A CBDC, or central bank digital currency, is a type of virtual money that’s issued and backed by a central bank, like the Bank of England. There are only a handful of CBDCs that are currently in circulation, but dozens of countries around the world are exploring the possibility of taking their national currency digital in the coming years.
But are CBDCs actually a good idea? What are the pros and cons of using CBDCs in our everyday lives?
In this post, I’ll brought together some of the best arguments for and against the creation of CBDCs. From financial inclusion to privacy concerns, here’s what I think you need to know about the advantages and disadvantages of central bank digital currencies.
CBDC Pros & Cons [The TLDR]
- Could make financial services easier to access for the underbanked.
- CBDCs might make it cheaper and easier to issue government benefits or collect taxes.
- Potential to reduce transaction fees for businesses and consumers.
- Might supplement existing systems to diversify our financial tools.
- Offers governments a tool to help fight financial crime.
- Could facilitate faster and cheaper international payments.
- CBDCs might simply be unnecessary given our current banking systems.
- Opens up a slew of issues related to centralisation and government oversight of financial systems.
- Large potential for privacy concerns for individuals.
- Possible decrease in financial freedom if the government has full control over major financial channels (i.e., social credit system where financial access is determined by your behaviour).
- Retail CBDC could destabilise current financial systems (e.g., major legacy banks).
- Risk of financial problems if centralised systems go offline for extended periods.
Arguments for CBDCs
CBDCs offer a number of key benefits for individuals and businesses. Most of these advantages centre around the possibilities that digital currencies have for reaching people who have limited access to current financial systems and for making our daily payments as simple, cheap, and efficient as possible.
Let’s take a closer look at some of the key arguments for CBDCs and why some people think that they might be the currency of the future.
Increased Financial Inclusion
Proponents of CBDCs are often quick to tout the opportunities that CBDCs provide in promoting financial inclusion around the world.
For those of us who have relatively easy access to bank accounts and digital payments systems, the idea of increasing financial inclusion might not sound that important.
But when you consider that approximately 1.7 billion adults around the world don’t have a bank account (that’s about 21% of the total global population), it’s clear that improving access to financial services is critical. That’s because people without bank accounts generally can’t get services that we all take for granted – such as loans, credit cards, and even the ability to receive wages.
Not having a bank account also means that you’ll have to pay more to cash a cheque at a retail store or cheque-cashing shop. If you don’t have access to traditional financial services, you might also end up in a vicious cycle of high-interest payday loans that could make getting out of debt and becoming financially stable all but impossible.
There’s a lot we still don’t know about how CBDCs will work in most countries, so we don’t know whether they’ll actually increase financial inclusion.
But based on what we do know from places like the Bahamas, the Eastern Caribbean, and Nigeria (where CBDCs are already a reality), it’s much easier for most people to use these new payment systems than it is to set up a bank account. As a result, CBDCs could open up a world of financial possibilities for the underbanked around the globe.
Easier Access to Government Benefits & Tax Payments
Nowadays, most government benefits in the UK are paid directly to your bank, building society, or credit union account.
Having your benefits payments sent directly to your bank account is convenient. But if you don’t have a bank account, receiving your benefits might be tricky and finding an alternative payment method can be both expensive and time consuming.
CBDCs, on the other hand, offer a potentially easier and more accessible way for people to receive government benefits.
Since many CBDC projects are designed to let people access their funds through a mobile or desktop-based wallet app, anyone with a connection to the internet could access their benefits if they were paid via CBDCs.
Of course, this doesn’t alleviate benefits payments issues for people without reliable internet access, which is about 7% of British households according to recent estimates. But it could open up a world of opportunity for the approximately 1.3 million adults in the UK without a bank account.
Additionally, CBDCs could make it easier for people to pay taxes, especially if they’re self-employed.
While most employees have their income taxes deducted out of their paycheques through the Pay As You Earn (PAYE) scheme, people who are self-employed or have more complex tax situations have to pay Self Assessment taxes on a regular basis.
Most people who pay Self Assessment taxes do so through bank transfers or through debit and credit cards. But this process can be tedious, and if you don’t have access to banking services, your payment options could be limited. CBDCs could be a great alternative way to pay taxes – especially for people who transact in cash or who have few other payment options available.
Improved Ability to Fight Financial Crimes
According to recent government estimates, more than £100 billion in illegal funds are laundered in the UK each year.
This money often comes from organised crime groups, such as drug and human traffickers, and it ends up stashed in the UK in the form of luxury London properties, all while the criminals involved go undetected.
Many advocates for CBDCs believe that this type of centralised digital money could help stop financial criminals in its tracks.
Since many proposed and implemented CBDC projects require that users complete identity verification and KYC (know your customer) checks, it’s easier for governments to keep tabs on who’s using their financial systems and to prevent money laundering.
CBDCs are also designed to operate on a digital ledger system with oversight from governments and their central banks. All of this centralisation and oversight could make it easier for governments to catch people who launder money and to stop the movement of illicit funds – even once that money is sent overseas.
Cheaper Transaction Fees for Consumers & Businesses
There’s a lot we still don’t know about the specifics of what many potential and proposed CBDC projects will look like (including in the UK). However, from the 3 CBDCs that are already in circulation (eNaira, DCash, and Digital Sand Dollar), one of the biggest things that we’ve seen is a movement toward cheap or fee-free transactions for both consumers and businesses.
For businesses that accept credit card and debit card payments, low-cost CBDC transactions could have a huge positive impact on their bottom line.
Most credit and debit card issuers (think Visa and Mastercard) charge credit card processing fees to merchants that can range from 1.5 to 3.5% of the cost of a transaction. For small businesses, these fees can quickly eat away at profits, so using something like CBDCs for daily transactions can help them save money in the long run.
These cheaper transaction fees can also translate to more affordable pricing for consumers in the long term (though arguably not by much).
That’s because businesses of all sizes are in the business of, well, making money, so they’re generally going to increase their prices whenever their costs – including credit card processing fees – rise. We’ve actually seen businesses, both small and large, raise their prices as a result of credit card transaction fee increases in the past.
One of the most recent examples of this happening was in 2019 when Visa, Mastercard, and Discover all raised their fees around the same time.
In response, many businesses simply raised their prices to cover their extra costs, which basically meant that consumers had to pick up the tab. More recently, some companies have started offering discounts to consumers that pay with cash or placing higher transaction minimums on credit card purchases.
All of this means that we consumers and our bank accounts are all at the whim of credit card companies and their never-ending desire to increase their profit margins. If we had CBDCs that offered free or very low-cost transactions instead, we would have an alternative payment method that helped us escape these constant increases in credit card processing fees.
Better & Cheaper Cross-Border Payments
In addition to cheaper daily domestic transactions for consumers and businesses alike, CBDCs also have the potential to change how we send and receive international payments.
If you live in the UK and you primarily use FPS (Faster Payments System) to send money to friends and family in the UK through your bank account, you might not see the need for cheaper transactions since FPS is both fast and free.
But if you rely on services like Revolut, Payoneer, Wise, Skrill, Western Union, or PayPal to send and receiving money internationally, costs can quickly add up for both businesses and consumers alike. Using CBDCs, most of which are designed to have free or low-cost funds transfers, could greatly reduce or even eliminate these transaction fees.
To understand how this might work, consider the fact that cross-border payments are a huge part of day-to-day life for many people. This is particularly true for immigrants who want to send money to support their family and friends in their home country.
These sorts of cross-border payments to friends and family, which are called remittances, accounted for $589 billion worth of money transfers to low- and middle-income countries in 2021 (US). The average cost of sending these remittance payments was an astonishing 6.4% according to the World Bank.
That means that someone who wants to send £100 back home to their family from the UK would spend over £6 in fees on that transaction. This might not seem like a lot of money. But if you send £100 in remittances each week for a whole year, you’d end up spending more than £300 in fees alone if you’re charged a 6% fee on each transaction.
Cross-border payments are becoming more important as the world becomes increasingly globalised and many companies start doing business in other countries, too. CBDCs would offer the same kind efficiencies for these entities.
It’s still unclear whether individual countries would allow their CBDCs to be sent abroad and, if they do, how much these transfers will cost. But many proponents of these digital currencies believe that they can drastically reduce how much people and businesses spend on cross-border transaction fees each year.
Added Diversification of Financial Systems
Although some supporters of CBDCs hope that they’ll completely replace our existing financial systems, others argue that they’ll simply diversify the systems that we already have in place and that this diversification is a benefit in and of itself.
Even though the world’s financial systems can seem really, really complicated, there are many ways that they fall short. Most of the world’s financial systems are designed with the interests of large companies and wealthy individuals in mind – not for the average, hard-working person.
For example, many of the fees and limits placed on bank accounts really only matter to people in low- to mid-income brackets. A £15 monthly bank account fee or a £500 account minimum balance might be a huge deal if you only have £1,000 in your account. But these fees and limits are just blips on your radar if you have hundreds of thousands of pounds in your account that’s waiting to be spent.
The same could be said about the transaction fees charged to businesses and their negative impacts on small business owners. In other words, wealthy people and large businesses can easily absorb these costs – but they can be huge hurdles for most people.
Therefore, many proponents of CBDCs hope that simply introducing another standardised payment method could make our financial systems stronger. The thought here is that adding in a low-cost money transfer system that has a relatively low barrier to entry could force legacy banks and payment processors to better meet the needs of the average person.
To imagine how this might work, picture a country like Canada where the banking system is effectively dominated by an oligopoly of 5 major banks.
In Canada, consumers end up paying higher prices for what’s arguably relatively low-quality service at the country’s 5 biggest banks because there’s basically no competition in the market from smaller financial institutions. Some critics even think that Canada’s 5 biggest banks work together, at least to an extent, to raise account fees and minimums while slashing benefits and services.
Simply introducing a new system like CBDCs could force major banks in Canada and elsewhere to lower prices and improve their services so that they can stay competitive and relevant. Otherwise, they could lose their customers – and their money – to this new (and probably) low-cost system.
Of course, this is all speculation, and it remains to be seen how well CBDCs will be accepted by the general public. But they could dramatically shift how we interact with money on a daily basis just by existing as an alternative to traditional banking.
Arguments Against CBDCs
As is the case with any new technology, there are plenty of people out there who are sceptical of CBDCs.
Here are some of the (many) arguments against CBDCs to consider.
Financial Systems Could Become Unnecessarily Complex
Introducing CBDCs could help diversify the range of financial systems that people and businesses have available to them for their daily transactions. This could be helpful for individuals and smaller companies that often struggle due to the high fees that many banks and payment processing companies charge for their services.
But this increase in diversity in our banking and payment processing platforms also comes with the risk that we’re making our financial systems more complex than they need to be. If these systems become too complex, we might end up alienating the very same people who these new platforms, like CBDCs, were originally designed to help.
To understand why this could be problematic, let’s consider an example.
Imagine that you want to send £200 to your niece for her birthday. Right now, you have dozens of different ways to send that money – be that through a simple UK bank transfer, PayPal, Bitcoin (BTC), or even a cheque in the mail.
Each of these payment methods has its own advantages and disadvantages, so you’ll have to do your own research to figure out which option provides the best blend of security, speed, and cost-efficiency for your needs. If you add in another payment method, like CBDCs, figuring out which option is best for you could become more complex than it needs to be.
Of all the arguments against CBDCs, I appreciate that this one is quite minor, as our financial world is already complex. But the more new payment methods we add to our financial systems, the more we risk making things more difficult than they need to be – especially if CBDCs don’t end up being that much faster or cheaper than our existing payment methods.
Increased Centralisation of Financial Systems
Although people often compare CBDCs to cryptocurrencies, the reality is that CBDCs and cryptoassets, like Bitcoin (BTC), are fundamentally different. In my mind, the biggest one has to do with centralisation.
With Bitcoin (BTC), decentralisation is of the utmost importance. The idea is that no single entity should have complete control over how it functions, or where or how people can spend the currency.
But with CBDCs, centralisation is the name of the game (quite literally, as they’re called central bank digital currencies). As they’re designed to be controlled by a single entity, it means that a government could decide who can access these CBDCs and on what terms.
Centralisation is already an issue in the greater financial world. Many governments, including the UK government, limit who can open accounts with banks in their countries and governments grant themselves extensive powers that allow them to block or seize funds from within people’s bank accounts for a variety of reasons.
However, CBDCs take this idea of centralisation to a whole new level. Since a government would ultimately control the digital ledger that all CBDC transactions are recorded on, they could easily shut down accounts, drain funds from wallets, or limit transfers to and from certain addresses.
Many governments argue that this level of centralisation offers them an unparalleled ability to fight cybercrime and to prevent money laundering. But I find it hard to ignore the potential drawbacks to our civil liberties that would come with it.
Added Privacy Concerns
One of the biggest drawbacks of the centralised aspect of CBDCs is the fact that they greatly reduce or completely eliminate any semblance of privacy that people can have in their financial transactions.
Since all CBDC transactions would be recorded in a digital ledger that’s controlled by a central bank, that bank would be able to see all of the funds that you’ve ever sent or received from your account.
This is a huge potential privacy concern.
However, unless you’re operating outside of the financial system using cash and cryptocurrencies like Bitcoin (BTC), it’s going to be impossible to be keep your transactions private anyway. But by centralising all transactions into a single digital layer, a government’s ability to monitor and interfere with your financial freedom would be significant.
Some people might say that there’s no reason to keep your finances private if you have nothing to hide and that the centralised nature of CBDCs can help fight financial crime.
But while this is certainly true, eliminating all semblances of privacy can also make it easier for authoritarian (or rogue) governments to unilaterally target individuals and businesses that they don’t like. Many governments around the world already have the power to freeze or seize bank accounts – but bringing everyone onto a CBDC would likely make it easier.
Basically, Canadian government won multiple lawsuits that gave it the authority to freeze the accounts of anyone involved in these protests. The hope was that freezing people’s accounts would make them give up their occupation of Ottawa and of the country’s major land border crossings.
Regardless of what you think of the protestors or their political views, this raises some serious privacy concerns – especially since it happened in a democratically run country like Canada.
In this situation, since the Canadian government doesn’t have direct control over people’s bank accounts and crypto wallets, it had to get court approval to freeze people’s assets. But imagine how much easier it would have been for the government to freeze people’s money if all of these protesters were using CBDCs?
Again, this is, to some degree, speculation as countries might enact laws that limit the government’s power to unilaterally freeze CBDC accounts. However, the ease with which governments could freeze someone’s account if they were using CBDCs is a serious concern in its own right.
Decrease in Global Financial & Social Freedom
Building off the idea of privacy concerns, centralised digital payment systems like CBDCs could restrict global financial and social freedoms.
In other words, when too much power is concentrated into too few hands in the financial system, it becomes easier for governments and companies to restrict people and organisations that they simply don’t agree with.
We’ve actually already seen this happen in the world outside of CBDCs with the recent OnlyFans and Visa snafu of 2021.
During this incident, OnlyFans announced that it would no longer allow creators to post sexually explicit content because credit card companies like Visa and Mastercard decided that their cards couldn’t be used to pay for explicit content.
OnlyFans eventually reversed its decision, but the whole incident highlighted the risks that come when two private companies have too much power over our financial lives – regardless of what you think of OnlyFans itself.
If private companies nearly caused a website to shut down, it’s potentially concerning to think of how much power a government could have over people and companies if CBDCs are more widely used.
Additionally, some critics of CBDCs argue that they could be used to create a sort of social credit system, like what currently exists in China. In these systems, people are either rewarded or restricted in their ability to do things that we take for granted, like travel, based on their behaviour.
For example, a government could use CBDCs to punish detractors by preventing their funds from being used to purchase train or plane ticks. In a worst-case scenario, governments could seize or freeze all of someone’s money.
Some people might say that these situations aren’t likely in large, mostly democratic countries. But these things can and do happen, so it’s worth considering how much power we actually want to give to governments when it comes to their abilities to limit our social and financial freedoms.
Barriers to Accessibility
CBDCs are often lauded for their ability to provide financial inclusion to people who are underbanked. But while it’s true that CBDCs have the power to provide digital payments services to people without bank accounts, they’re not exactly accessible to everyone.
We still don’t know what many CBDC systems will look like, but chances are pretty high that you’ll need some sort of digital wallet on your smartphone or computer to be able to access them. The biggest issue with CBDCs, then, is that many people who are underbanked don’t have access to this sort of technology anyway.
In reality, the countries with the largest underbanked population are also some of the world’s poorest countries.
For example, according to the World Bank, only about 15% of people over the age of 15 in Afghanistan have bank accounts or access to digital money services. Compare that to the over 96% of adult Brits that have a bank account, and it’s clear that the banking access divide closely follows a country’s economic status.
As a result, it’s hard to imagine that many of the people in the world’s poorest countries would actually have access to the expensive smartphone and internet technology that they would need in order to use CBDCs in the first place. This means that this powerful technology that could help the underbanked may never reach the people that need it the most.
Potential for Financial System Destabilisation
Although some financial organisations and governments believe that CBDCs can help diversify and bolster existing financial systems, others believe that these digital currencies could destabilise the world economy as we know it.
Many commercial banks are concerned about what would happen if large numbers of people started withdrawing funds from traditional bank accounts and storing them in their digital wallets instead.
Should this happen, many of the world’s largest banks wouldn’t have the funds in reserve that they need to back all of the deposits on their balance sheets. If this lack of cash flow causes large banks to fail (that’s when banks can’t repay their obligations to depositors and creditors), our financial systems could quickly become destabilised, dragging the economy down with it.
This sort of economic calamity actually happened during the 2008 financial crisis, both in the UK and abroad. The most obvious example of this happening was when multiple large banks in the US, including Washington Mutual, collapsed in quick succession, plunging the world into a recession.
To be fair, the collapse of these banks was a result of years of financial mismanagement and greed on behalf of mortgage lenders and risk-happy securities traders. But the end result was that huge banks around the world didn’t have the cash flow they needed to stay afloat and taxpayers around the globe ended up footing the bill for huge bank bailouts.
So, how does this all relate to CBDCs?
For many large banks, financial disintermediation, which is when you cut the middleman out of a financial transaction (in this case, the banks), is a major argument against CBDCs.
That’s because, from a bank’s point of view, CBDCs could greatly reduce or eliminate their profit streams by making traditional banks redundant and unnecessary (which some might argue is actually a good thing).
As a result, if a bank that’s too big to fail ends up defaulting on its debts because people are storing money in digital wallets rather than their bank accounts, it could be really bad for the global economy.
However, we don’t yet know how CBDCs and commercial banks will interact, and it’s possible that this fear is a bit overblown.
Furthermore, from what we do know about the 3 CBDCs that are in existence, most digital wallets can only hold a relatively small amount of money. This means that it’s unlikely that people will fully abandon their traditional bank accounts in exchange for CBDCs anytime soon.
Increased Risk of System Malfunctions
Finally, as is the case with any highly centralised, internet-based service, there’s a serious risk of a major system malfunction with CBDCs that could have major real-world consequences.
The idea behind most retail CBDCs is that people and businesses would be able to access their funds through a digital wallet on a desktop or mobile app. Although it’s possible that you’ll be able to use multiple different third-party apps with your country’s CBDCs, most of the current CBDCs in circulation are only compatible with their official mobile app.
To some degree, having a single, official, well-designed government-backed digital wallet for a CBDC can reduce the risk of fraud and security breaches.
But this centralisation also means that there’s a single point of failure in the system. Should someone manage to infiltrate that system or if a natural disaster disrupts the system’s servers, an entire country’s financial system could come to a screeching halt.
This might sound like hyperbole or an unsubstantiated fear. But as we’ve seen before with major internet service outages, like the 2021 Facebook outage and the 2018 Visa outage in Europe, these sorts of disruptions, no matter how brief, can have serious consequences for people around the world.
Plus, even if the system itself isn’t offline, it might still be impossible to make payments if both you and your payee aren’t connected to the internet. This could be problematic if you’re travelling in remote areas without cell signal or if you’re experiencing a natural disaster and there’s a disruption to local communications networks.
Ultimately, it’s unlikely that CBDCs will completely replace our current financial systems anytime soon. But it’s worth considering the potential downsides to relying on a single digital service for all our financial needs.
Are CBDCs a Good Thing?
CBDCs might be a relatively new concept in the financial world, but they’ve quickly drawn both support and ire from people around the globe.
There are a lot of potential benefits to CBDCs, especially when it comes to financial inclusion and the potential for cheaper and faster transactions. Many governments also believe that the widespread use of CBDCs could make it easier to fight financial crimes.
However, CBDCs have a lot of potential downsides, too.
The biggest drawbacks to CBDCs come from the fact that these digital currencies are inherently centralised.
This level of centralisation poses major privacy and security risks, especially for people living in autocratic societies. CBDCs could also reduce social and financial freedoms for people around the globe – as they could give governments too much power to decide what you can and can’t do with your money.
But what do you think? Are CBDCs a good thing? What other pros and cons of CBDCs can you think of?
Let me know in the comments below!