What Are CBDCs, And Why Are They Controversial?

Central Bank Digital Currencies give monetary authorities an unprecedented level of surveillance and control over transactions.

What Are CBDCs, And Why Are They Controversial?

The rise of blockchain has brought many new possibilities, including applications that are qualitatively as well as quantitatively different from legacy services. One of the use cases under most active development also happens to be one of the most controversial: Central Bank Digital Currencies (CBDCs).

What Are CBDCs?

A Central Bank Digital Currency (CBDC) is a digital form of fiat currency that is issued and regulated by a central bank. CBDCs exist entirely in digital form (i.e. do not include physical cash) and are built using some form of blockchain or other distributed ledger technology. The general idea is that this allows cash transactions to take place securely and efficiently, while being managed by the central bank instead of by a number of different commercial banks.

Unlike open cryptocurrency platforms such as Bitcoin, Litecoin, and Ethereum, CBDCs are centralized and are controlled entirely by the central bank or another monetary authority. This gives the issuer full oversight and regulatory control over the CBDC's creation, distribution, and usage.

What Are The Benefits?

CBDCs have several potential advantages over the existing payments system, which is typically managed by many different commercial banks. However, these advantages can also bring potential problems.

  • Financial inclusion. Retail CBDCs would typically be made available to all citizens, who would have an account with the central bank. This ensures that everyone has access to the payments system, including those who cannot open a traditional bank account.
  • Efficiency and speed. Transactions can be near-instant, with lower costs than conventional payments.
  • Transparency. As transactions can be traced on the blockchain, the authorities have greater visibility over illegal activity.

The Interest In CBDCs

CBDCs can take various different forms, including CBDCs designed solely for interbank transfers, and retail CBDCs for general public use. To date, a large number of countries are actively researching launching CBDCs, and some have reached the point of actually trialing them in the real world.

At the time of publication, 120 countries have, or have had, some kind of CBDC program, with around 30 in either the pilot or launch stages.

Map of CBDC development

Why Are They Controversial?

Since CBDCs are centralized and managed by the central bank, they allow an unprecedented level of surveillance and control over the payments system. Because they are potentially also programmable, they allow administrators to block certain transactions automatically, and/or to encourage users to comply with certain financial or social objectives. For example:

  • Citizens with criminal records, or those on benefits, might be automatically prevented from spending money on certain goods and services.
  • Everyone could be given a monthly carbon allowance (e.g. meat, gas, public transport, etc), and transactions for more carbon goods would be refused after the maximum threshold had been reached.
  • Certain types of transaction could be refused for individuals who fell under suspicion of criminal activity, without proof or conviction.
  • In the worst cases, citizens could be debanked entirely if they became persona non grata with the authorities.

In the video below, Agustín Carstens, General Manager of the Bank for International Settlements (BIS)—the central bank for central banks—explains the "benefits" of CBDCs.

These include "absolute control" over the rules and regulations under which the currency operates, along with the technology to enforce them. As he states, this makes "a huge difference as to what cash is".

Instead of money being purely a medium of exchange, store of value, and unit of account, CBDCs allow the payments system to be leveraged as a form of social control.

These risks have led to a backlash against CBDCs in some jurisdictions. In the US, for example, Presidential candidate Ron De Santis has made opposition to CBDCs part of his campaign, and has signed legislation banning CBDCs in Florida—prompting several other states to put forward similar laws.

The "FedNow" platform has also been criticized. FedNow allows instant, low-cost, 24/7 cash transfers. Rather than being a CBDC, it is an upgrade to the US's financial infrastructure (its payment rails) that will enable existing money to move around more easily. However, critics complain that it will increase the degree of centralization and control the authorities have over payments, and opens the door to the possibility of a CBDC in the future.

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