Central Bank Digital Currencies (CBDCs) are coming — and sooner than you might think. This past October, the Bank for International Settlements (BIS) joined forces with the Hong Kong Monetary Authority, the Bank of Thailand, the People’s Bank of China, and the Central Bank of the United Arab Emirates to pilot commercial cross-border foreign exchange transactions based on CBDCs. 

This latest news follows a rush of development around CBDCs around the world. According to the Atlantic Council’s CBDC Tracker, 114 countries are actively exploring or rolling out a central bank digital currency — up from just 35 countries less than three years ago — with the Asia-Pacific region leading the charge. Aside from Hong Kong and Thailand, CDBCs are also in development or a pilot phase in India, Japan, Singapore, Australia, South Korea, Indonesia, Cambodia and Malaysia. Mainland China, which began developing a digital yuan back in 2014 and now has the most advanced CBDC for a major economy, has already seen its e-CNY used in more than 360 million transactions worth 100 billion yuan (US$13.9 billion), and more than 5.6 million merchants now accept the state-backed digital currency as payment.

Some may think this is a cause for celebration, as it seemingly provides evidence that financial authorities in the Asia Pacific and beyond see value in digital assets, perhaps even considering them a viable foundation for financial services. If true, this would indeed mark real progress. 

However, while it’s a welcome development that the financial establishment is taking digital assets seriously, CBDCs are in fact inherently flawed. But before we examine why, it’s useful first to ask why central banks are suddenly so interested in CBDCs, when not so long ago cryptocurrency of any stripe was considered anathema. 

Why CBDCs are in vogue

If you are to listen to the central banks, the reasons given for CBDCs are all very logical and reassuring. Some of the cited drivers for adoption include use cases such as more efficient payments, faster cross-border transactions, and the preservation of payment privacy. But is this the whole story?

The fact is that these value drivers have been known for almost as long as Bitcoin has been in existence. And although it’s possible that they have only now come to the attention of central banks, what’s more likely is that they are only part of the banks’ true motivation. After all, one of the main roles of central banks is to instill confidence in the financial system. It’s conceivable that official announcements on CBDCs are made more with an eye on building consumer and business trust in the new technology.

A more likely explanation for the sudden rush into CBDCs is a response to current macroeconomic instability. With fiat currencies in difficulty the world over, central banks are turning to CBDCs in desperation. It should be no surprise for example that Turkey, with 80% inflation (and growing), was among the first outside of China to launch a CBDC, which is slated to appear later this year. With traditional monetary policy failing, CDBCs are being grasped as a possible alternative. 

The limitations of CBDCs

The problem is that CBDCs are not the right answer to fiat money’s growing problems. For a start, we don’t know how successful banks will be in building consumer confidence in the currency. Today, central banks assure us that CBDCs will be complementary to cash and commercial bank money — but it’s not too far a stretch to envisage a scenario where governments force CBDCs on populations through partially or fully obsoleting cash and commercial deposits. 

In fact, we can witness the cashless agenda being pushed already on the people of Nigeria, a country where a CBDC was launched in October 2021. Nigerian authorities have recently announced that ATM cash withdrawals will be limited to just 100,000 Nigerian naira (about US$225) a week, and older notes will be made obsolete, with only a few months’ window for exchanging the old notes for new ones. 

In the hands of a malevolent or misguided state, CBDCs could all too easily serve as powerful tools of control, coercion and surveillance. It’s these potential consequences of CBDC adoption that we should be most alert to. 

An arm for state coercion

CBDCs bring with them a range of features that would be of interest to authoritarian regimes, not least providing the issuer with direct control over the nation’s digital currency. This control enables states to impose negative interest rates at will, or even collect taxes directly from people’s accounts. 

With CBDCs, the financial system can also be used as a mechanism through which to spy on citizens and censor them. By setting up direct retail accounts with the central bank, a regime can easily freeze the funds of irksome citizens until they behave in a desired manner. Such actions may not be limited to countries most often associated with authoritarianism — let’s not forget that the liberal democracy of Canada used emergency powers to freeze the financial assets of truckers involved in protests against Covid-19 vaccine mandates. 

CBDCs make it far too easy for governments to sanction individuals and groups. They are nothing less than a step back to Soviet times of state control. It’s a fully surveilled, fully centralized system managed by the central planning committee of the central bank board of governors, and a model that can all too easily be used to suppress human rights. 

Refocusing on Bitcoin’s true value

CBDCs are the antithesis of Bitcoin, which was developed to decentralize the financial system in order to provide individuals with financial self-sovereignty and protect them from state overreach. Bitcoin is about building resilience against censorship and providing people with the means to transact anywhere and at any time. Unlike CBDCs, Bitcoin is also a true store of value that provides the ability to preserve purchasing power.

Before central banks in the Asia Pacific and the rest of the world go too far down the road of assessing the viability of CBDCs, and drawing up frameworks for their testing and deployment, humanity needs to pause and consider if CBDCs are really what the world is looking for. 

There are many problems with the current financial system, based as it is on commercial bank oligopolies, and it’s clear that this system needs to change. However, CBDCs will succeed only as a means for rogue governments to peer ever more closely into the minutiae of our lives, to track and curtail activities deemed undesirable, and to limit people’s options for independent economic lives. That is far too heavy a price to pay for whatever monetary stability CBDC may or may not bring