It has become clear by now that central bank digital currencies, or CBDCs, will be in our future and the technology will fundamentally change the use of money and the economic system as a whole.
The world’s biggest economies and their : the U.S. Federal Reserve, the Bank of Canada and the European Central Bank are trailing behind the People’s Bank of China, which already is testing its CBDC with more than 50,000 citizens. its central bank digital currency – the “sand dollar” – in October.
CBDCs faster settlements, better security, ease of use, instant implementation of monetary policy (if you consider that an improvement) and transaction costs that are lower than cash. In the future, these advantages will be stressed ad nauseam by pundits and politicians to make the technology palatable to the whole population.
While all of the advantages are true, it is also crucial to think through the implication of the technology and how it could negatively affect the economy and the citizenry. There with varying degrees of risks, and it’s important to understand the subtleties of these systems. However, all CBDCs need to be centralized and manipulatable to some extent because otherwise monetary policy would not be possible.
As a contrast, Bitcoin is booming due to its decentralized, open, public, borderless, neutral and tamper and censorship-resistant properties. Depending on the type of CBDC, CBDCs can become the exact opposite, especially if central banks offer accounts to the public at large, implementing what is known as a .
This article outlines four scenarios of how CBDCs have the potential to undermine economic stability and eradicate privacy.
Governments are fallible. In the U.S., think back to the launch of healthcare.gov or federal- and state-level breaches involving in more than 300 million cases in the last 10 years. With CBDCs, the whole economic system could be brought to the brink by bad updates or data leaks of the centralized ledger, which won’t be protected by proof-of-work in the same way as Bitcoin. For Bitcoin, it took a decade to build a robust decentralized computing power to assure the integrity of the blockchain. Governments won’t go to such lengths, and they need to rely on different, more fragile ways of protecting the centralized ledger.
Government tends to collect as much data about its citizens as they can get away with. This happens under the guise of safety, as in the governor of the state of Michigan’s decree to document every customer’s personal information to contain the spread of COVID-19 or under the pretext of nudging people to become model citizens in the case of China. Imagine a coupled with a CBDC. All your purchasing decisions could influence your score on which you depend for everything. Donate to the “wrong” non-profit like WikiLeaks? Whoops, you cannot purchase train tickets anymore. Bought some interesting adult toys for your spouse? Oh no, your credit score might drop, or your application for the government job does not get accepted.
What sounds like a far-fetched dystopian nightmare is already a reality in China. If you hang out with the wrong crowd, your citizen score, which is crucial for purchases, jobs, travel and so much more suffers. Pair this level of surveillance with the ability to track any purchasing decision you make and you have the perfect recipe for Big Brother on crypto-steroids.
More than operate in the informal economy. This results from the lack of free-market institutions like the rule of law, property rights and stable money in many developing countries. But even in developed countries like the U.S., the informal economy plays a huge role. Here the estimates there are at least 30 million jobs that rely on the informal market. That’s a lot of livelihoods threatened by CBDCs. The informal economy includes innocuous things like paying your neighbor to fix your roof or paying a teenager to take care of your yard.