In countries around the world, central bank digital currencies (CBDCs) are poised to change the way average citizens use money. Over the next decade, billions of people will likely use CBDCs — a new kind of currency run on a centralized ledger — to do everything from paying taxes to buying groceries to cash checks. ‘welfare.
Once considered a technology of the future, CBDCs, along with other digital payment innovations, have garnered new attention during the pandemic as governments explore how they can better exchange money with banks and consumers. But unlike Bitcoin and other private cryptocurrencies that promote ideals of decentralization, CBDCs are meant to leave the state very much in control.
Already, the United States is moving forward with CBDC testingTHE UK is recruiting a head of central bank digital currency and testing a digital bookand China launched his version of the CBDCs in the real world. We are closer than ever to a world of centralized digital currencies that are reshaping the financial industry. This raises the question of whether we are entering a new era of financial efficiency or, as critics fear, one of dystopian surveillance.
What is a CBDC? And who creates them?
A CBDC is a new form of digital currency created, issued and controlled by a central bank such as the Federal Reserve.
The digital payments we use today (i.e. Venmo, CashApp, etc.) are generally a liability of the institution providing the account – often using commercial banks – whereas CBDCs are a direct liability. from the central bank, not too different from physical money. However, unlike cash, CBDCs provide the central bank with more direct tools to monitor and control the economy.
It is useful to realize that in discussions of CBDCs, there are two proposed uses: retail and wholesale. The latter is simply an improvement to the current system that allows banks to send money to each other, which shouldn’t affect the average person much. On the other hand, CBDCs in the case of retail involve ordinary consumers interacting directly with a central bank ledger to conduct day-to-day transactions. This offers the possibility of cheaper and faster payments, including for things like government stimulus or social programs, but also poses new types of risk.
The most obvious of these risks relates to privacy. At a time when public trust in government and institutions is declining around the world, there are legitimate fears that authorities could use CBDCs for new forms of surveillance and control.
Central banks could freeze the accounts of actors opposed to the country’s agenda, such as when Canada froze the accounts protesting truckers. Or even stop you from buying junk food if they think your diet is too unhealthy.
Nevertheless, 114 countries – which account for 95% of global GDP – are considering a CBDC (according to Atlantic Council). Of these 114, 57% are in the research or development stage, 16% are in the pilot phase and 10% have launched their CBDC.
While the United States and Europe are still exploring the potential deployment of CBDCs, China and India have already rolled out their own versions in the real economy, while Nigeria and Jamaica have also launched their own projects.
“The reason we see divergent approaches on CBDCs is because each country considers its own national context, economic model and social constructs when seeking to advance a CBDC,” said Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association.
While every country has its unique societal challenges, every major power wants to at least dip its toes in the waters of digital currency for fear of being left behind.
“You can call it FOMO or you can call it geopolitics,” Kusz said. Fortune. “Part of it is about positioning, making sure they’re included in where the world is going.”
Are CBDCs too dangerous?
The idea of central banks using programmable money to exercise flexible control over how citizens spend their money seems dystopian. But not all CBDCs will have such limitless capabilities.
Johnathan McCollum is at the forefront of efforts to create a CBDC in the United States. As President of Federal Government Relations for Davidoff Hutcher & Citron, McCollum works closely with members of Congress to help change federal laws so America moves toward a safe digital currency.
“Privacy is a major concern here in the United States,” McCollum said. Fortune. “I think a lot of these things are really spelled out in our financial laws. There are protections for individuals that need to be transferred if we move to some form of digital money.
It specifically outlines the protections provided in the Privacy Act of 1974 and the Federal Information Security Management Act of 2002 to apply to digital currency.
“People don’t want the government looking at their banking information and their transactions,” McCollum said. “I think it’s important that we use intermediaries, so a CBDC would work the same as cash through commercial banks and different payment providers.”
In authoritarian China, meanwhile, there are unsurprisingly fewer concerns about privacy.
Zennon Kapron, Director of Kapronasia, focused on helping organizations strategize around implementing CBDCs in Asia. He saw how the Chinese e-CNY pilot was received by the public.
“In a place like China, where the privacy protections haven’t always been there, there’s probably a bit more acceptance that the government is going to look at. [your] transactions.” Kapron said Fortune“but in many markets that is not the case.”
Another complaint about CBDCs is the level of computer knowledge that may be required to use this new financial system. However, governments adapt to the abilities of their people to drive adoption.
In the case of the Chinese e-CNY, the mobile app will allow you to pay for transactions via a QR code, a system similar to AliPay which has 1.2 billion Chinese users. A card payment system is also being tested, which works like contactless debit cards, with the potential to merge with national ID cards in the future.
“One of the biggest challenges was user habits. They tried the carrot approach, in pilot areas, where they had lotteries for people using it,” Kapron said. to really get the long tail of people embracing CBDCs, it’s going to have to be the stick to move people around China is in a good position to do that, they’ll tell people “this is the future, we’re eliminating the cash and you must use your identity card”.
The United States does not have the same history when it comes to digital finance, and combined with national skepticism of CBDCs due to privacy concerns, the transition will not be as smooth.
CBDCs have the potential to compound privacy, control, and technology adoption issues, but there are workarounds. Technology is not inherently bad, but do we trust our central banks not to take advantage of this opportunity?
“For me, there is a question of ‘who should make the decisions about the currency?’ And historically, people made pretty independent decisions about which currencies to use,” said Christopher Anoma, co-founder of Anoma. Fortune. “We have recently moved to a world where issuance control and payment oversight are increasingly centralized. Not only is this a little worrying, but it is also a little incompatible with democracy.
Anoma, which is well known for developing the communication protocol behind Cosmos (IBC), suggests that democracy is not legitimized by our electoral votes every four years but by our daily choices to support different companies, currencies, etc.
When CBDCs are rolled out, know that your use of them is a vote of confidence in the new digital currency standard. If you don’t know where you put your votes, our financial democracy could end up being a financial dictatorship controlled by our central banks.