Central Bank Digital Currencies (CBDCs) have been the subject of intense debate in the world of cryptocurrency, with most of the industry being highly sceptical about the potential risks they pose. I’ve heard more than one panel with the words: ‘CBDCs are evil’. The Bank of England and HM Treasury have been relentlessly advocating for their use, and at the last crypto AM conference, the MPs did their best to convince us that despite all concerns, CBDCs will not infringe on civil rights. But what are the concerns?
For proponents of CBDCs, the benefits are manifold. These digital versions of fiat currency would allow for the efficient payment of taxes and bills through smartphones and other digital devices. Some proponents are hailing the CBDCs as a way to revolutionize digital transactions. More than this, they could bring a sense of legitimacy and security to the crypto industry, signalling to investors and companies alike that the industry is committed to the web3 spirit of innovation and progress. After all, its hard to outlaw crypto when your own national bank uses its technology, isn’t it. Moreover, CBDCs could act as a catalyst for regulators to engage more closely with the crypto industry, ultimately safeguarding its growth and legitimacy. Then again, sceptics say that the regulators might just issue something into production that they dont yet understand.
Despites the immense signalling power, there are challenges that must be faced before the widespread adoption of CBDCs. One of the most significant is the potential for mass surveillance, which could be enabled to an unprecedented degree by digital currencies. Enabling such a level of scrutiny through digital currencies could be a significant infringement on civil liberties.
While paying with a CBDC may resemble using a digital wallet like Bitcoin, the key difference is that a CBDC is backed by a government authority, representing a major shift from crypto’s anti-regulation origins.
Behind the scenes, CBDCs would enable central banks to interact directly with the public, allowing anyone to open an electronic account at the Federal Reserve in the case of an American digital dollar. While the user experience may not differ significantly, this would mark a major shift for central banks, which have traditionally issued currency but not managed its day-to-day use. Cash, by comparison, is relatively anonymous, but with a CBDC, anonymity could vanish.
Security advocates have voiced concerns over the potential for governments to track citizens’ purchases and gain intimate knowledge of their daily activities. Although CBDCs could allow for some low-value transactions to be anonymous, legal restrictions in many countries make anonymous CBDCs practically impossible. Governments typically require financial institutions to link accounts to identity documents to combat illicit transactions like money laundering and terrorism financing, which means that a CBDC account would be tied to its user’s name.
This raises the possibility of authorities monitoring individuals’ spending habits, coercing them into spending money on certain things, or targeting them based on their spending. For example, in 2022, the Canadian government froze the bank accounts of people who protested Covid-19 vaccine mandates, working with commercial banks to achieve this. CBDCs could eliminate this hurdle, making it easier for politicians to interfere with the accounts of targeted individuals. As such, CBDCs raise significant challenges.
Besides this casual possibility to live in a dystopian black mirror reality, many of us worry about the government’s execution capability. Given its track record with emerging tech and tech projects in general (someone think of the corona tracking app), we doubt that anything built will be an actually useful product. Building good products, that people can and want to use, is a science in itself. Silicon Valley spends fortunes on product managers, User-Experience research, and continuous iteration. And the UK wants to create this on a government budget? It will either be expensive, in which case, do we not have more pressing issues to attend, schools to renovate, and nurses to pay? Or it will be a mediocre product at best, with many refusing to use it. So why bother?
Another issue is the challenge of attracting top talent to work on CBDCs. The Head of CBDCs job listing offers a high five-figure compensation, which will not be enough to lure the best and brightest from the crypto industry who could earn much more at most startups. For comparison, entry level jobs in the Web3 space offer similar compensation to what was listed for the Head of CBDC. We can only hope someone felt obligated by patriotic conviction to take on the challenge. That, or pray that the person sitting in the chair somehow has years of tech and industry experience that would make them easily worth a high 6 figure salary. The government may end up hiring individuals who lack the deep tech knowledge and expertise necessary to ensure CBDCs’ success.
I personally hope that CBDCs will at least bring web3 back on the agenda for mass consumers and kickstart a conversation about privacy, innovation, and civil rights. We could all benefit from revisiting and clarifying our standpoints on those.
As we navigate these new frontiers, it’s essential to take a nuanced look at the potential benefits and risks of CBDCs. While they could revolutionize the crypto industry, the risks must be carefully considered to ensure they don’t outweigh the rewards. Only time will tell whether CBDCs will become a reality, but it’s up to us to proceed with caution and make informed decisions.