A sober and enthusiastic view on Central Bank Digital Currencies

It goes without saying that the world is changing. I mean, the mere fact that it is now considered a norm to work from home, study from home, and even for many to shop for all groceries right from home show that the world as we know it will never be the same. This transformation to digital technologies creates a major gap that Central Banks of the world would like to fill. The motivation behind this is exercising control and ensuring sovereignty, as most of the digital payment systems currently filling that void are controlled by private entities whose interests might or might not always align with those of Central Banks and governments of the world. Hence, where we are now, governments are looking at creating their own sovereign currencies that are digital and should be used just as paper currencies. There is, however, a difference between the two: digital currencies will never be the same as paper-based currencies, although issued by the same entity. This article will try and look at some of the implications of this move by governments and how it will affect Privacy, Control, and the public-private relationships between governments and various Information and Communications Technology (ICT) stakeholders as there will be no successful implementation of Central Bank Digital currencies (CBDCs) without a well established and lubricated relationship between these two entities.

In terms of Privacy, the two main issues are that of ensuring that individual currency holdings are not always fully known but also that of not fully knowing what and where individual spending is made. A simple illustration would be that currently if individuals owning bank account might have their information known at their specific commercial bank, government most often only have aggregated spending information on individuals which is not always as detailed as knowing your last purchases of sweets for your son, daughter or niece or even yourself and this is even harder in the case where one uses literal paper money. On that point, I think we can all agree that moving to digital currencies will have a tremendous impact on Privacy. Central Banks, though trying to the best of their abilities to provide all the privacy they would want to provide, will quickly realize that it will not be the same as you would have if you were to hold a stash of fiat money under the couch at your house. In the one instance, once a coin and paper money leaves the minting or printing venue and gets distributed, it is very difficult for government to keep tabs on where it lands and how it will be used - or even how much one individual is holding. On the other side, this will not be a similar scenario if we compare to how much the government will know about what individuals hold on their CBDC wallets and how they go about spending it. It is without a doubt that there will be more visibility on individual holdings and spending under the CBDC era than currently. The question of knowing whether this is good or bad might be one we can discuss another day, however it is still a pertinent one.

When looking at Control, my personal view is quite distributed. I used “distributed” for a reason. We can all agree that the creation of distributed technology and currencies such as Bitcoin planted the seed in governments’ minds that something has to be done to the financial sector which was highly antiquated and did not change much for at least four decades. These technologies and their decentralized nature woke up governments (I have a feeling that many governments have been sleeping on duty) as they can to some extent represent a potential threat to countries’ sovereignty and the level of control governments have over their internal financial affairs. The creation of CBDCs might, in a sense, offer governments a framework within which they can keep tabs on what is happening in their economies.

The last point of this article looks at the public-private relationship. It is without a doubt that there needs to be a well established public-private relationship between governments and the ICT stakeholders, the reason being linked to the fact that government on its own does not have all the necessary capabilities to fully control CBDCs at all levels. Let’s put it in perspective: Say government employs a blockchain company to create its CBDC. They will create the platform, discuss about the protocol to be used and many other variables, however, how will the created digital currency reach its intended users? Few things comes to mind, including network infrastructure, settlement entities, actual devices where users will have their wallets, etc. All these elements will need to work in tandem to achieve communication with existing and established systems and many others, hence government will not be the only player here. There will be a need to partner with network operators for providing network support, sometimes mobile phone manufacturers or even services providers such as PlayStore or AppStore where actual mobile applications for their CBCDs have to be hosted to be accessible to its intended users. As we can see, cooperation among government and private sector will be the only bonding glue to achieve a successful CBDC deployment which will fully fulfill its intended use case.

In conclusion, this space is heating up and exciting are the days ahead of us, but unlike in times where most infrastructure were built in silos, this next world will require not only government but private entities, businesses and common individuals as you, the reader, and myself to work with one another to build solutions which will ensure that a perfect balance of Privacy, Control and Cooperation is achieved. Please let me know what your thoughts on this topic are by leaving a comment.

Thanks for taking the time to read this article and see you on the next one. Whether you like it or not, CBDCs are upon us!