Beware of the CBDC Temptation

  • Central Bank Digital Currencies (CBDCs) are the preferred transaction system of central banks.
  • The general population remains sceptical of CBDCs.
  • Creative ways to market CBDCs will be undertaken, including universal basic income.

Myth

Sirens are mythological creatures who used to lure passing sailors with the beauty of their song. Their song was said to be so pleasant as to even charm the winds. Once sailors succumbed to the call of the sirens, they would be murdered by these creatures, who were half woman and half bird. Following a warning by the sorceress Circe, Odysseus had his crew tie him to the mast of his ship and block their ears with wax so that he could hear the sirens’ song without falling in their trap. If someone managed to resist their song, the sirens would perish.

Much like sirens, the world’s central banks will begin an alluring marketing campaign for central bank digital currencies (CBDCs). They will try their best to make it appear safe, convenient, cheap and even fun and edgy. They will create all sorts of incentives to attract people away from anonymised transaction systems like Bitcoin. Like Odysseus, Bitcoin users will have to resist the allure of short-term incentives in order to preserve their personal liberties.

Nightmare

A CBDC is a digital currency issued by a government. It is the digital representation of fiat and centrally controlled. Despite efforts to make CBDCs appear similar to Bitcoin, they are its complete opposite. Bitcoin is designed to preserve privacy by establishing an anonymised digital transaction system without any central authority or intermediary. CBDCs, on the other hand, are centrally controlled by design. Governments will have full knowledge and control over everyone’s assets. A wrong opinion, a false accusation or a mistaken identity could all lead to the automatic freezing and seizure of one’s assets. This is a direct threat to personal liberties and there exist no legal guardrails strong enough to protect people from such a system.

There is growing enthusiasm for CBDCs among the world’s central banks. A 2021 survey by the Bank of International settlements (BIS) found that 86% of the central banks it had surveyed were working on a CBDC project. CBDCs enable central banks to have total control over an economy. CBDCs would allow central banks to print, or airdrop, money at will. This money could have an expiry date and could presumably also be removed from circulation at the touch of a button. To resume this nightmare scenario, governments would know what everyone held and then distribute and redistribute according to what they thought was best. They could create new currency even more easily than now, seize money whenever they wanted, make money expire and destroy any privacy in financial transactions.

Reality

2022 has witnessed an acceleration of CBDC-related projects. In the most recent Winter Olympics, China carried out another pilot test of its CBDC, the e-CNY or digital yuan. Users who converted significant amounts to e-CNY were offered gifts such as wearable devices that would allow them to spend their newly acquired CBDCs. During the trial, it was reported that the e-CNY had, at times, even overtaken Visa as the preferred payment method.

Nine countries in the world have already launched a CBDC. Nigeria has the e-Naira and the other eight countries are in the Caribbean. About a dozen African countries, apart from Nigeria, are also considering CBDCs. India, for its part, is considering a CBDC as soon as this year while the European Commission is planning to propose a digital euro in early 2023. In the US, the Federal Reserve published an initial paper regarding a digital dollar and is carrying out trials that could handle 1.7 million transactions per second in a test called “Project Hamilton”. As the Federal Reserve admits in its paper, a system where individuals would hold accounts with the Federal Reserve “would represent a significant expansion of the Federal Reserve’s role in the financial system and the economy”. This may explain the widespread enthusiasm CBDCs elicit among the world’s central banks.

Selling Dreams

From the available poll data, the general population still seems very sceptical of CBDCs. An August 2021 poll by Politico found that only 24% of the British population thought a CBDC would be more beneficial than harmful. 70% of respondents worried that they would lose privacy in their transactions and 62% worried about the government’s ability to seize their assets. The same poll found that 40% of respondents, instead, would welcome the full legalisation of digital assets like Bitcoin. In Germany, a similar poll found that only 2% of respondents were “definitely” in favour of a digital euro. A plurality were “definitely not in favour” of a digital euro and a majority was definitely or generally against the adoption of a digital euro.

At the same time, there appears to be growing enthusiasm for Bitcoin and other cryptocurrencies. As Politico put it, “Bitcoin and other cryptocurrencies are going mainstream, but the European Central Bank wants you to love the digital euro the most.” The central banks’ charm offensive will grow and intensify, as they prepare to roll out CBDCs. This promotional strategy will include arguments regarding efficiency, convenience, safety and cost. It will also include macro arguments regarding financial inclusion, financial stability and innovation.

They will probably also resort to promotional tactics like giving out high-tech gifts as China did with the e-CNY during the Winter Olympics. They might also recruit a raft of beloved public figures to extol the virtues of CBDCs on a range of television, print, radio and online outlets. By blurring the lines between CBDCs and cryptocurrencies like Bitcoin, they will try to benefit from the grassroots popularity of Bitcoin. Finally, as part of their marketing arsenal, they will deploy the ultimate weapon - free money. Similarly to some crypto projects, they will perform a public airdrop. This may be a one-off payment or a recurring payment in the form of universal basic income. Free money will provide the ultimate incentive for people to adopt CBDCs while giving central banks the tools they desire.

Conclusion
If enough citizens follow Odysseus’s example and tie themselves to the mast of Bitcoin, there will ensue an epic battle between Bitcoin and CBDCs. The electorate will put pressure on elected officials to enact pro-Bitcoin legislation while central banks will push for CBDCs. It will not be an easy fight, but, as central banks operate under the purview and mandate of legislative bodies in democratic countries, electoral pressures should eventually triumph.

Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.

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