Everything you need to know about Central Bank Digital Currencies

Starting this year, many of the world’s leading countries – at least in terms of financial clout – are unveiling plans for turning their currencies digital.

And not in the sense of simply going paperless. No, they are creating entire new systems, which could see them cutting out commercial banks and releasing money directly to the public.

Why are they doing this? Simple. It gives them more control, and it cuts down on their costs. So a win-win for the world’s central bankers.

But the question for us is – will this make our lives better or worse in the long run. Oh, and of course… how will it affect crypto?

Let’s take a look.

What are Central Bank Digital Currencies?

Basically CBDCs are like cryptocurrencies that are created and controlled by central banks.

So, they would have the advantages of cryptocurrencies:

very cheap to use, no or low fees for sending money all around the world, secure, unforgeable, and likely able to have other functions built into them.

And all the advantages of traditional currencies:

Stable, backed by a country, widely accepted, controllable.

And it’s that last point that’s key here: controllable.

Unlike traditional cryptocurrencies, the Central Bankers will have total control of the CBDC’s supply, interest rates and even transactions.

With a CBDC the Central Bank could just decide to blacklist a particular individual, company or country on a whim.

It could also enforce automatic negative interest rates, which citizens would have to swallow.

And it could increase or decrease the monetary supply with a few clicks of a mouse.

So, if we were to look at this through utopian-tinted glasses, we could say that CBDCs will let us:

• Travel freely and spend our money anywhere
• Save huge amounts on international bank transfers
• Get more money directly into the hands of the people by cutting out the banks
• Encourage international collaboration through reduced fees and faster payments

However, if we were to look at this development through the ever-popular dystopian-tinted glasses, we could say that CBDCs will let governments:

• Know exactly what we are spending, where we are spending it, and how we are spending our own money
• Impose whatever new currency rules they like on us – for example negative interest rates, so people are forced to spend or lose money
• Block any individual, company or country they want from using their currency
• Take money out of anyone’s bank account they liked, at any time they liked, and for whatever reason they decided

When you look at it like that, it’s easy to see why CBDCs make a lot of people uneasy.

But like most technology, CBDCs are merely a tool. In this case, one that makes the monetary system work more efficiently.

Used by good people, they have the power to do good. Used by bad people, they have the power to do ill.

I guess as citizens, we have to assess if our leaders are more likely to use them for the former or the latter.

Why are so many countries rushing to create their own Central Bank Digital Currencies?

One word: Libra.

This all started when Facebook and its cabal announced plans for its own stablecoin cryptocurrency called Libra.

As I wrote at the time in Exponential Investor:

Libra will be pegged to a basket of currencies and assets. Which currencies it includes in this basket and in what proportions will have huge political consequences.

Think about it, right now the US dollar is essentially the world’s reserve currency. Well what if Libra really takes off, and becomes commonly used by Facebook’s 2.3 billion customers?

All of a sudden Libra is a very important currency, and what it is backed by becomes very important.

Libra really took the political and financial elite by surprise.

Up until its announcement, crypto was seen as something inconsequential.

Sure, some people talked about how it was going to “revolutionise” the financial system. But that revolution always seemed a long way off, and most of the elite didn’t take the people saying those things very seriously.

Then along came Libra, with 2.3 billion Facebook users, ready for adoption and the backing and investment of Visa, MasterCard, Uber, Spotify, eBay, PayPal, stripe and more.

Suddenly, crypto – or more accurately Libra – was legit… and it was gunning for prime position as a world currency.

Again, as I wrote at the time:

Within 24 hours of the Libra announcement, political elites all around the world had decried it:

France’s finance minister Bruno Le Maire proclaimed it to be “out of the question” that Libra “become a sovereign currency”. “It can’t and it must not happen,” he said.

The Bank of England governor, Mark Carney, said: “Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation.”

Markus Ferber, a German member of the European Parliament, said Facebook could become “a shadow bank” and regulators should be on high alert.

While the chairwoman of the House Financial Services Committee “requested” that Facebook “agree to a moratorium on any movement forward on developing a crypto-currency until Congress and regulators have the opportunity to examine these issues and take action.”

And US Senator Sherrod Brown, who sits on the Senate Banking Committee, said: “We cannot allow Facebook to run a risky new crypto-currency out of a Swiss bank account without oversight.”

And the G7 nations are setting up a working group to “evaluate the risks of currencies like Libra,” according to the Financial Times.

Six months later, and Central Banks around the world are rushing to create their own national cryptocurrencies… while still trying to stop Libra from ever seeing the light of day.

Which countries are working on Central Bank Digital Currencies?

China is the big one. And it’s been working on its plan for a while. In fact, it’s already in the testing phase.[i]

But it’s not the only one. As a direct response to China’s plans, Japan is now working on a digital currency of its own.

“A group of ruling party lawmakers are working on a proposal for Japan to issue its own digital currency, one of the members said, in a sign of alarm Tokyo is feeling about Facebook’s Libra and China’s drive to create a digital yuan.” – Reuters 24^th January 2020[ii].

And on the 21^st of January the Bank of England announced it was working with five other Central Banks (including Japan) on plans for CBDCs.

If you’re wondering who the five are, it’s Canada, Japan, the European Union, Sweden and Switzerland.

And they’re doing it in collaboration with the Bank for International Settlements.

So it’s safe to say that CBDCs are gaining some serious momentum. And the first two we’re likely to see will come from China and the EU.

The European Central Bank’s (ECB) President, Christine Lagarde has been on record advocating for a digital Euro.

From an interview she did with French business magazine, Challenges on the 8^th of January:

“ECB will continue to assess the costs and benefits of issuing a central bank digital currency that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines.”

Coin Telegraph followed up on this interview with the ECB directly and was told:

“We are working on all aspects of CBDC, with in-depth analysis of costs and benefits of such a new form of central bank money. It will take a while before we will communicate on our conclusions.”

These CBDCs are coming soon, whether we like it or not.

And they’re going to directly affect all of our lives… never mind the impact they will have on trade, business and industry.

What does this mean for crypto?

CBDCs may be based on the same technology as cryptocurrency, but they are very different.

The main difference is that cryptocurrency was created to get rid of the need for a central authority and CBDCs are being created by supreme central authorities.

Cryptocurrency was also created to be uncensorable, private (it’s not, but they’re working on it), independent and most importantly decentralised.

So it’s not like CBDCs will come out and suddenly no one will see the point in crypto anymore.

CBDCs are merely a way for Central Banks to control their countries’ monetary supply more easily and more directly… with the added bonus of making it easer to track every citizen that uses them.

The interesting thing will be how easily these new CBDCs can be traded with real cryptos. Because it’s likely they will be much more compatible than our current systems are.

And so, they could render a lot of stablecoins obsolete.

But only the centralised stablecoins like Tether. Decentralised stablecoins would still be just as useful and just as important.

And if CBDCs really do start moving societies towards the dystopian nightmare vision, it would push more people into using real cryptos.

CBDCs also legitimise the entire concept of digital currencies.

So, in summary, I think CBDCs could be good for crypto, but bad for our freedom… at least in the mid-term.

Thanks for reading.

Harry

[i] https://cointelegraph.com/news/chinas-central-bank-completes-top-later-design-and-joint-tests-of-planned-cbdc

[ii] https://www.reuters.com/article/us-japan-economy-digital/japan-ruling-party-lawmakers-to-float-idea-of-issuing-digital-currency-idUSKBN1ZN0OU