This piece of paper represents money issued by the central bank. But, the use of this type of money is quickly dropping as people are more and more using bank cards like this to buy stuff online and in stores. So, now central banks all over the world are introducing so-called central bank digital currency, or CBDC, which is a digital form of cash, that will live on your phone or on a brand-new central bank issued card.
But, is that a good thing , or a bad thing?
Well, on the one hand central bankers claim that CBDCs could make digital payments much cheaper and more accessible to vulnerable groups in society, while at the same time making our economies safer, and less vulnerable to domination by big or foreign tech firms. On the other hand, there is now also a massive backlash against CBDCs, especially amongst conservatives in the United States, take for example this clip from Fox News, where ex-presidential candidate Tulsi Gabbard says that the while the government tells us that
This is for your own good, for your own convenience. Make it easier for you to conduct transactions when, in fact, they are giving themselves all of the power, take it away from us because they want to be able to control us.
So, who is right? Are central bank digital currencies going to make our lives easier and safer? Or are they a dangerous experiment? To answer this question I’ve immersed myself in the arguments of both sides, talking to central bankers in Frankfurt, reading central bank reports about CBDC pilot projects that have already been tested in the various countries yo u can see here on this map, and contrasting these promising findings with the various concerns around privacy, security, and the potential demise of cash.
And, after all of that, I’ve come to the conclusion that the current debate around CBDCs is, frankly, a hot mess. On the one side, the benefits of CBDCs are still not clear to most people, and, on the other side, valid concerns about privacy & financial stability have been drowned out by hyper sensationalized conspiracy theories.
So, to find out whether you need a CBDC in your life, let’s first dive into the 6 main arguments that I found in favor of CBDCs and then into the 4 main arguments against them. But, to truly understand all of these, let’s first briefly dive into
What is Wrong With Our Money Today?
Because the two types of money that we have today, physical central bank money and digital money issued by private banks are both far from perfect. To see why, let’s judge how well these types of money score in six different categories: privacy, accessibility, safety, convenience, online payments, and costs, using a three star rating system, where 3 stars is a good score, and 0 stars is a horrible score.
Okay, first let’s talk about privacy. If, you pay for something using your bank issued card, well, then various institutions are potentially getting access to this data. First of all, your bank stores this information, and second, card companies like Visa & Mastercard also often keep records of transactions made with your card. Sure, in many cases this data is never accessed by anyone. However, occasionally both banks and card companies have been caught selling or accidentally leaking data. But, perhaps more importantly, governments have easy access to this data as well. That is, if they suspect that you are avoiding taxes, financing terrorism, or laundering money. So, I’d say for privacy digital bank money gets a 1 star score. On the other hand, while cash is almost untraceable for small transactions, many countries have laws that forbid large cash transactions or require them to be reported to the authorities. So, I’d say cash is not perfect either and gets a 2 star score for privacy, while noting that, actually, many people don’t mind giving up some privacy to fight crime and terrorism. That being said, I think this striking photo of Hong Kong protestors queuing up to use cash rather than digital metro cards reveals that if a country turns authoritarian, people may suddenly really appreciate that physical money is there as an option.
Okay, next up is accessibility. As money, cash is extremely accessible. After, all to hold this piece of paper, all you need to do is to convince someone to give it to you. However, if you want a card like this, you will need to convince a bank that you are who you say you are by presenting your id, and that you are not going to use it to do anything illegal. And, while that might not be a problem for most viewers of this channel, research shows that roughly 6% and 30% of the population in advanced and emerging economies respectively, does not have access to a bank account. Even more worryingly, there have been quite a few high profile cases of people getting debanked, meaning that they lost their bank account. For example in the United States companies and people whose activities were legal but banks found to be risky, such as sex work and pot growing, were often refused a bank account. Perhaps even more worryingly, in the United Kingdom, controversial politician’s Nigel Farage lost his bank account briefly, because “his values did not align with that of the bank”, and in Canada the government even forced private banks to freeze the bank accounts of Truckers that were protesting against COVID-19 vaccinations. So, while private bank accounts are accessible to most, it’s still not accessible to many people, and there is a legitimate threat of you using your access to it, leading to a 1 star score versus a 3 star score for cash.
However, when it comes to safety, I’d say it’s a bit of a toss-up. One the one hand, having a lot of physical money is pretty dangerous as it exposes you to theft or losing it. On the other hand, bank fraud is a risk as well. However, as you can see in this picture of people queuing up at their ATM during the Greek financial crisis, if there is a financial crisis, people often re-discover that actually digital private bank money is a promise to pay physical central bank money. So, in such a scenario physical money is way safer. Still, in most cases both are pretty safe, so let’s just give them both two stars here.
But, despite that draw, cash is starting to look pretty good, right? So, then why are so many of us switching to digital bank money. I mean, I hardly use cash anymore, and depending on where you live, a lot of people seem to feel the same way. For example, check out this graph from the United Kingdom where you can see that the value of cash payments has declined to from 55% in 2012 to only 15% today, while card, and other payments, have rapidly increased.
Why is that? Well, in surveys people most often mention convenience. Which makes sense given that these days, using a digital card or app is often just as simple as holding it close to a card machine. No need to count money, worry about change, carry around a large wallet, or heading to the ATM all the time. Similarly, if you are a merchant, then collecting digital payments saves you a ton of administrative work and trips to the bank to deposit cash. So, yeah, that is why digital money scores a three star rating here versus a single star for physical cash.
Then, if we talk about the rise of **********online business,********** it gets even worse for physical money given that well, it’s almost impossible to use cash to buy stuff online. And, so instead of looking at a person, you are likely looking at a screen like this, where you can choose various payment methods to pay the merchant.
But, why are some payment methods featured more prominently than others here? Well, as a small business owner, I can tell you that it has to do with the final money consideration and that is costs, where the reason that for example PayPal is of ten so low on your screen, is that they charge ridiculous fees to merchants. Still, when it comes to costs, I think it is a bit of a toss-up between physical and digital money. As a consumer, you probably don’t think it matters too much since both digital and cash payments appear to be free. However, from the merchant side, they most definitely are not free. After all, cash needs to be safely stored, administered, and deposited at a bank every now and then, and all of that is actually quite expensive. On the flipside, a merchant does also pay a small fee to banks and card companies every time you use your card. And, so, you can be assured that actually, as a consumer you are paying slightly higher prices because merchants have these payment costs.
So, okay, having compared our two current forms of money, it has become clear that they both have their advantages and disadvantages, which has led us to a point where fewer and fewer people are using cash, even though most people still say in surveys that they do really appreciate that cash is around as an option. But, what a recent survey in the UK also made clear is that consumers are not entirely happy with the current set-up of having to choose between the privacy of cash payments and the convenience of digital payments.
And, that is where CBDCs come in.
Although, before discussing how CBDCs can make our lives better, there are two crucial pieces of context that we need to talk about first. The first is that actually, central bank digital currencies are not new. In most economies the central bank already issues a digital currency besides cash. However, this CBDC, also known as a wholesale CBDC, is not accessible to the public. It is only available to banks, who use it to pay each other. And so, the discussion that follows will be about the so-called retail CBDC, which will be accessible to the public as public digital payment option, complementing physical money and private bank digital money.
The second piece of context that you need to know is that a CBDC is a technology that can be implemented in many different ways. Of course, it can be implemented in a highly authoritarian way, which we will talk about later in this video. But, actually, many of the current proposals in countries like the United States, the United Kingdom, and Europe have more in common with what the OECD calls CBDCs with democratic values, of which the main aim is to make the lives or citizens better, rather than to increase government control.
What are the Advantage of CBDCs with Democratic Values?
Well, after going through a ton of proposals and research, I’ve come across six main arguments in favor of adding a CBDC to our current payment mix.
The first proposed advantage of CBDCs is that it can be more private than digital bank money and, depending on which country you are in, perhaps even as private as cash. So, how will these CBDCs be more private than private digital money? Well, first, by cutting out the card companies, meaning that there is now one less party that can sell or leak your data. Second, while in most proposals, private banks will manage CBDC wallets and store transaction data instead of central banks themselves, they won’t have free access to that data, unless it receives an official government request. More importantly, in most proposals, the central bank, which will handle transactions, will not be allowed to save information that can tie these transaction to you as a person. So, CBDCs with democratic values are actually more private than digital bank money because it cuts out access by private parties while keeping government access the same. Although… actually, in some cases, such as the digital Euro proposal, if you use it offline on your phone, your transactions will be more private. Even better, in Nigeria, which recently launched a CBDC, you can buy CBDC cards that are almost completely anonymous that can hold small sums of money, making it equally private as cash for small transactions, and yes, on the flipside that means that petty corruption, or small criminal transactions are also possible with such a CBDC.
So, depending on the exact proposal, a democratic CBDC could score a 2 or even 3 star rating for privacy.
Next, when it comes to accessibility. Imagine that indeed we do get this offline CBDC or anonymous cards that you could just buy in the store. This would really make a digital currency more accessible than private digital bank money. Indeed, increasing accessibility has been the main driver to introduce CBDCs in emerging market economies. For example, the first retail CBDC to ever be introduced, the Bahamas’s Sand Dollar, was introduced with accessibility in mind as they explain in their promotional video
in many of our remote communities there’s very limited access to financial services on a daily basis. It helps those unbanked members of our population who don’t have access to who don’t have access to commercial banking facilities
But, does a CBDC also protect people from being unbanked for their political views? You’d think it wouldn’t. However, in their proposal for CBDCs with democratic values the OECD writes that
universal equal accessibility for all citizens to a digital version of sovereign currency are both prerequisites
For this to happen, no undue restrictions should be imposed related to user profiles and/or conditions to the use of CBDCs by any and all citizens.
In other words, a democratically designed CBDC could in theory protect people like Nigel Farage from being unbanked fo r having different values, giving it a three star rating.
Okay, next, let’s talk about safety. Remember that cash is the ultimate safe asset in a crisis and digital bank money is less likely to be stolen or lost? Well, a CBDC could actually combine both of these traits, and so, it could score a three star rating here, better than both cash and digital private bank money.
On the other hand, for convenience and online shopping, a CBDC doesn’t bring much new to the table and would be just as good as private digital money,
So, then, let’s move on to the fourth advantage of CBDCs and that is that they should make our lives cheaper, which, as we have discussed is a bit of a hidden advantage since currently the costs of paying with both cash and private bank money fall mostly on merchants and are therefore hidden to consumers.
So, how will a CBDC make your life cheaper?
Well, the idea is that by cutting out the middlemen, like Visa & Mastercard, central bank digital currency payments could be quite a bit cheaper for merchants, who now face transaction costs up to 3.5%. And, these cost savings could be even bigger for those of us that sometimes send money across borders, for example to go on vacation, to do business, or to send money home to your family. The reason for this is that, just like with local bank transfers, a specialized messaging company, that charges high fees, is needed to make this a ll work behind the scenes. And to make this all even worse, banks often use even more intermediaries, such as a correspondent bank in a big financial center like New-York or London to make the foreign exchange transaction work behind the scenes, meaning that there will be even more fees.
So, in response, several central banks have recently been running trials with so-called cross-border CBDCs, which is a fancy way of saying that they’ve experimented with giving foreign banks access to their wholesale CBDCs. For example in project Dunbar, Australia, South Africa, Malaysia, and Singapore worked together to give their banks access to each others CBDCs. So for example, in this project an Australian bank could hold digital Rands at the South African Reserve Bank and a South African bank could hold digital Australian Dollars at the Reserve bank of Australia. Therefore, if a South African wine exporter now wanted to export wine to Australia, it’s bank could just directly receive Rands from the clients bank in Australia. In the current model this transaction between banks would likely have gone through intermediaries in New York or London, hence being more expensive.
So, CBDCs could make regular transactions slightly cheaper and international transactions a lot cheaper, meaning that a 3 star rating is in order here.
And, as you might have noticed, we have now arrived at the part where we will talk about some new stuff, because the fifth proposed advantage of CBDCs is that it is supposed to give countries a geopolitical advantage.
After all, as Russia has recently found out the hard way, relying on the dominant banking system of other countries can be quite risky. After all, if global payments run through foreign banking systems, then you can be excluded from those. Actually geopolitics has been a major argument for the European central bank to introduce the digital Euro project, as it’s president Christine Lagarde explained in this leaked clip:
the reason I’m personally convinced that we have to move ahead is a situation like the one we are in now we are dependent on the supply of gas by a a very unfriendly country. I don’t want Europe to be dependent on an unfriendly country’s currency for instance I don’t know you know the Chinese currency the Russian currency the whatever or dependent on a friendly currency but which is activated by a private corporate entity like you know Facebook or like uh Google or anybody.
So, by moving people to a CBDC payment system, countries potentially also unlock more geopolitical safety than relying on foreign financial institutions.
And, with that, we’ve arrived at the final potential advantage of CBDCs which is that they have the potential to revolutionize money through so-called programmable money or tokenized money. You see, in some proposals CBDCs make use of similar technologies that cryptocurrencies use today, which will actually allow users automate money. So, for example, if you buy a house with normal money, then you typically pay a substantial fee to a third party to hold money in escrow, ensuring that the seller gets the money once the key to the house is handed over. The advantage of a programmable CBDC would be that you can automate this process, thereby making it cheaper and easier. And, this is just the tip of the iceberg, central bankers imagine that by giving private firms access a CBDC API, a vibrant new ecosystem can emerge that provides innovative payment solutions based on conditional payments that make payments easier, safer, and cheaper across the world.
So, yeah, that’s it, CBDCs with democratic values, that complement cash and private bank money, can theoretically make your life more private (1), easier (2), safer (3), cheaper (4), and it could make your country safer (5), and revolutionize its financial system (6). However, as you might now say, Joeri, it’s pretty naive of you to assume that CBDC that we end up with will be a CBDC with democratic values. Indeed, there are also people like Fox News contributor Dr. Monica Crowly who believe that
The bottom line is it’s not ease or convenience. the you will main objective is to move us to a cashless society. you won’t have that hard asset of the $10 or $20 bill. your money will be software. it will be a number in the treasury that your opponents and the government will have access to. they want to get rid of the banks. they want to wipe all the banks out so your bank will be the federal reserve. this is not really about the money. this is about power and control. because the government such as it is will have access to all of the information related to he single transaction you make. you buy a stick of gum be the government will know. you brought the wrong car? now you are going to get penalized. this is a move towards a CCP-style social credit system. they are using this move to a central bank digital currency as the biggest lever to get us there
The 4 big dangers of CBDCs
First, before we get to the truly dystopian stuff, economists and politicians have voiced two important concerns about a poorly designed CBDC. First, given that governments don’t have a great track record of implementing good software, a poorly designed CBDC could be so clunky and bad that it ends up being less accessible** than private digital money. Second, by offering a very safe digital asset, some economists have argued that the central bank could actually make bank runs actually more likely, thereby **decreasing the safety of the monetary system. However, a simple counterargument to these points would of course be that recent successes in India has shown that governments can actually build online payment systems that people love, and that financial stability concerns can be limited if people can only hold smalls sums of CBDC money, as has been proposed in Europe and the UK.
But, what is less easily dismissed is that while a CBDC can be used to improve the lives of citizens, it can, of course, also be used to increase the control of a government over its population. To get to the root of this fear, let’s quickly go back to that photo of protesters in Hong Kong, that wanted to travel to the site of the protests with cash. In this case, it is clear that cash helped people to voice their concerns about increasing authoritarianism. And now, China is one of the countries that is at the forefront of developing a CBDC and many experts fear that indeed its motivation is to move to a cashless soc iety and increased its level of social control.
And, so yeah, if that is true, then it makes total sense that people worry that every CBDC will be used like that. Because, indeed, unlike a democratic CBDC, a CBDC with an authoritarian design, would be far less private than cash and potentially also less private than private bank money.
And to make matters worse, in this case programmable could allow governments to do weird and wonky stuff like giving us money that can only be spent on certain things, or as Dr. Monica Crowly put it
they can control whether you can buy a firearm, how much gas you can buy, how much electricity you can use, or whether you can buy meat.
And to make matters even more controversial, the Chinese CBDC pilot project included money that could expire. Something that could make economic stimulus much more effective, as it guarantees stimulus checks will actually be spent. But, as critics pointed out, if your money can expire and therefore you HAVE to spend it, this certainly reduces your freedom.
So, yeah programmability when used for authoritarian purposes can potentially limit the benefits of a CBDC for the population reducing its score to two stars. And to be fair, central bankers in democratic countries have also discussed the possibilities of CBDCs that can expire or only be spent certain things. However, at the same time, I do have to mention here that while this sounds really scary, expirable money or money that can only be spent on certain things already exists today, and we know it as a voucher.
And, that brings us to my
which is that I think that the main question, whether CBDCs are good or bad, is wrong. The question should be, how do we end up with a good CBDC? And there, while sometimes presented in an overly sensationalized way, the main concerns that have been voiced are really valid, in my opinion. And, actually, the fact that these concerns have been voiced so loudly has already had a really positive impact, as central banks have been listening, and some of them, like the European Central Bank, have updated their proposals to reflect these concerns, moving their proposed CBDC closer to the CBDC with democratic values that I think most people would prefer.
Specifically the proposal for the digital Euro now includes pseudo-anonymous offline payments, and is packed with legislation that aims
to safeguard the role of cash, ensure it is widely accepted as a means of payment and remains easily accessible for people and businesses across the euro area.
And, yet while this made me much more positive about CBDCs, I hope that all of you will remain critical, so that we end up with a CBDC that improves our lives, rather than helping our governments to control us. Which, luckily, I think for many of us is really likely. After all, there have been many new government owned technologies, ranging from railr oads, to tanks, to television, that have made some dictatorships more powerful, and yet have not led to every country that adopted these technologies to become an authoritarian dystopia. Instead, what has protected these countries from government overreach in the past has more often been about rules, regulations, and institutions that are separate from that government and which hold it accountable.
But, yeah that is my take. What do you think, should we have a public form of digital money that lives alongside cash and private bank digital money, or do you think that digital money should purely be left to for-profit banks and card companies?
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