Central bank digital currencies – central bank-backed digital currencies – have gained renewed interest with United States President Joe Biden’s executive order on ensuring responsible development of digital assets. Proponents of CBDCs argue that widespread adoption will promote financial inclusion, expand public access to secure funds, improve the efficiency of payments, and much more.
But his argument remains weak. Many analysts and businessmen increasingly view CBDCs as fundamentally hindering the cryptocurrency’s purpose, which is to provide a secure, decentralized peer-to-peer mechanism for money transfers. And the hypothetical benefits of CBDCs are still hypothetical – no evidence yet exists that suggests any advantages over other examples of distributed ledger technologies in financial services, especially given the new risks.
Status of CBDCs around the world
Nine countries have already developed their own CBDCs, and the US joins a list of over 100 countries that are exploring issuing one. According to a recent report, most CBDCs take a hybrid approach whereby “central banks issue CBDCs to banks and others and other payment service providers, who in turn distribute the CBDCs to users throughout the economy and give them account-based transactions.” Provides related services.” by Hoover Institute
According to leading experts at the Bank for International Settlements, there are other types as well – including stakeholders from major central banks. These include a synthetic CBDC, where the consumer has a claim on the intermediary, with the central bank only keeping track of the bulk accounts; and a direct CBDC, where the consumer has a claim on the central bank, which holds all retail sales.
Some scholars have emphasized that DLT has a role to play in helping central banks become more efficient and secure, but such technology should be introduced with a “minimally invasive” CBDC design – which disrupts the proven two. Upgrades money to existing needs without doing-the-level architecture of the monetary system,” according to Raphael Auer, Head of the BIS Innovation Hub Eurosystem Center and Professor Rainer Böhme of the University of Innsbruck.
The fact that central banks are interested in digital currencies is not surprising. As countries look to recover from a nearly two-year lockdown and other restrictions on mobility, coupled with rising inflation, central banks are feeling pressure to boost employment and manage price levels with their “dual mandate” . Around the world, central banks have purchased large amounts of bonds, expanding the money supply and arguably further contributing to inflation. For example, the Federal Reserve has increased the US money supply from about $4 trillion to more than $20 trillion over the past two years, but we are only seeing the resulting inflationary effect now.
evaluation of potential benefits
In a 2020 report, BIS outlined some of the potential benefits brought by proponents of CBDCs: financial inclusion, cross-border payments, financial flexibility and stability, increased efficiency of fiscal transfers, and privacy. But cryptocurrency serves all these purposes better than government-backed currencies.
Let’s take a look at these potential benefits one by one.
Financial Inclusion: The expansion of decentralized finance and the emergence of non-fungible tokens has already changed the economic landscape. Thousands of content creators have sold NFTs and joined the DeFi community, eliminating middlemen and letting revenue go directly to creators.
VaynerNFT President Avery Akkineni told the magazine, “We are entering a ‘Web2.5 era’ where content creators have benefited from the rise of social media, but what they create is owned by centralized groups. Is.” “Now they are mastering the end-to-end process, and we have seen some of these manufacturers become wildly successful. […] It is inspiring a new generation of creators.”
In addition, existing financial institutions have already expanded access to credit by lowering barriers to adoption. My research from 2021 found that the expansion of mobile banking in the US from 2014 is concentrated among people who are youth, singles or part of minority groups.
Even if these patterns did not hold true, it is unclear how CBDCs expand financial inclusion.
Efficiency of cross-border payments and financial transfers: While financial transactions across borders are already possible, they are time-consuming and costly. However, several Web3 companies that enable cross-border transactions have emerged, including Ripple.
Financial Flexibility and Stability: Flexibility is essential to protect the system from unexpected shocks. The financial crisis of 2007–2008 in the US and many developed countries was arguably driven by the concentration of risky, securitized assets. In the wake of the crisis, the number of mortgages increased sharply, but many new homeowners were not financially prepared to pay off their mortgages – a pattern that was at least partly influenced by the Federal Reserve’s impact on interest rates. Was affected and failure to attend to the warning signs.
The financial crisis could have been avoided if these warning signs were taken more seriously. The United States’ 2011 Financial Crisis Investigation Report read: “The prime example is the Federal Reserve’s significant failure to stem the influx of toxic mortgages, which could have been done by setting prudent mortgage-lending standards. The Federal Reserve did so. There was an entity empowered for it and it didn’t.
Central banks are making claims consistent with those made before the financial crisis, when they downplay the risks of CBDCs, particularly the potential monopoly of the financial system by central banks, and only talk about their benefits. According to the BIS, “One of the main means by which central banks fulfill their public policy objectives is to provide banks, businesses and the public with the most secure form of money – central bank money.”
Charles Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia Business School, tells the magazine that CBDCs seem more like a power grab than a useful fintech.
“CBDCs are the latest attempt by self-interested central bankers to expand their power at our expense more than any other instrument of government over the past two decades in developed countries to expand their power at the expense of democracy and done more.”
The architectural design of a CBDC matters. If they are designed, even if not explicitly stated, they could replace private commercial and retail banking, as suggested by the People’s Bank of China, leaving central banks with a means to make money. And there will be mechanisms in which there is no collateral or the underlying asset’s value. Such an approach would have serious inflationary implications.
Last year, several economists published research on CBDCs and bank runs, finding that large-scale arbitrage by central banks could make them monopolies. Since central banks’ contracts with investment banks are stringent, they have the potential to prevent bank runs. According to the authors of the research, consumers “pre-internalize this feature, and the central bank emerges as a deposit monopolist, attracting all deposits from the commercial banking sector.”
a nail in the coffin for privacy
Even though public documents from central bankers talk about secrecy as a feature of CBDCs, no explanation exists for how this would work. In contrast, the BIS pointed out that “complete anonymity is not plausible. […] For a CBDC and its system, payment data will exist, and a key national policy question will determine who can access part of it and under what circumstances.”
Such a rollout could mean that each central bank would be able to identify each and every user. Today, a bank cannot tell who is using the euro versus dollar bill, but “the key difference with a CBDC is that the central bank will have complete control.” [over] The rules and regulations that will determine the use of that expression of central bank liability, and at the same time, we will have the technology to enforce it,” Agustin Carstens, general manager of the BIS, said during the 2020 panel discussion.
There is no doubt that illegal transactions happen with cryptocurrencies, but there have always been illegal transactions, whether with gold a thousand years ago or with cash today. The question is how to create a framework that protects privacy and combats illegal activities.
If central banks can track every transaction, what is stopping them from shutting down people’s access to finance, travel and their livelihood? Also, what will prevent central banks from coordinating what is mentioned in the BIS’s 2020 report?
“CBDCs not only threaten but completely infringe on our financial autonomy, taking away our most basic rights and freedoms as enunciated by our forefathers,” said Hydro.Finance co-founder and host Eric Weissen. Secret Codes Podcast, the magazine tells. In contrast, “DeFi provides freedom from perceived security that deprives us of our ability to participate,” Vasson continues.
— Sats Symbol (@SymbolSatoshi) 31 March 2022
The Future of Money and DeFi
The future of finance lies in decentralisation. While we have traditionally known and interacted with large, centralized institutions, we have seen widespread preference and adoption for decentralized technologies stemming from technological advances, along with the recognition of the evils of centralization.
But in general DLT and blockchain is just a tool. It still needs good governance and proper management. The emergence of CBDCs is likely to further centralize the “creation” and flow of finance by giving central banks more authority to issue tokens rather than buying and selling bonds in a somewhat “open” market.
“CBDCs are the dream of an authoritarian government and a big step forward for consumer privacy,” said Paul Watkins, Managing Director, Patomac Global Partners.
Several architectures have been proposed for CBDCs. There is widespread enthusiasm for the use of DLT in central banking, but not for retail CBDCs that can simultaneously create money without collateral and require individuals to share personally identifiable information. It is important to seriously consider the architecture of a CBDC when thinking about design; Otherwise, CBDCs will be launched in competition with the increasing move towards decentralization and hunger.