Central Bank Digital Currencies: A step towards cashless society or a tool for authoritarian regimes?

Central Bank Digital Currencies (CBDCs) are electronic tokens issued by a country's central bank backed by the trust and credit of the government aimed at replacing its paper bills and coins altogether. 

In other words, they are the digital version of the country's fiat currency where one unit of CBDC is equivalent to depositing the same amount with the central bank. Why is it so important? CBDCs cut floor transactional costs drastically as consumers can directly utilise the cheap financial plumbing of the central banks for transactions at little to no cost instead of paying financial intermediaries like banks or digital payment platforms route payments for you. 

What could this look like in the future? Imagine scanning QR codes and paying from your Bangladesh Bank e-wallet to pay for your Illiyeen punjabis, FoodPanda deliveries and your nephew's salami without having to pay that surcharge on Bkash or overdue credit card fees. 

While we may not be used to central banks becoming vital and cheap payment hubs offering efficient, accessible and swift transactions, plans are already in motion in developed and emerging countries like the US, France, China and Switzerland to test out and eventually roll out their own 'Americoins' or 'e-euros' in the near future. 

Fun fact, the Bahamas became the first country in the world to issue its own CBDC called the 'sand dollar' which citizens can use to make payments through their e-wallets. China has also completed trials for its 'e-yuan' and aspires to become the new global reserve of the digital currency. Of course, its authoritarian controls on digital payment platforms like Ant and state control over its currency may prevent its CBDC to be used as such and instead as a tool for monitoring the transactions of its citizens. 

Do we really need it?

The main functions of money are its reliable store of value, a stable unit of account and an efficient means of payment. Modern forms of money like cash, cards and even cryptocurrency all have trade-offs that we have to consider when using them. While cash is the most liquid and commonly used, it is subject to inflation and can become worthless during hyperinflation (for instance, Zimbabwe in 2008). 

With the Federal Reserve of the US printing trillions of dollars to fund stimulus checks during the pandemic, the world's reserve currency has become a less reliable store of value with looming threats of hyperinflation in the future which has forced many to park their assets in more stable stores of value. 

As a result, cryptocurrencies that allow decentralised payment like Bitcoin, Ether and even Dogecoin have gained popularity (thanks to Elon Musk) as well as demand with an increasing number of people hedging on them as a store of value alongside commodities like gold. However, cryptocurrencies cannot be easily traded for goods and services and are outright illegal in countries like Bangladesh. 

While the banking system with its credit cards, debit card and EFTs are commonly used for deposits, loans and regular transactions they are still not as cheap (credit cards fees tend to be sky-high for irresponsible spenders) and accessible or as quick as digital payment platforms like Bkash or Nagad; prompting many people to switch to these apps for daily transactions. 

Globally, digital payment giants like Ant Group (China), PayPal (worldwide), Mercado Pago (South America) have greatly prospered during the pandemic as consumers preferred quick, cheap and accessible payment facilities on their phones while maintaining social distancing. 

This growing adoption of digital payment methods on a global scale has become a worry for central bankers worldwide as transactions move away from the banking system (which they control for using interest rates and money supply for monetary policies) and into the hands of tech giants and platforms. 

In fact, alarm bells to retain control started ringing when Facebook planned to offer its international cryptocurrency called 'Libra' (later branded as 'Diem') that could be used to independently trade across borders without a trace beyond government controls. So, to address all these problems related to the volatility regarding the store of value and to ensure control over the money supply in the future, governments around the world are testing and developing their digital currencies.  

New horizons 

CBDCs could be as promising a leap in technology as that from paper money to cards and maybe even more. For small countries, it may be the only way to protect its financial sovereignty lest people switch to more convenient, stable and safe stores of value like digital currencies of a foreign country like China or from tech giants like Facebook which could be dangerous for the economy due to a lack of record and control. 

Similarly, central banks can expect to become the hub of all transactions in the economy enabling them to enact monetary policies with an unprecedented degree of effectiveness. For example, since it controls the entire money supply, it can easily make transfer payments to its citizens and collect taxes instantly without the scope for corruption or accessibility problems. 

Speaking of accessibility, the unbanked population may find it easier to make payments via their e-wallet and apply for loans based on the creditworthiness of their transaction history data, not collateral. Retail banks of the future may be pushed to the sidelines or cease to exist as there is no need for financial intermediaries when the citizens are directly dealing with their central banks. 

What could go wrong?

The truth is that CBDCs could be as damaging to individual freedom as they could be beneficial to society. It is hard to determine how central banks and the governments running it will handle the responsibility of operating a national digital currency as the scope for things to turn authoritarian quickly cannot be discounted. 

Imagine mass surveillance of all the transactions made by the citizens in a country, while it is liberating to know that this can be used to crack down on white-collar crimes and money laundering, the same tools can be used to ban transactions of local and foreign books, literature, art or services that undermine the status quo. 

Similarly, the supply of digital currencies and government intervention needs to be capped for digital currencies with laws in place to prevent governments from using it as a tool to manipulate the central bank for its gain over that of its people. Furthermore, centralising all transactions through the central banks can make nations vulnerable to cyberattacks that could cripple the economy in a single blow so proper security protocols also need to be designed. 

What's our take?

In the end, countries need to approach CBDCs with equal doses of caution and optimism as it is a double-edged sword. However, governments that are late to react may likely be forced to adopt digital currencies of the fast-movers like China which could severely limit state control over money supply so they might not have a choice but to develop their own. While Bangladesh Bank remains hostile towards any form of cryptocurrency like bitcoin at the moment, it is not as far-fetched to think that in the future, we could have our own 'Bongocoin' as well.