A few weeks ago, I wrote a post about CBDCs, focusing on their technical aspects and the benefits they could offer as digital tools. In this new post, I want to explore a comparison between their potential advantages and risks, depending on how each country uses them. I always emphasize that technology is neither inherently good nor bad—its impact depends on how it is employed and the intentions of those who control it.
Central Bank Digital Currencies (CBDCs) represent a significant shift in the global financial system, but they also come with risks and challenges. Depending on the country’s approach, they can either enhance financial systems or become dangerous tools of control. Below, I explore two scenarios: one in a democracy using CBDCs to boost the economy, and another in an authoritarian regime employing them to limit freedoms.
Scenario 1: CBDCs in a Stable Democratic Society
In a stable democracy, CBDCs can offer benefits such as faster payments, financial inclusion, and increased transparency. Imagine a developed country where citizens adopt digital currencies to make real-time payments without intermediaries. Governments could also use CBDCs for direct stimulus transfers to individuals during economic crises, as seen during the pandemic.
In this scenario, CBDCs strengthen the economy by reducing tax evasion, streamlining commerce, and improving cross-border payment efficiency. Additionally, the traceability of transactions helps combat corruption, making the digital currency a tool for social good without infringing on individual freedoms.
Scenario 2: CBDCs in an Authoritarian Regime
On the other hand, in the hands of an authoritarian regime, CBDCs can become instruments of mass control. Imagine a government tracking every citizen’s transaction and limiting their ability to spend. For example, authorities could impose restrictions on buying certain goods, like meat, or block investments in cryptocurrencies or foreign stocks.
Further, programmable smart contracts could enable automatic sanctions. If someone participates in a protest, the government could freeze their funds instantly. In such regimes, CBDCs would pose a severe threat to privacy and individual freedom.
Other Potential Risks of CBDCs
- Loss of Privacy: Unlike cash, CBDC transactions can be monitored in real-time, leaving a complete digital trail.
- Bank Disintermediation: If people hold money directly in central bank accounts, commercial banks may lose deposits, affecting their ability to issue loans and support economic stability.
- Programmability: Governments or central banks could block specific transactions automatically. For instance, they might restrict the sale of certain goods to align with environmental policies.
- Limitation of Economic Freedom: CBDCs could be used to enforce consumption patterns or implement restrictive monetary policies more aggressively.
While CBDCs offer benefits like efficiency and transparency, they also bring significant risks if not implemented with proper safeguards. Their impact will largely depend on the legal frameworks and policies of each country. In democracies, they can be tools for development, but in authoritarian regimes, they may become instruments of control.
Finally, even though CBDC programmability enables precise control, it also raises questions about how much influence the state should have over individual spending habits and personal choices. In my view, this is a complex dilemma that may never have a definitive answer in our world.