Introduction
CBDC, or Central Bank Digital Currencies, are starting to make news headlines, twitter posts, and finance discussion boards. What exactly is a CBDC? What separates it from Bitcoin? Are we seriously going to introduce another crypto coin? Well, no, while they may resemble digital crypto currencies, they are vastly different beasts. They combine the digital ideas put forward by Bitcoin with the agenda and motives of a central bank issued currency such as the US Dollar, Euro, or Chinese Yuan. However, as you’ll read below, there are some nasty little catches that come with these that may have you thinking twice about them as they offer an element of control and surveillance never before seen.
CBDC Definition
A central bank digital currency is a digital form of money which is issued and controlled by the authority of the central bank. In simple terms, its your nation’s current form of money or currency, but made digital instead of on paper. So if you live in the United States, this is the U.S. Dollar made into digital form which is issued, tracked, taxed, and controlled by the Federal Reserve. It will not exist in a physical form, and likely not be convertible into a physical coin or paper form.
How are they Different Than Bitcoin?
A CBDC is vastly different than Bitcoin. While digital and online, this is about where the similarities will end. A CBDC will be issued by a central banking authority and the network on which they run will also be centralized and secured by the same authority. On top of this, the monetary policy and issuance will be dictated by the central bank and of course, be flexible per the economic needs of the country. Lastly, the network protocol will likely not be done through a proof of work mechanism, or mining, like the one used by Bitcoin. This will mean the energy intensity of the network should be next to nothing when compared to Bitcoin’s monstrous daily energy consumption.
So as we can see, there will be very little in common between the two. If you would like to learn more about Bitcoin and how it stands in contrast to the points above, read my article on why you should consider buying some Bitcoin.
Current CBDC Examples
As of right now, no country has officially launched a central bank-backed digital currency, though China is very close with their digital yuan. However, many nations have launched pilot programs and research projects to determine the feasibility of such digital currencies.
The race towards Digital Money 2.0 is on.
~Citigroup
The Bank of England was the pioneer to initiate the CBDC proposal. Following that, most other central banks have followed, like China’s People’s Bank of China, Bank of Canada, and the central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore. It is currently estimated that 86% of the world’s central banks are exploring digital currencies.
Interestingly enough, the United States is late to the game. However, if we stand back, it makes some sense seeing as they hold the global reserve currency with some 44% of all transactions being done in USD. So why mess with a good thing? However, with the rising threat of China’s digital currency, their hand will be forced in order to maintain this dominance.
The latest information as of April 20, 2021, has the Federal Reserve launching a pilot project with MIT to explore the possibilities and implications of such a currency. Of course, we need to see that the USD has a steeper hill to climb given the current global reliance on the dollar, and the national political landscape. They have so much to lose if it is rolled out wrong.
On top of those listed above, Russia has been moving forward with its creation of the “crypto-ruble,” announced in 2017. It is speculated that one of the main reasons for their interest is that transactions are encrypted, and thus easier to discreetly send money without worrying about sanctions placed on the country by the international community.
CBDC Possibilities & Use Cases
The following list of use cases for a CBDC is by no means exhaustive or even guaranteed to be implemented. In fact, I hope the great majority of them will not be implemented. They simply outline what could be possible or improved upon by virtue of a country’s currency being issued, held, and spent in a digital format.
Instant Data & Monetary Statistics
Collecting detailed accurate monetary statistics is a painstaking process which usually lags the active economy by 1-2 months. Through a digital currency, central banks could tally statistical information daily and be confident in the accuracy of the reports.
Where is money being spent? – Where are consumers spending their money today, yesterday or over the last 30 days? Which sectors of the economy are suffering and which merchants are doing well?
Where is money being earned? – After each payday, the income and taxes could be quickly tallied across the country. Do the expenditures of a given citizen match their income? If not, why not? Where could the extra income be sourced from? How much debt do they carry and how much are they spending on interest payments?
Improved ability to track illegal activities – The central bank could employ the use of AI to predict and track illegal activities. Because this is such an obvious use case, criminals will resort to other means of exchange.
Controlled Spending
Incentivize certain spending patterns – If you would like to incentive spending on certain items or services that are clean, green, healthy or otherwise productive, you could increase the purchasing power over baseline. For example, if you buy a gym membership, your dollars are multiplied by 1.5X or you could could issue every citizen a portion of “Health Dollars” that can only be spent on exercise.
Prevent spending on certain goods – Essentially do the opposite of the above line item by reducing the purchasing power, increasing the tax, or allocating only a certain amount for each citizen.
Buy local discount – Promote buying local by increasing purchasing power within a certain radius of your mailing address. So within a 100 mile radius of your home, certain products will be cheaper; or if you buy in person within a certain radius the products are cheaper. Would also help with buy American while penalizing goods from a specific country.
Dollar Expiration
Stimulate economy with dollars that expire in 6 months – With everyone’s collective experience of the COVID-19 pandemic and stimulus money, I think you can see where this type of policy would be used. It would have strongly incentivized people to buy goods and services instead of speculating this money into the stock market. If you don’t spend it by a certain date, the money expires; and make it ineligible to buy marketable securities.
Prevent saving – With money that expires, people will be more likely to spend them and exchange them for a good rather than saving them only to have them expire and vanish. Merchants could then redeem the expiring money for durable currency, or pay down debt.
Confiscation – Nasty, but possible. The government could confiscate your money with just the click of a button. They could also confiscate their issued currency if held in a foreign wallet or bank.
Personalized Monetary Policy
Improved taxation on all movements of money – It is no secret, that governments love the movement of money. For each time money changes hands, there is the opportunity to tax it. With every single transaction passing on their blockchain network, they can tax it. So now, tips, cash deals, off the record transactions, and the like are all tracked and therefore more accurately taxed. Anything that moves on their network can be taxed.
Sales tax based on last income tax return – Another ability the government will have it to adjust and personalize the sales tax you pay depending on your previous tax return. Why not make the wealthier pay more sales tax, while the poor do not? You could also tax the sale of used items between private citizens.
Income tax rates scale based on net worth – While we’re adjusting the tax rates based on previous income tax returns, why don’t we also scale it based on net worth?
Improved ability to tax online spending – With increased spending through online retailers, it is getting increasingly difficult to tax these correctly. Through digital currencies, this could be much simpler and much more accurate. Taxes could be collected by where the buyer is located and immediately funneled to the government instead of going to the merchant first.
Programmable Money
Again, the above use cases and possibilities are just ideas of what could be possible through digital currencies. As some infringe on privacy and personal rights, I’m certain (and hopeful) only a handful of these get implemented.
However, this is what is possible when you take money and make it programmable. Money becomes personalized per your needs and opportunity; it becomes customized for each citizen.
Conclusion
To many, wealth symbolizes the freedom to do what you want when you want to. Much of what we have spoken about today seem to restrict, control, and monitor this freedom. So, it comes as no surprise that the nations pushing their digital currencies forward are those with centralized governments.
In the end, I believe all nations will eventually issue a digital currency. However, just like how income tax was introduced, once a government gets a taste, they never go back.
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