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They’re coming for you and your bank sooner than you think. And they have the potential to change the way you transact and the future of cash as we know it. Meet “Central Bank Digital Currencies” or CBDCs.
CBDC: Coming to a country near you
According to the Atlantic Council, an independent Washington, DC-based organization that tracks CBDCs, as of April 2022, 91 countries are considering issuing a CBDC. The Biden administration signed an executive order on digital assets on March 9, 2022 that contained a stipulation to investigate what a whole-of-government approach to implementing a CBDC in the United States would look like.
The important thing to know is that CBDCs are different from Bitcoin and other cryptocurrencies because they are created and governed by a centralized authority, in this case, a nation-state. You can argue that many cryptocurrencies are also centralized, but there are many that fall on the spectrum of decentralization, and this is what makes them unique from our current legacy financial system.
All CBDCs are centralized by nature – the word “central” is even in the name. This means that there are a small number of decision makers who control how currency flows through the economy. This is similar to how the current financial system works with groups like the Federal Reserve being given the authority to set monetary policy.
It is also important to understand that not all CBDCs are created equal and nation-states will implement them in a variety of ways, which will have significant implications for their citizens. The consequences of specific CBDC designs will play out in everyday society and culture. Let’s explore some of the nuances of CBDCs so you’re prepared for the next revolution in government money.
What is a CBDC?
A CBDC is a central bank digital currency. They are digital versions of a nation-state currency issued by the central bank of a given nation. They may or may not be backed by another asset or they may exist purely as fiat currency, meaning the value is based on government promise. Most major nation-states use fiat currency today and you could think of CBDCs as a digital version of fiat currency that has unique special additions in capabilities and features because it is purely digital.
For example, in the US, a CBDC would essentially be a “digital dollar” and is often referred to as such.
Studies are underway on how to apply CBDCs and start issuing them in several major nations around the world. Some countries have already successfully launched their CBDCs, including Nigeria.
Often touted as the next evolution to replace cash as the dominant medium of exchange, hurdles remain before we see widespread adoption.
Government issued and owned
Governments like CBDCs because they are state-issued and allow for strict regulation within a closed system. CBDCs are under the direct control of the government, unlike cryptocurrencies that are issued by the private sector or public blockchains.
A concern of many governments is that cryptocurrencies offer populations the option to opt out of the traditional financial system in decentralized finance that exist beyond the typical oversight of government regulation. CBDCs are a way for governments to offer a digital payment competitor to cryptocurrencies and decentralized financial systems that are built off of the most current government regulation infrastructure.
It is appropriate to point out that money has not been under the control of a centralized authority for very long in history. Just a couple of hundred years ago, gold coins were accepted all over the world without any central oversight. Only in the last hundred years have governments seen the immense power they could harness by establishing central banks to exercise central authority over their economies.
Governments see CBDCs as a way to take back their monopoly on money because one of the best ways to control a population is through the economy. A control of monetary policy is an important lever of control that governments are not willing to give up, but questions remain about how quickly the citizens of a given country will adopt this new form of money such as CBDCs.
Many factors could influence this arc of adoption. Adoption is likely to vary greatly depending on the nation’s climate and existing political system. Cultural differences may also make one nation more open to such developments in currency versus others who may be more wary of these new technologies.
Let’s remember that crypto is opt-in because you have the freedom to choose if you want to participate in the cryptocurrency and web3 economy. No one is forcing you to download a crypto wallet and start trading NFTs or cryptocurrency tokens. It is totally your own individual choice. It is critical to note that CBDCs may be optional, or may become mandatory, depending on the laws and regulations of a specific country.
Concerns with CBDCs
Inflation remains a legitimate concern because government central banks still maintain control over the money supply. There is nothing to prevent a government from issuing more of its CBDC when it wants to or circumstances require. In fact, it might be even easier to inflate CBDCs because they are completely digital and no physical inputs are needed to create more currency. Just a few keystrokes and a government can create more money out of thin air.
Privacy is a major concern when it comes to CBDCs because CBDCs are inherently centralized. Centralization provides many avenues for corruption or abuse to occur, especially as CBDCs create huge troves of data on who pays whom, and this could be leveraged to begin censoring certain transactions that the government deems illegal or illegitimate.
If CBDCs are the only payment method by which one person can pay another, then the government has the power to block transactions or freeze your bank account whenever it wants. Furthermore, with all this data, it will be tempting for some governments to use it to monitor their population.
CBDCs can be optional or they can be mandatory. An example of a CBDC being built with surveillance as a priority is the Chinese Digital Yuan. The Digital Yuan aims to replace cash in Chinese society. China’s digital yuan enables surveillance of all transactions throughout the financial system, and China has the ability to freeze accounts or block transactions that use the digital yuan remotely.
The basic rights described in the Bill of Rights depend on the economic freedom that is exercised. If economic freedom becomes more limited through the strict supervision of financial transactions using CBDC, fundamental rights are affected and threatened.
Benefits of CBDCs
There are a variety of benefits derived from some CBDCs, while others may offer limited benefits depending on their application. CBDCs are more profitable than physical cash as they have lower transaction costs. It is much cheaper to send bits of data across the country than it is to pay for the security required to transport large sums of cash, such as using armed guards and armored banking vehicles to collect and deliver cash and other physical assets such as gold bars. .
The move to digital currencies and the elimination of cash means everything is traceable so governments can ensure the safety and integrity of their money supply with extensive oversight and detailed data on the complexities of their economy.
An important benefit is that CBDCs can promote financial inclusion by allowing people who are often left out of the financial sector to access banking and other services. In many cases, all you need is a smartphone to access CBDCs. They can compete with private companies that need incentives to comply with transparency standards and limit illicit activity.
How will CBDCs affect you?
A CBDC is virtual money backed and issued by a central bank. CBDCs are a government version of digital money, but they differ in some ways from cryptocurrencies because they are always centralized, while cryptocurrencies vary in their level of decentralization and central control. CBDCs could reach mass adoption and become almost as much a part of everyday life as debit and credit cards.
As cryptocurrencies become more popular, the world’s central banks have realized that they need to provide an alternative to compete in a world where the future of money is already passing by with new innovations being launched every day. . Decentralized finance (DeFi) and the use of stablecoins, which are cryptocurrencies pegged to a nation-state fiat currency such as the US dollar or the euro, are examples of new possibilities occurring beyond the guardrails described by the financial system. legacy and its regulatory network. agencies
In some places, CBDCs could easily achieve mass adoption and become almost as much a part of daily life as debit and credit cards. You may be forced to start paying official government dues in the native CBDC of a given government.
CBDCs will be adopted and implemented differently by various nation-states. It is crucial that governments implementing CBDC enact them carefully to preserve the rights of their populations and protect their data from overreach or corruption. Certain governments may take advantage of the monitoring and surveillance opportunities offered by CBDCs and use them to further strengthen their power in their jurisdictions.
If you control the economic levers of a society, you can control the population. There is no freedom without the freedom to transact: If a government censors your ability to transact, then it is limiting your right to freedom of expression. The benefits of CBDCs include more ways to monitor financial trends and can help monetary policy flow faster and smoother.
The biggest factors in determining how CBDCs will affect your life largely depend on where you live and how your country begins to implement this next evolution in money.
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