CBDC (Central Bank Digital Currency OR Control) – Fiat’s striving to ride the Blockchain Hype!!!

Let me start by making a few statements to ensure you know what we are going to talk about here.

1. The concept of CBDCs is independent of Blockchain or DLT technology.
2. CBDCs are not about financial inclusion or more efficient and faster payments, because there are better ways to achieve those objectives.
3. Even if not acknowledged explicitly by CBDC proponents, CBDCs can easily be used for the suppression of opposing voice
4. CBDCs can’t replace non-sovereign cryptocurrencies without sovereign banning the cryptocurrencies through law.

In the last 10 years, while cloud and AI have transformed the way business is done, blockchain has not been able to justify the hype it has been getting. Instead, despite being on the Hype curve for more than 5 years, the real business benefits of blockchain are still elusive to many.

However, it has given birth to many other concepts which have taken their own life. While the list started with cryptocurrencies, goes to Digital Assets, Decentralized Autonomous Organizations (DAO), Non-fungible tokens (NFTs), and now most fungible sovereign tokens called CBDCs. I’ll leave Metaverse, another offspring of blockchain, out of this discussion for now.

While the concept of blockchain goes back to the late 90s, it came into prominence with bitcoin and Satoshi’s paper on a Fully decentralized mode of exchange. The purpose of blockchain has been to create an Immutable Decentralized Ledger no one party can control. Bitcoin is still following the same philosophy.

Although we concede that with industrialized bitcoin mining, only a few are controlling the global mining. However, those few can be replaced any day by other few who are willing to invest in the concept. We have witnessed this transition in May 2021, when China banned bitcoin mining, and overnight more than a third of the bitcoin network moved from Asia to North America. And all that happened without any bitcoin holder facing liquidity impact. This is the power of non-sovereign currency and assets.

Just before I delve into CBDC, let me say this - I am not a proponent of absolute freedom because I not only believe in rule of law but also that to keep the social fabric functioning, my freedom will have to negotiate with somebody else’s freedom.

In a modern economy, we already have digital money. These are debits and credits in our bank accounts, credit card accounts, and digital wallets. While this money is partially backed by liabilities of central banks, these are augmented by commercial banks through loans and mortgages. So, we can say that we already have a decentralized currency framework.

Even though the current sovereign monetary structure is governed by sovereign governments’ policy frameworks, there is still an arms-length distance between willingness to control and implementation of control. CBDCs overturn that arrangement completely, making it exactly the opposite of what blockchain represents. One may argue CBDCs will be more centralized and controlled than any of the major cryptocurrencies currently in circulation.

Now let’s elaborate on the three statements I made at the start of the article.

1. The concept of CBDCs is independent of Blockchain or DLT technology.

Even though claimed by the IMF research group as one of the motivations, I believe the CBDCs, at least in their current form, are opposite to what blockchain represents – decentralization.

Currently, as per the Atlantic council’s CBDC tracker, there are 91 CBDC projects underway. They are in various stages of the project lifecycle. Among large countries, China, Russia, and Saudi Arabia have already launched their Pilots, while others like Canada, India, and Australia have started the development.

Although out of these around 18 are claiming to be based on Blockchain, almost all are controlled by the central bank of that country. Therefore, they may not benefit from the Blockchain or DLT technology. However, if all central banks can find a way to link all these CBDCs to reinvent the international payment settlement, it could be the best use of the power of blockchain. Recently launched, ‘Project Dunbar’ is an effort in that direction.

For now, CBDC development around the globe has its genesis in the fear psychosis - FOMO (fear of missing out) against cryptocurrenciesand fear of China’s rapid progress on various economic and geopolitical fronts. We are in a world where if China does something – the rest of the world would think either it must be good OR it is being done to hurt them.

Without, digressing anymore – CBDCs on blockchain make sense only when non-central bank parties have a say on the token creation and its circulation, which I don’t reckon most central banks will allow.

2. CBDCs are not about financial inclusion or more efficient and faster payments, because there are better ways to do that.

It has been cited multiple times that CBDCs will expedite financial inclusion. Nothing is farther from the truth. Many economic surveys have underlined that a large population that is not part of the organized financial sector is only because of two reasons.

The first reason is that people, don’t have access to banks because they live in remote, inaccessible areas of the country. This is mostly a problem in developing or under-developed countries, where serving remote parts is not financially viable for private organizations, while the government itself doesn’t have adequate resources to fill the gaps.

However, countries like Kenya (m-paisa) and India (Jan-Dhan) have demonstrated how to circumvent this challenge. Leading by example, these countries have demonstrated that the problem of access to banking can be solved just by the sovereign’s willpower.  Just 5 years old, India’s Jan Dhan (Public money) initiative has brought millions to the banking sector in a very short period. The government of India demonstrated willpower by incentivizing (and penalizing) public and private sector banks to achieve its objectives. And even before India’s Jan Dhan, Kenya’s M-Paisa made a diligent effort toward Financial Inclusion. It was an innovative way of driving financial inclusion by using the technology infrastructure of mobile telephony.

The second reason behind the under-penetrated financial sector is that a few people chose not to be part of the organized financial sector because they don’t trust banks or governments with their money. This is mostly a problem with the developed world with a greater freedom index. For this, non-sovereign cryptocurrencies are gaining popularity.

CBDCs doesn’t solve either of these problems because of their practical limitations.

Just assume you own a few CBDC coins. The only way to access and spend them is to get a Digital Wallet either with the central bank OR with a commercial bank. Mostly it would be with a central bank, otherwise, it is no different than the current monetary framework. Becoming a Central Bank’s client, a citizen can easily be under surveillance at any time by one central organization, eliminating an individual’s financial freedom.

Moreover, if you are in a remote location with limited or no network coverage, you can’t access your money. So financial inclusion fails here. In fact, as of today, no form of digital money supports offline transactions and that is why Cash is still prevalent.

3. Even if not acknowledged explicitly by CBDC proponents, CBDCs can easily be used for the suppression of opposing voices.

Now, look at an aspect of CBDC that is the most talked-about by CBDC’s opponents but sugar-coated by the CBDCs proponents as “transmission of monetary policy”.

Assume you live in a country with a non-democratic governance structure and have spoken against a government policy. You have all your liquid money in the form of CBDCs. It would take government minutes to ensure you are taught a lesson.

You don’t need to imagine it. Many governments around the world are already using financial tools to suppress the critics with whatever tools they have. CBDCs will just be another bow in their armor.

4. CBDCs can’t even replace non-sovereign cryptocurrencies without sovereign banning the cryptocurrencies

Now, come to the last point of CBDCs’ adoption. Nobody who is a proponent of non-sovereign cryptocurrency will choose CBDC because they either preferred crypto over sovereign currency to regain their financial freedom OR over traditional assets to speculate on its value. CBDCs will provide none of that. So, the only way for governments to replace cryptocurrencies with CBDCs is to make it criminal to own the cryptocurrency. Whether many governments can do that, is yet to be seen.

Moreover, if a situation comes when one has a global asset like bitcoin, ether (in this context they may not behave like a currency until they have more acceptability) that one can carry anywhere in the world in his or her memory, there is no reason one would choose a CBDC as a store of value. This is the reason why bitcoin is finding acceptance in war-torn countries like Ukraine.

So, in nutshell, with very few benefits, CBDCs may result in the further concentration of financial control with an entity, the government, which already has full control of law-and-order machinery. Even though there are few use cases of CBDC which can benefit society, the same benefits can be realized through ways that are much simpler, less costly, and much easier to implement.

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Just so you know, I am not crypto maximalist, but for sure a CBDC minimalist. I will change my opinion when I have supporting data.