CBDCs, or Central Bank Digital Currencies, are digital currencies issued by a central bank that are designed to function as a digital version of a country’s fiat currency. Unlike cryptocurrencies such as Bitcoin and Ethereum, CBDCs are not decentralized and are instead issued and backed by the central bank of a country.
The purpose of CBDCs is to provide a more efficient and secure means of conducting transactions and payments, while also providing greater control and oversight to central banks over the monetary system.
CBDC Benefits
- Increased efficiency: CBDCs can potentially facilitate faster and more efficient transactions and payments, reducing the need for physical cash and traditional payment systems.
- Improved financial inclusion: CBDCs can potentially provide greater access to financial services for people who are unbanked or underbanked, particularly in developing countries.
- Greater monetary policy control: CBDCs can potentially give central banks greater control over the money supply and enable more effective monetary policy.
- Reduced transaction costs: CBDCs can potentially reduce the costs associated with traditional payment systems, which can benefit consumers and businesses alike.
CBDC Risks
- Cybersecurity risks: CBDCs will likely face cybersecurity risks, and if a CBDC system is compromised, it could lead to significant financial losses and disruptions.
- Privacy concerns: CBDCs could potentially raise privacy concerns, as central banks would have access to more detailed information about transactions and financial activities.
- Disintermediation: CBDCs could potentially disrupt traditional financial intermediaries such as banks and payment processors, which could have broader implications for the financial system.
- Adoption challenges: The adoption of CBDCs may be slow, as consumers and businesses may be hesitant to switch to a new digital currency system.
Here are two examples how the public is hesitant to use CBDCs.
China
Shenzhen, a metropolis in southeastern China, has begun distributing digital yuan hard wallets to Hong Kong tourists, but the demand has been lower than expected.
The initiative was launched in collaboration with the Bank of China and Octopus Cards, and aimed to provide visitors with convenient and secure digital payment services. However, as of 26 February, only 625 visitors had taken advantage of the offer, falling short of the goal to distribute 50,000 digital wallets by the end of March.
The wallets can be used at over 1,400 merchants in the Luohu district, with users receiving a 20% government consumption subsidy. Despite China’s efforts to promote CBDC adoption, including testing in at least 26 provinces and cities across the country, the project faces challenges such as limited use cases and competition from established payment services such as Alipay and WeChat.
Nigeria
In Nigeria, citizens have taken to the streets to protest the cash shortage in the country and the government’s implementation of a central bank digital currency (CBDC). The cash shortage occurred due to cash restrictions aimed at transitioning to a 100% cashless economy, but instead of adopting the CBDC, protesters demand the restoration of paper money.
This experience in Nigeria strongly suggests that CBDCs present a substantial risk to financial freedom without providing any unique benefits. Policy analyst Nicholas Anthony at the Cato Institute’s Center for Monetary and Financial Alternatives notes that while central bankers, policymakers, and consultancy firms have grown more interested in CBDCs in recent years, citizens’ views have been quite different.
In fact, when the U.S. Federal Reserve solicited comments on CBDCs, over two-thirds of commenters were concerned about the risks to financial privacy, freedom, and the stability of the banking system.
Moreover, CBDCs offer no unique benefits for consumers. Many currencies are available in digital forms through debit cards, payment apps, and even prepaid cards. The low adoption rate of the CBDC in Nigeria, where less than 0.5% of Nigerians have used it, highlights this fact. In contrast, over 50% of Nigerians have used cryptocurrency.
Despite the Nigerian government’s efforts to spur CBDC adoption, including removing access restrictions and offering discounts for using the CBDC to pay for cabs, Nigerians still prefer cash.
Why Do Governments Want CBDCs?
These two examples show that the general public doesn’t want CBDC yet. If the majority of the public doesn’t understand crypto, how will they understand CBDCs?
It doesn’t take a genius to understand that governments around the world want more control over people’s spending. They want to be able to see every single transaction a person makes for several reasons.
- They want to make sure people can no longer hide income. Payments in cash won’t be allowed.
- They want to be able to track criminals more easily.
- They want to stop people from using cryptocurrency.
But people don’t want the government to have more control. Privacy is already a huge concern when we have so much of our lives online. There’s no way we want the government to have access to every single transaction we make.
Digital Pound
The Bank of England is looking to issue a CBDC called the Digital Pound and they explain that cash would still exist and that no one would be able to see your transactions.
So then what is the point of this CBDC? It seems to be a way of replacing debit cards. You’ll need to top-up your digital wallet from your bank account in order to make payments. You’ll tap your device as you do now with Apple Pay.
They say it will bring efficiency and choice to the public, which I can see, but not for a long time. People simply don’t understand digital currencies and CBDCs are no different. But if I know the UK, they will do a nationwide marketing campaign when the time comes. Every bus will have a CBDC ad and will become something we can’t escape.
If your country issues a CBDC, would you use it?