The Capital
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The Capital

The Dark Side Of CBDCs

Central banks, one by one, were announcing that they’re working on their own CBDCs. But what are those exactly? Let’s find out!

How do you feel about CBDCs? In the last few years we’ve witnessed a big growth in this sector. Central banks, one by one, were announcing that they’re working on their own CBDCs. But what are those exactly? Should we be ready for major changes in the world economy, or that’s not such a big deal?

What’s CBDC?

Surely, the success of Bitcoin (BTC) and other cryptocurrencies didn’t go unnoticed by central banks. Maybe it even scared them a little, so banks decided to do something about it. And you know how the saying goes: ‘If you can’t beat em, join em.’

Central bank digital currency (or CBDC) is almost the same thing as the usual fiat currency, only it’s virtual. We can’t touch it. CBDC is also issued by a central bank, and it is backed by the government. However, since CBDC is virtual money, banks have to create new systems for it to work.

Compared to cash, CBDC can reduce the cost of papermaking, printing, storage, and transportation of fiat-related manufacturing processes, as well as increase the use of business transactions. Moreover, banks and governments will be able to precisely trace every transaction which was ever made with one specific CBDC. With online payments, it’s impossible to find out all the story behind non-cash.

Why central banks need it

So, why do central banks want to develop digital currencies if, in the end, they’re almost the same as fiat? There are several reasons for this phenomenon.

  • Safety. Central Bank can create a highly secured ecosystem for the CBDCs, so we won’t be needing any other brokers or commercial banks (who else can we trust, if not the Central Banks);
  • Efficiency. Growth in the efficiency of payments;
  • Fewer risks. Reduction of credit risks and liquidity risks of counterparties;
  • Competition. There is an increasing competition in the world’s financial market (which country will create the perfect digital money);
  • Transparency. Bringing a part of the economy out of the shadows by reducing the level of anonymity;
  • Confidence. Users feel more confident in the financial system.

These are the main advantages of CBDC. As you can see, there are pros and cons for Central Banks and for users. With CBDCs, we won’t need any commercial banks or brokers. Plus, operations with digital currencies will be cheaper for the bank, so maybe the bank could reduce transaction/service fees for users.

In the end CBDCs turned out to be great helpers in political games and social justice but not so much in our everyday life.

The government will be able to control everything we do?

Smells like total control, doesn’t it? There won’t be any other bank or broker, and the Central bank will be able to control every transaction made with the CBDC. Yes, it’s not that bad. For sure, there would be less illegal activity and crime. However, it also gives too much power to central banks and governments.

They can transfer or withdraw money from your wallet, as well as freeze your account for any reason. CBDCs are also programmable money, meaning they could have an expiration date like the digital yuan — Bank of China can revoke user’s money after a certain date.

Not only will governments be able to see where you are spending all your money, but they get the opportunity to instantly withdraw funds from your account under any circumstances. For some, that is totally fine because they have nothing to hide, but others can say that that undermines their personal freedom.

Let’s imagine that you occasionally like to eat junk food. For some reason the government doesn’t like it, and with one click, it can block your wallet for these transactions. Then, even if you somehow manage to buy these products, they will find out and may afterwards deny you medical care because you did not follow the official guidelines. Something like that.

In conclusion, creation of the CBDCs means connection of all our personal financial information with credit systems. Governments will be able to see our health and political donations, but that will also help with solving crimes in the country. So the main question still stands: do we need a central bank digital currency? Only time will tell.

Thank you for your attention! Don’t forget that you’re always welcomed on SimpleSwap, where you can easily buy and exchange crypto.

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