Central banks the world over, such as the New York Fed and the Bank of England, are now entertaining the idea of embracing digital currency and issuing their own Central Bank Digital Currencies (CBDCs). Such a venture is presented as a protective measure for the consumer, offering a cost-saving possibility as private banking intermediaries are cast aside. It also allows central banks a new and intriguing tool for policy-making. It can be seen as beneficial that certain middlemen are removed, but there’s only a single contender waiting on the other side of ledger – an ever-exploring government capable of monitoring every transaction made.
Presently, the proposal revolves around central banks like the Bank of England releasing a digital version of their currency, essentially making it a direct claim on the bank itself. In this case, claims would transpire similarly to how cash currently operates. It would be a significant departure from the current system where central banks don’t allow for direct deposit accounts and consequently, a private banking system exists as an intermediary between the central bank and the accounts belonging to industries and individuals.
While it appears promising, the claims that central bank digital currencies will cut unnecessary costs are slightly contentious. The drives for efficiency can be illusory and harmful. Intermediaries such as agents, aggregators, and monitors are crucial stakeholders operating across thousands of markets. They aren’t relics of a bygone era that can simply be dismissed.
Rather, these middlemen often add value through competitive pressures that motivate them to offer more than just minimal services, such as innovative banking products. Eliminating these key players stifles competition and can cause the market economy to stagnate.
Additionally, a system involving CBDCs might leave confidential information vulnerable to an anonymous government entity that has its own prerogative and could misuse the gathered data. With the removal of the private banking sector, the protections that currently shield individuals against government interference and overreach are also eliminated. Cash transactions and bearer instruments are untraceable by state entities, but digital transactions are.
A shift to CBDCs can also afford central banks, who have little competition, the capacity to direct funds such as personal loans and mortgages toward their chosen entities. This almost certainly breeds potential corruption within state industrial policies. The nightmarish possibilities are evident but preemption proves to be a hard problem.
In recent efforts, the Bank of England propagated the idea of the digital pound as a measure to combat climate change. Therefore, one can argue that the existence of explicit political motives may embolden a state-controlled bank to influence certain energy producers while penalizing others through their bank dealings.
As CBDC’s evolve, favored businesses such as solar and wind power could be unduly enhanced, bypassing the need for private investors or being subjected to the scrutiny of private banking institutions. Literally, bank accounts could be at the mercy of the ballot or bureaucrat, with political targets possibly being denied banking services overnight.
The launch of a digital dollar in the United States was initially proposed as pandemic stimulus to boost the economy. Yet evidence shows that hasty government payments were tremendously wasteful. The same risks prevail now, even as the pandemic eases.
However, the potential for adopting new technologies shouldn’t be overlooked, as long as it’s done appropriately. One way is to view money as a neutral unit of measurement, like inches or kilograms, as mentioned in an article from the Brown Journal of World Affairs.
Further benefits are yielded by a fixed system that can help developing countries with measures for modernization. By integrating a digital currency system such as Bitcoin with a fixed supply, that can ward off devaluation and potentially offer greater benefits than any government-centric system.
Therefore, as enticing as CBDCs may seem for some, the journey to a nationalized banking system carries its own set of dangers that should not be overlooked. It certainly warrants a comprehensive discussion on all facets of this emerging phenomenon in order to ensure the safe and ethical use of this technology.
Source: Coindesk
