to private interests. Central bankers are also aware that they are not seen as an obstacle to ‘innovation’.
For the Federal Reserve, there is also concern that in the long term, cryptocurrencies could threaten the DXY of the US dollar,
dominant status as a reserve currency. But the introduction of CBDCs by large economies risks creating instability as it would erode the monetary sovereignty of smaller countries and facilitate capital flight in times of instability. For international adoption, collaboration on technical standards and legal frameworks would be necessary.
CBDCs make little sense. Currency remains an important medium of exchange and provides a payment option for legitimate transactions. Despite the growing use of electronic payments, cash is still widely used, especially for low value transactions. The use of cash around the world remains high among the poor and elderly as well as in large parts of the world where fast internet coverage is not ubiquitous. The elimination of money would aggravate, not improve, social and financial exclusion.
Instead of pandering to the fintech fad, central banks would do better to focus on their core goals – ensuring sound currency and improving cheap access to essential financial services for their country’s citizens, especially the poor. disadvantaged.
The Russian novelist Fyodor Dostoyevsky considered that money, which in his day was just cash, “invented freedom”. It would be ironic if crypto-technology, conceived by its inventors as a mechanism to increase freedom, became the basis for increased state control over individual lives and decisions.
Satyajit Das is a former banker and author of A Banquet of Consequences – Reloaded ( 2021) and Fortunes Fools: Australia’s Picks (2022).
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