Are CBDCs Really the Future of Money?
Let’s talk about money
The history of money is the story of humanity. At every stage of human development we’ve innovated new ways of getting the things we need and want either by various means of exchange and compensation. We’ve come a long way from the beginning, bartering materials and livestock. At various stages humans have to using shells or beads, lumps of precious metal, then coins, banknotes, and checks, and cards. Today’s banking system would be unrecognizable to our ancestors, as now only a fraction of the currency amount is physical.
With every currency-relevant technological advance, money has seen an improvement, and Central Bank-issued Digital Currencies (CBDCs) are a much discussed logical next step of this technical and historical evolution of money, and of our ever digital lives. CBDCs are digital currencies that are issued by a central bank. Crucially, they differ from existing types of digital money available to the general public because a CBDC is a liability of the country’s central bank, like cash only digital. This is different to the digital fund’s you might have in your personal bank account, which are a liability of that bank.
All over the world, the topic of centrally issued digital currencies is on the minds of regulators and bankers, so much so that some are already describing competing development as “a race.” But, CBDCs come with certain drawbacks that previous evolutions did not have. And at the moment, with all the hype around cryptocurrencies and the breakneck pace of technological and regulatory change in this space, there needs to be a serious conversation about the pros and cons because millions of people will be affected. To be clear from the start, we have both practical and philosophical difficulties with CBDCs. But, let’s approach the topic from a different angle.
Is crypto actually private?
As well as responding to the commercial and practical needs of people, every technological advance brings a chance to improve one’s competitiveness. When it comes to currency, especially the matter of which currency dominates international trade, the competition here is so strong, and the stakes so high, that practically none of the big players can ignore any advance that might improve their currency. The latest technological evolution facing currency is blockchain technology.
We can see why blockchain is so disruptive to this space by examining the properties of Bitcoin, the predecessor of all cryptocurrencies and tokens in existence. When Bitcoin first came out in 2009, people said that it would be used by criminals because of it was “anonymous.” Despite overlooking the fact that the criminal world has been thriving on cash for decades, this understanding is problematic because Bitcoin’s anonymity is actually a double-edged sword. Bitcoin is anonymous because it uses addresses, effectively a string of numbers, without any name tag or personal identification attached. The address owner could be anyone, from your own tech-savvy grandma to drug trafficking gangster. However, while the blockchain address might be anonymous, the history of which address sent what, how much, and to whom will stay publicly visible in the blockchain forever. The persistence of all historic transaction information is not just an awkward convention. It is the cornerstone of the entire idea behind blockchain. In other words, Bitcoin wouldn’t work without it.
For criminals looking at Bitcoin, or any cryptocurrency, as a potential replacement for cash, the problem is that if their transaction history is never deleted, a blockchain address doesn’t have to be linked to them right now. If at any point in the future law enforcement finds out who is behind an address, the entire history of what this person did with their Bitcoin, and where they got it from, is plain to see. It’s a forensic accountants dream. Tying names to addresses only takes a bit of sleuthing by law enforcement, and suddenly the lifetime transaction history of an account is giving up its secrets.
In other words, with respect to the case of Bitcoin and its anonymity, if you give it long enough, then sooner or later a blockchain address will have a name tag. So, why would any criminal really want to use Bitcoin? Historically speaking, in the criminal world cash, specifically the US $100 bill, is king, and for good reason. Neither Bitcoin nor any other crypto currency really makes sense as an alternative because the potential for massive incrimination is simply too high.
This example really illustrates what makes an algorithmic currency like Bitcoin so attractive to law-abiding citizens. It’s private enough to be secure, but not so private that it’s a safe-haven for criminals, and its decentralized nature means that no single entity can control it, misuse it, or restrict your ability to spend with it. In other words, while it doesn’t prevent financial crime from taking place, it heavily discourages it by making it easy to prosecute. It’s important to keep this in mind, because one of the primary arguments in favor of CBDCs is that they will be used to stop financial crime, in its current forms anyway, dead in its tracks.
What’s possible with CBDCs
With all that in mind, let’s talk about what’s possible with CBDCs. There are lots of breathless hype articles for it, and there are plenty of dark doomsday predictions against it. The fact of the matter is that they are still being explored, and we don’t yet have a final product to look at. However, there are some objective points we can discuss by taking what has been proposed for CBDCs and looking at the nature of blockchain based currencies, money, and law. As we said at the start, the history of money is the story of humanity, so there are some very logical assumptions we can make based on that history.
In the infamous words of Murphy’s law, “anything that can go wrong will go wrong.” When it comes to something as important a national currency, ensuring its stability, security, and accessibility is, from the citizen’s point of view, of the utmost importance. This is one of the reasons why even in some of the wealthiest and most advanced countries in the world, like Switzerland, cash is still not only widely accepted, it’s the norm. Aside from physically robbing someone, cash is also fairly secure-able, meaning you can hide it and protect it, unlike an electronic account. Cash, of course, has its own problems. It can be counterfeited, it can be easily destroyed, it’s hard to do large transactions with, and, from a central bank’s point of view, it’s virtually impossible to regulate.
CBDCs solve all of those problems. But, they also give central banks the option of programmability for things like the enforcement of rules. If CBDCs replace other forms of money, which would be a logical evolution from the bank’s point of view, then they can effectively be used to influence, or even control, civilians and their spending. For example, states could easily enforce a maximum spending limit each month on certain items, so that regardless of whether you have plenty of funds, you can only spend as much as the powers-that-be set for you as a limit. These could be used to protect national industries, or to further national goals, such as fighting climate change by enforcing consumer behavior.
One doesn’t have to be too visionary to see that this can easily be used as a form of punishment or arbitrary enforcement that is more devastating than any methods currently available. The serious problems of bias and misuse that have already been encountered using AI and other algorithmic tools in law enforcement are well documented, and CBDCs are simply another algorithmic tool in a nation’s legal system.
Money is also a foreign policy tool. Currently, many countries with struggling economies use more stable currencies like the US dollar. In Caracas,Venezuela, over half of all transactions happen in US dollars, and the local economy essentially functions on this foreign currency. As Venezuela is already heavily sanctioned, it’s easy to imagine the impact on innocent civilians if the US decided to suddenly restrict the use of a digital dollar to IP addresses in Venezuela, as recently happened on some large crypto exchanges. To be clear, this potential for devastation and misuse applies to all countries and issuers of CBDCs, regardless of politics. If we’ve learned anything from history, it’s that nations rise and fall.
CBDCs are… boring?
Finally, aside from the easy potential for misuse and negative impact on citizens, CBDCs are also just unimaginative, a brute force combo of the legacy financial system and a disruptive, forward thinking technology. Blockchain is inherently transparent and decentralized which, from the point of view of the average law abiding citizen is a benefit, and to the criminal a cause for serious concern. Taking a transparent, decentralized technology and then centralizing it, removing the transparency for all but the issuing bank, and making it an integral part of every citizen’s life is cartoonishly uninspired; it’s a worst of all worlds scenario that doesn’t really solve current issues better than other methods, while creating new problems.
All of the potential, the promise of blockchain technology and its ability to empower individuals through things like asset tokenization or DeFi, is all gone in a CBDC. Rather, they make it possible to restrict the banking system for select groups, and even have the same downsides that any current digital bank or crypto service has, the ability to be hacked and funds stolen. And as a recent UK parliament study on CBDCs pointed out, those same vulnerabilities that personal accounts face could now be exploited on the state level by hostile states or actors, creating another economic vulnerability. That same UK study ultimately wondered if these digital currencies created more problems for states than they solved, and if they were a solution in search of a problem.
“A solution in search of a problem”
If this all sounds like doom and gloom, it’s important to keep in mind that most countries are still in the exploration phase, and when (or if) CBDCs do become legal tender they may look completely different than what we, and others, can see as possible. This article is simply taking into consideration what the technology allows, what we’ve read so far about how CBDC’s will be implemented, and what makes sense based on the past. This is a global conversation, and the pros, cons, and technical possibilities are quite obvious at this point. It remains to be seen whether individual states think that the pros outweigh those cons.
Ultimately, there is no perfect solution, especially when we are talking about something as important and all encompassing as a national currency. While there are some practical and logical arguments to be made for the use of CBDCs, it should also be clear and obvious that CBDCs do have their own serious problems that need to be addressed; and they are not the only next technological step in the history of money.
At CoreLedger, we believe that blockchain is a practical technical solution to improve and solve a wide variety of issues across industries and sectors, which is why we try to cut through the hype and focus on real world applications, not just what’s technically possible.
CoreLedger’s mission is to help businesses of all sizes quickly and affordably access the benefits of blockchain technology. From issuing a simple token, to enterprise- grade token economy solutions, we have all the tools you need to quickly and affordably integrate blockchain into your business whether you’re a new startup or a big multinational enterprise.
Interested in our results-focused, real-world approach? Then visit our website for more information, or get in touch with us directly to discuss your project.
