Have you heard about CBDCs yet?

CBDCs, short form for Central Bank Digital Currencies, are a type of digital currency issued by the central bank of a country, whose value would be pegged to the fiat currency of the country (dollar, rupee, euro, etc.). This technology is being developed by a number of countries, to be implemented in the near future. So I think we talk about it.

CBDCs can be divided into two types, namely, wholesale CBDCs and retail CBDCs. Wholesale CBDCs would be for financial institutions to hold as reserves with the central bank, for simpler money flows and reducing counterparty risk. Retail CBDCs, on the other hand, would be issued by the central bank for the general public. This would help with efficiency and trackability.

In most countries, a percentage of the population doesn’t have access to proper bank accounts, and a percentage of people hence have to rely on costly alternate options like loan sharks, payday loans, etc. So, governments want to create CBDCs to give consumers and businesses both, increased accessibility, convenience and security.

CBDCs almost take out, or at least greatly reduce, the risk of volatility, which can be associated with all the cryptocurrencies (the other form of digital money being used right now). Crypto in its current form cannot be used as a regular mode of financial transactions due to less awareness, less adoption and the high risk it poses to household savings in the form of daily volatility.

CBDCs would also help with cross-border transactions, by making remittances faster and cheaper. Illegal activity would also reduce if cash is completely done away with and CBDCs are the only mode of transactions made legal in a country.

But, despite all of the things CBDCs bring to the table with them, there are a few things we should be concerned about. As I said, traceability would improve, but in other words, that means all your transactions would be visible to the central bank if they choose to see it.

Sceptics also talk about the fact that if there is no option to hold physical cash, and the only money possible is a digital, programmable one, it can be set up to have negative rates when the economy needs a boost. Negative rates basically mean that you would have to spend some percentage of your money, and if you fail to do, that money will “expire”.

And programmability poses a problem, since the money can be programmed according to whoever is making the rules. Apart from the expiring money, just as an example, things could eventually come to a point that if your ESG score falls too much you lose some money. Also, if sending money to citizens is as easy as pushing some buttons, inflation can get out of control very fast.

Now, most of the modern financial systems are based on trust, trust that banks wouldn’t get greedy and blow up in the process, trust that your government won’t one day stop working or fall, you get the idea. Everything is well and good until those in control have good intentions and are working in the favour of the public. But with CBDCs, recklessness or incompetence by those in control would be felt by everyone much faster. Keep in mind, CBDCs won’t just be thrust upon us suddenly. They would be launched and tested in phases over some years hopefully, so we have some time to prepare. What you can do to prepare is, buy physical assets like precious metals, land, houses, etc. which would hold value even if stones are used as currency.

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