A CBDC stands for Central Bank Digital Currency. They're run by central banks such as the Bank of England (BoE), The Federal Reserve (Fed), The Bank of Japan (BoJ), and The European Central Bank (ECB).
They’re exactly the same as existing currencies such as the GBP, USD, and AUD, except they’re digitised. You might be thinking that these currencies are already digital. They are, partially. They run on legacy systems that have fewer modern, digital processes to transact. As a result, the current system is slower and more expensive to use than pure digital currencies.
We’re referring to currencies on a new architecture that resembles blockchain-based technology. Only not decentralized.
These new “digital” currencies can be monitored and controlled by the central bank instead of a commercial bank like Barclays. You could receive money in this wallet, you could earn interest, and could could transact.
It has the potential to disintermediate existing banks. With a CBDC, privatised banks are, in theory, no longer required.
What's so bad about a CBDC?
It’s a honeypot for nefarious actors
Central banks will be creating a monetary system with a single point of failure. It will be a honey pot for nefarious actors to steal and use that information against individuals, groups of individuals, or entire countries. It's a problem when a bank has been hacked and information is stolen. It's a bigger problem when a country's central bank has been hacked. This could leak every citizen's transaction history and other financial and personal information. It’s not difficult to imagine that this could be the first thing warring countries do.
There are many ways that this could be used against us. These could include hacking our accounts to steal our money, using this information for identity theft, and selling this information to other bad actors.
In July 2022, it was reported that the Chinese government conducted a massive espionage attack on the US Federal Reserve. This was a decade-long espionage attack that was undetected until this year. They were able to acquire a lot of sensitive, important information over the last 10 years. Imagine what they would be able to acquire if we roll out CBDCs.
Another example is when Russia invaded Ukraine. The hacking group Anonymous hacked the Russian Central Bank within weeks.
With a CBDC, there is a single ledger. A single point of failure that can easily be hacked. Bitcoin is a distributed ledger that is decentralized and protected by the world’s largest network of computing power. No central bank or technology company in existence can compete with that.
Potential for even looser monetary policy
Once upon a time central banks printed money, with a printing press. They did this for various reasons. It's become easier for central banks to inject new money into the system by changing the money supply digitally. We saw this in full force during covid and we're now feeling the full effects of that with global inflation.
In 2021, the Federal Reserve printed $13 trillion. This is by far the largest print in history. $5.2 trillion was for COVID, $4.5 trillion for quantitative easing, and $3 trillion for infrastructure. To put this into perspective, more than 50% of all US Dollars in existence were printed in 2020 and 2021.
With a CBDC, this will be easier than ever. They could parachute money to wallets at a click of a button. This will be too enticing for most central bankers to resist. You might ask why they should resist. Because it's debasing your money. If you get 'free' money, all it's doing is making the overall money supply less valuable. Remember, debasing money affects the poor far more than the rich.
Controlling what you buy
Imagine a government is elected that shares different values to you. Imagine one day, they enforce those values by controlling what you buy. This could be banning the ability to buy coffee beans they don't like, or Donald Trump may want to give you extra interest for buying his Maga hat. It could also be encouraging certain buying behaviours with a points-based system. If the government you like is in power and they share your values, fantastic. Bad luck to all those people that voted the other way. Imagine for a moment an administration is in power that doesn't share your values. You should be concerned.
Protests, be gone
There could be a situation where governments want to control or outlaw protests with monetary restrictions. There’s a cause you care deeply about and you want to catch a train to join the protest? They could block your wallet from transacting, thereby restricting your movements. We saw this in China when people were protesting about losing their money in the current housing crisis. Are there protests your government would actively block monetarily if they could? We’re about to find out.
A social scoring system
China is currently rolling out a social scoring system with their CBDC. This is a system that gives you points for what they deem as good behaviour and they subtract points for what they deem bad behaviour. This is great if you have a government in power that aligns with your values. This could be a precarious situation if there's a government in power that doesn't. You did a social media post criticizing something that a particular government cares about? Lost points. Did you eat too much meat that week? Lost points.
This may seem too far-fetched and Orwellian for most. It does for me too. It’s not to say all of this will come true, it’s just to outline what the capabilities are of this type of technology. Furthermore, there is a country rolling this system out in the way I describe. It’s China.
You can rest assured that once something like this is implemented, there will be no going back. Why would a government give up that sort of power? And once it's normalised into society, no one may be willing to vote it out.
Nobody wants them
Central banks have been running surveys on people’s opinions of CBDCs. The ECB ran two surveys to get public opinion on the project. The first survey had 8,000 respondents and the second survey had 16,000 respondents.
The ECB reported that “The analysis confirms, by and large, our initial findings: what the public and professionals want the most from such a digital currency is privacy (43%), followed by security (18%), the ability to pay across the euro area (11%), no additional costs (9%) and offline usability (8%).”
The two biggest concerns of the public are privacy and security. CBDCs are not private and they’re not secure. With that information, why is the ECB continuing? Will they address these two concerns with their final execution? Very unlikely. Quite the contrary.
So if the ECB isn’t acting in the interest of the public, what are they doing?
Instead of being top-down, and enforced on people, Bitcoin is a bottoms-up grassroots project that protects people’s privacy, sovereignty and security. It addresses the very things that the public asked for in the survey.
Central bank credibility has never been lower
Take a look at the state of affairs with the economy. All of the issues we’re currently dealing with can be traced back to the incompetencies of central banks around the world. Misstep after misstep has led to out-of-control inflation and currency debasement. Those following these developments have lost faith in their respective central banks. Yet, according to them, we want to give them even more power over our finances.
They have to outsource it
Central banks are not technology companies. They lack the people, culture and infrastructure to be technology companies. As a result, they have two choices. They can outsource this technology to companies like Amazon. Or they can acquire a private company to help them become a technology company. Neither scenario is particularly appealing and both have many risks.
If they outsource it to a technology company, we are potentially giving a single private company the keys to a country’s monetary system. If they build in-house, we need to trust that they can transition to become one of the best technology institutions in the world. They will be necessary to protect a country’s monetary system.
Can you think of a single time a government has created a successful technology institution or company? Do you remember when the Obama administration rolled out the White House website? If case you don’t, it was plagued with crashes for months and the cost of building and maintaining this website quickly spiralled out of control. Unfortunately, it wasn’t just the White House website, it was also Healthcare.gov.
If we can’t trust the most powerful and technologically advanced country to roll out a basic website, can they run a CBDC? The difference here is that if the White House website crashes, it’s a shame. If the monetary network crashes, is hacked or becomes faulty, it’s an entire country’s net wealth that is at risk.
How this is likely to be rolled out
It's likely to be an opt-in system where people are encouraged to stop using cash and start using the CBDC system. This will be with incentives such as free money airdrops, vouchers, higher interest rates, and more. While initially opt-in, over time it’s likely to be completely enforced under the guise of “free money” incentives. By the way, that “free money” is just more printed money debasing the currency further.
It’s one big advertisement for Bitcoin
In the end, I believe this is going to be a giant advertisement for Bitcoin. The fact that Bitcoin is a digital currency isn't what makes it unique, or valuable to people. What makes Bitcoin unique and valuable is that it is decentralized and it has a deflationary monetary system with a fixed supply that cannot be changed.
These two features are the Achilles heel of central banks. In the startup world, we call this “The Innovators Dilemma”.
Central banks can’t compete with these two features because if they went decentralized, there’d be no need for a central bank. If they went deflationary with a fixed supply, they couldn’t print more money at will to cover up mistakes they made in the past.
It’s only a matter of time before more people realise this, and once they do, it could spell trouble for central banks around the world.
