What is Central Bank Digital Currency (CBDC)?
No, it is not Bitcoin! CBDC is the antithesis of Bitcoin.
Is it any wonder that some people cannot tell the difference between the two, with headlines like US FedCoin and UK BritCoin? It is as though the mainstream media are intentionally trying to blur the lines.
Although CBDC may use similar blockchain technology, this is where the similarities end. Ultimately, the implementation of this financial technology will have wildly different effects on society, depending on whether it is centralised or decentralised. To understand the very real threat of CBDC, a certain level of technical understanding is required.
Therefore, for those without a technical background, here is a basic explanation:
Bitcoin is decentralised. This means that there is no centralised ownership or control. It works because the digital ledger (aka block chain) is validated by everyone in the network. The validity of each ‘block’ in the chain is assured by consensus. Each block is basically just data containing a list of transactions. These ‘blocks’, in turn, make up the entire digital ledger. For promoters of Bitcoin, they often advertise that it is secure and transparent. Furthermore, if you own a non-custodial wallet (the place where you store your personal keys to access your Bitcoin), no government can access your money without your permission. The only person who can access your money, is you! Now, this is not a sales pitch for Bitcoin and nor is this in any way to be taken as financial advice. However, this is necessary information to understand the threat that CBDC pose.
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CBDC, Not All Digital Currency Is The Same
In contrast to Bitcoin, the digital ledger of a CBDC is centralised entirely. This gives governments and central banks, complete visibility, and control of all citizens financial transactions. Some of you might be thinking, “how is this different from current online banking?”. Well, it is very different for several reasons. Firstly, if a government department wishes to go into your bank account, currently they must follow judicial process to gain access through retail banks and they must have a legally justifiable reason to do so. However, much of this privacy may be gone with CBDC. In fact, it is possible that retail banks themselves, will also be gone. Secondly and more importantly, CBDC is programmable money. This means that the Government and central banks will be able to program when, what and where you spend your money.
For example:
• Central bankers are always looking for ways to improve money velocity (i.e., spending) to boost the economy. Therefore, with CBDC Central Banks could simply add an expiry date to your money. So, you can forget about being a responsible saver because any money saved will be lost at the end of the year, month, week or even day!
• Our current Tory government seem committed to its insane green initiatives. So, maybe to help reduce the use of fossil fuels, the government puts a cap on how much fossil fuel you can buy each month. Fancy a road trip? Sorry, you’ve reached your fossil fuel limit this month.
• To varying degrees, governments around the world seem to flippantly decide what is or is not good for its citizens, without their consent. Therefore, maybe the government takes a disliking to a certain organisation or seller and thus, prohibits spending with these companies.
Although the above examples are not written in stone, the possibilities for total control are endless with CBDC. Therefore, we would be wise to take notice now and start the conversation as to the future of our money.
Why Are Governments Globally So Eager?
Good question! Many believe the reason for the latest developments in CBDC, are because of Facebook’s Libra digital currency. It is said that this was a key catalyst for the momentum into CBDC, as governments globally saw it as a potential threat to their fiat currency and ultimately, their power and control!
CBDC and Cash Facts
- In 2018, 28% of transactions in the UK were made with cash and it is predicted to fall to just 9% by 2028
- In Sweden, 50% of retailers will no longer accept cash by 2025 and half of the country’s bank branches have already stopped accepting cash deposits
- 80% of the world’s central banks are already either researching, developing, piloting or have released a CBDC
- The Bahamas was the first nation to release a CBDC in 2020, called the sand dollar
- The UK and US are both researching CBDCs, which have been dubbed the US FedCoin and UK BritCoin
*Since the time of writing this article, recent reports have shown an increase in cash withdrawals at the UK Post Office. Personal cash withdrawals were up almost 8% month on month in June, and up over 20% from a year ago in July. Many are speculating that this is due to inflation, with people managing their budgets by withdrawing cash. Additionally, more holidaymakers are holidaying at home in the UK instead of abroad.
Arguments For CBDC
Two of the most popular arguments in support of CBDC include;
- A reduction in financial transaction costs (compared with current retail and international banking)
- More stability in value, compared to Bitcoin
- Crime prevention
These arguments have been put forward by the Bank of England, as benefits to their planned CBDC. However, with the UK national debt nearing $3 trillion and the ever-increasing inflation, I remain unconvinced that stability is something that the Bank of England or UK government can claim. This has been especially true since our money became fiat currency and not backed by the gold standard. This change gave “government the power to manipulate purchasing power without being hindered by an ‘external’ factor, namely, the money relation of the gold standard”. Today, governments have the power to overspend, printing money when, and as, they see fit. Subsequently, as money supply increases with quantitative easing, the money in circulation holds less value.
Therefore, it is very unlikely that CBDC will bring more stability than Bitcoin. However, a similar argument for CBDC is that more people will feel confident in CBDC, compared with Bitcoin, precisely because it is backed by government. This is likely true, the adoption of CBDC will no doubt be much greater, because of its government backing. However, the bigger question is whether that public trust is deserving or misplaced. Taking into consideration the past boom-and-bust economic history of the UK and US, many will be siding on the latter.
To counter the argument of crime prevention, we can look at statistics of the global prison population. 10.3 million people are incarcerated across the world, out of the approximately 7.8 billion of us, that is 0.13205%. Therefore, should we introduce technology that will potentially negatively affect so many people for a 0.13205% minority. Furthermore, crime prevention is also one of the Chinese Communist Party’s (CCP) selling points of their Chinese Digital Yuan, which is already being piloted and is closely linked to their existing social credit system, whereby citizens are given a score, for how good or bad they behave as a citizen. Ultimately, the crime prevention argument comes down to a bigger question of how we balance freedom vs safety. Governments globally, seem to be setting a troubling trend of diminishing freedom, in the name of “safety”.
CBDC Summary
In summary, it is the authors belief that centralised power should more often than not, be decentralised. Therefore, we should look upon CBDC with healthy distrust and skepticism.
“Power tends to corrupt and absolute power corrupts absolutely.” – Lord Acton, in 1887
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