What are CBDCs?
CBDCs are digital currencies issued by central banks as an electronic form of money. These digital currencies are not the same as cryptocurrencies, which are privately created and given value by people. Governments and central banks cite a number of benefits of digital currencies, including improving payment efficiency, reducing transaction costs and boosting confidence in money. However, CBDCs carry with them many challenges and risks to monetary policy, financial stability, the international monetary system, and most importantly significantly threaten the anonymity and freedom of individuals. Many countries are already exploring the possibility of issuing CBDCs (US, China, EU countries…) and are seeking help from the International Monetary Fund (IMF) in implementing this idea. In today’s blog we will present you what are the many shortcomings of CBDCs, and why they should be resisted.
Source: cointelegraph
How do CBDCs work?
There are two main models of CBDCs: wholesale and retail. Wholesale CBDCs are intended for use between financial institutions, such as banks, brokerages and payment systems. The goal of wholesale CBDCs is to improve the security, speed and efficiency of interbank transactions, especially internationally. Retail CBDCs are intended for use between individuals, businesses and governments, such as wages, taxes and purchases. Retail CBDCs aim to reduce dependence on cash and other intermediaries, and provide access to digital payment services. To function, CBDCs require a specific technology infrastructure that allows the creation, distribution and management of digital money records. This infrastructure can be centralized or decentralized. Centralized technology implies that the central bank has full control over the issuance and verification of CBDCs, as well as the tracking and recording of transactions. On the other hand, decentralized technology means that there is a network of distributed nodes that participate in the validation and verification of CBDCs, as well as in maintaining a common ledger of transactions. Decentralized technology can be based on blockchain or other distributed systems. However, most central banks plan to build their CBDCs on centralized infrastructure in order to have absolute control over transactions and the issuance of new money.
Source: cointelegraph
Absolute control of central banks and governments
The issuance of CBDCs by central banks is a process involving the creation and distribution of digital records of money that have legal force and value. Central banks can issue CBDCs in two ways: directly or indirectly. Direct issuance means that the central bank issues digital records of money directly to end-users, without the mediation of other financial institutions. This means that the central bank has full control over issuance and verification, as well as the tracking and recording of transactions. This also means that the central bank has full responsibility for ensuring the safety, availability and functionality of CBDCs. This way of issuing CBDCs requires the central bank to establish and maintain a large and complex technological infrastructure, as well as to face regulatory and legal issues. Indirect issuance, on the other hand, implies that the central bank issues digital records of money through other financial institutions, such as commercial banks, payment systems or other intermediaries. In this way, the central bank shares control over the issuance and verification of CBDCs with other participants, as well as the tracking and recording of transactions. Regardless of the method of issuing CBDCs, central banks or countries have absolute control over them, because CBDCs are legal currencies subject to their monetary policy, regulation and supervision. This means that central banks or countries can affect the quantity, price and terms of use of CBDCs, as well as the rights and obligations of users. This guarantees that central banks and governments can monitor, analyze and control the financial activities of CBDCs users, which may have implications for their privacy, freedom and security.
Source: cointelegraph
Control of financial activity
Control of financial activity is the ability of central banks or countries to monitor, analyze and control financial transactions and the behavior of CBDCs users. Controlling financial activity can have downsides for CBDCs users, such as:
- Loss of privacy: since the central bank or government would have access to transaction data of all USERS of CBDCs, this could compromise their anonymity and confidentiality. The central bank or the state could see to whom, when, where and for what users spend their money, which could reveal their personal data, habits, preferences and interests. This could lead to violations of their privacy and data protection rights.
- Loss of freedom: the central bank or state would have power over the conditions of using CBDCs, this could limit the freedom and choice of the individual. The central bank or state could impose different rules and restrictions on the use of CBDCs, such as minimum or maximum amounts, deadlines, fees, interest, taxes or sanctions. Also the state could interfere in users’ transactions, by blocking, freezing, seizing or diverting money.
- Loss of security: the state along with the central bank would have responsibility for the safety and functionality of CBDCs, this could jeopardize their security and reliability. Data centers could be exposed to hacking attacks, loss of information, technical failures or human errors, which could lead to the loss or theft of users’ money. Also, the central bank could abuse its power and manipulate the value or availability of CBDCs.
As an example of the negative side of controlling financial activity, we can take the case of the regulation of CO2 emissions of individuals in such a way that when a certain amount of fuel is purchased for a particular month, that individual can no longer buy fuel that month. This would mean that the central bank or state can monitor how much fuel each individual uses and limit its consumption in line with CO2 emissions reduction targets. Of course, this has negative consequences for the privacy, freedom and security of citizens.
Source: cointelegraph
Conclusion
CBDCs are digital currencies issued by central banks as an electronic form of money. We have listed the numerous shortcomings, challenges and risks that CBDCs pose to monetary policy, financial stability and the international monetary system, as well as the negative consequences for the privacy, freedom and security of users, because central banks or countries would have absolute control over them. Because of this, CBDCs require careful design and testing, as well as collaboration and coordination between different participants and institutions. This money is not simply a digital version of cash, but is a complex and dynamic phenomenon that has far-reaching implications for the entire financial system and society. Therefore, it is important that we inform ourselves and educate ourselves about CBDCs, as well as think critically about their shortcomings. In this blog, we tried to give an overview of what CBDCs are, how they work, what their shortcomings are, and what are some of the current initiatives and challenges related to them. We hope you enjoyed reading and learned something new about this interesting and important topic. We would love to hear your opinion on CBDCs, and you can share it with us on our social networks (Twitter, Instagram).
