The Implications of CBDCs
Laying Out the Fundamentals
In this post the focus is laying out the basics of Central Bank Digital Currencies. This is a post for anyone who has heard about CBDCs but doesn’t have an understanding of the fundamentals. “Digital dollars” or can be difficult to grasp at first. Most people are unaware of the implications of CBDCs because the largest central banks like the Federal Reserve, and the European Central Bank have been moving slowly.
They are carefully proceeding forward because CBDCs bring sweeping changes that will completely change the financial system. They "have to get it right" as you’ll hear from representatives of the world’s largest central banks.
Crypto has posed enough of a threat to the incumbent financial system, and has provided a new option to transact in a currency that is more elite and completely outside of the purview of the current traditional system. Crypto assets like Bitcoin and Ether enable you to be a truly sovereign individual. The exact opposite is CBDCs.
One may feel like the development of these started just very recently, in reality it was a perfect storm of events over the last few years amplified this change. CBDCs have been under development and in pilots since 2014, Ant Group has been helping China’s Central Bank on it’s CBDC since 2017.
Characteristics of CBDCs
CBDCs will present a newer and better system for those who are unbanked. Especially for those living in developing countries. CBDCs can establish a one to one connection between consumers and central banks, and will be eliminating the need for unnecessary infrastructure spending.
CBDCs present and provide more efficiency, and a more frictionless process in government functions. Just as they can promote financial inclusion by simplifying the process to distribute money, CBDCs can also minimize effort and processes for other government functions, such as distribution of benefits or calculation and collection of taxes.
Primary characteristics of CBDCs:
Invasive: These are going to assert a lot of control and come with a loss of privacy. Lack of privacy is the primary disadvantage. The data collected like your behaviors, your locations, sending and receiving -> everything is going to be directly stored and saved and sent to the central bank.
Interchangeable: CBDC is an equivalent in value to the nation’s existing currency. It can be exchanged for other currencies, redeemed, or “bought” for equal amounts. The movement and process will involve less friction
Digital: Both for the Retail and Wholesale CBDC. Will be attached to your phone, as seen in China's CBDC pilot. Will enable both online and offline payments.
P2P, P2B, B2B: Will be able to transact outside of financial intermediaries with each other. Objective is to create convenience and a seamless process for this.
Programmable: As CBDC use cases grow and develop, their definition will adapt as needed. It is certain that each nation’s CBDC will differ as they adapt to unique economic needs. As such, additional characteristics will continue to emerge and be categorized. When it comes to programmability, we need to remember that the money, the CBDC, and the payments are going to be programmable.
Objectives
CBDCs provide a lot of opportunity for bolstering the current system and expanding on new potential. What do you think is easier and more likely to happen over the next 10 or so years? Spending vast amounts of resources building bank branches across developing countries, or issuing CBDCs and improving traditional finance across the globe.
“By the end of 2021, more than a quarter of central banks were developing or running CBDC pilots. To make sure that cross-border functionalities are considered in time, central banks across the globe must collaborate at an early stage. Only then can CBDCs have a significant impact on the costs, speed, access and transparency of cross-border payments.”
Cecilia Skingsley, Chair of the CPMI Future of Payments Working Group and First Deputy Governor of Sveriges Riksbank
As CBDC use cases grow and develop, their definition will adapt as needed. It is certain that each nation’s CBDC implementation will differ as they adapt to unique economic needs. As such, additional characteristics will continue to emerge as new use cases are identified.
Large institutions like the Bank for International Settlements (BIS) and the World Bank are currently working with other central banks with various projects to test CBDC.
The first project was a Wholesale CBDC project involved with the Bank of Canada. The first large CBDC project that used distributed ledger technology (DLT) involved with the private sector. The project took place in 2017. The project involved testing with the Bank of England (BoE) and the Monetary Authority of Signapore.
The newest project is Project Dunbar. The focus is on developing retail CBDCs and to develop a shared platform that will provide efficient and effective cross-border payments. Enabling “faster, cheaper, and safer” transactions through the Corda platform. Swapping for other currencies will be made easy, and with instant settlement. Inspiration for this was derived from DeFi.
What this Means for You
Those involved in crypto today are ahead of the curve and are aware of the ongoing developments of CBDCs. They know the primary reason they are being developed is because Central Banks know they need to adapt. Crypto is much bigger than trading digital assets to take profits in Fiat, and the central banks know that as well. The truth is that they have known about it for years.
It is very obvious and clear that many “advantages” of CBDCs are also major disadvantages. A central authority, in this case a central bank, creates an interesting scenario. CBDC transactions under the complete purview of a central bank pose many threats to your privacy, and freedom to transact
What Does This Have to Do with Crypto?
Rewind back to January 3, 2009 when the very first Bitcoin block was mined, the Genesis Block. This block contained the message “Chancellor on the brink of second bailout for the banks.” This headline was chosen as a message and is indicative for *why* Bitcoin (BTC) was created.
Central Banks like The Federal Reserve and the European Central Bank will simply print money whenever they want to, or need to. Mostly achieved through a monetary policy called quantitative easing where the central bank puts an electronic entry into their balance sheet in cash and they use that “money” to purchase long term government bonds. The government creates new money to purchase bonds, and citizens who don't own assets suffer as a result.
The Emergencies Act and the situation in Canada from earlier this year escalated into the Canadian government's mobilization of the banks against their own citizens. They are freezing targeted individuals bank account's involved in the protesting or the funding of the protestors. Sadly, not much has changed since then.
The Royal Bank of Canada (RBC) is unbanking customers who are purchasing Bitcoin through ShakePay. Shutting down the bank accounts of citizens opting into a better financial instrument in the midst of economic hardship.
Conclusion
CBDCs will amplify the problems we’re seeing today. CBDCs will erode privacy. A centralized authority responsible for collecting and and tracking transactions authorized by your digital ID so your transactions can be officially executed. Remember, this is a digital currency issued by your central bank that still operates on the system it runs, this is still the current system. They will continue to collect all your information and will learn more about you, and will tie it to your digital wallet.
It is imperative to also consider the issues involving geographical oversight. I believe people should also be asking how they plan to regulate when crossing borders? How are people going to feel with all their data in the central banks of the world. The portability of CBDC systems means that a strong CBDC issued by a large nation will very likely end up substituting the local currency of a weaker country as we can already see today. Again, another example of the spread and scope of the large central banking apparatus.
Pushback is important.
Like many other parts of the agenda, the people have the power to "Just say no".