Rise of CBDCs - Revolution in Digital Currency or Threat to Personal Freedom?
Abraham George Crypto Musings
CBDC (Central Bank Digital Currency) is the topic of discussion for this article. If you live in a first-world country or any major city in developing countries like India or Brazil, chances are that you already conduct 80 to 90 percent of your financial transactions digitally. CBDCs have become a major talking point, with around 115 countries involved in some form of introducing a CBDC. So let's delve into what a CBDC is.
Simply put, a CBDC is a digital version of a national currency that is under the control of a country's central bank and federal government. Unlike cash transactions, every transaction with a CBDC can be tracked and taxed. If all bills and coins are removed from the system and the central bank guarantees all transactions using their digital currency, it should theoretically increase tax revenues significantly and clamp down on tax evasion. This is a big incentive for every government to roll out a CBDC.
Using a CBDC can make money transactions simpler and safer. While most of us are already used to mobile payments, using a CBDC will be no different. A central bank-backed digital wallet will also make it easier to distribute stimulus or any other benefits to the population. Stimulus or handouts can be earmarked for specific purposes, for example, money meant for purchasing fertilizers for farmers can be used only for that. Similarly, stimulus meant to offset an increase in electricity prices could only be applied to an electricity bill.
A well-designed CBDC has its benefits and applications. Take, for example, the Paycheck Protection Program (PPP) that was introduced during the COVID lockdown. It is estimated that around 15 percent of those funds were distributed fraudulently. Billions of US taxpayer dollars were incorrectly funneled or distributed, which has come at a huge cost to hardworking and tax-paying US citizens. Similar situations have occurred in many other countries.
However, if not used properly, this technology can take away our freedom and personal rights in many ways. For example, in Canada, citizens who peacefully protested for an end to "mandates and lockdowns" were "de-banked" by the government. A supposedly democratic country seized their bank accounts simply for protesting. This is the fear and concern that many should have. A CBDC can have centralized control of a nation's money, which can give enormous power to governments to punish their own citizens for having unacceptable views and not walking the government line.
As of now, three countries have introduced full CBDC, namely Bahamas, Jamaica, and Nigeria. While the European Union, the UK, India, Brazil, and Japan are fast-moving toward the introduction of a CBDC, many of them are already in pilot projects. China has been the leader in this space for years and officially introduced it during the Winter Olympics in Beijing last year in a controlled way. Since then, they have scaled up in a big way by using the popular Chinese social networking application WeChat to integrate the CBDC.
WeChat is everything rolled into one. It facilitates messaging, video calls, peer-to-peer payments, food delivery, e-commerce purchases, and many more. By integrating with China's CBDC, WeChat can bring in a billion users under the viewership of the government. Using the CBDC through WeChat will look and feel just like using any other form of payment or currency. Consumers won't notice any major changes, but it will act as a Trojan horse for the government. Very soon, the digital Yuan or eCNY will be used nationwide, making China the first largest economy in the world to roll out a CBDC to its whole population. Once adoption nears 100 percent, China will be able to remove all bills and coins from the market and gain complete control and surveillance over every transaction within its borders.
It is very likely that in China, the use of CBDC will be tied into the social credit scoring system that they have been using to "incentivize" desired behavior. Having control over every individual in how they use money means control over your way of life. This is surely a scary development for anyone who values freedom and autonomy, especially those who live in a democratic country.
The World Economic Forum (WEF) has also been talking about a similar system but on a global scale. It is hoped that the rest of the world doesn't go down that path. In the US, Senator Ted Cruz and Florida Governor Ron DeSantis are all out to bring laws and efforts to squash financial surveillance state initiatives. In fact, Congressman Tom Emmer has introduced a bill prohibiting the Fed from issuing a CBDC directly to individuals. Emmer has been a big advocate that the US digital currency should protect financial privacy, maintain the dollar's dominance, and cultivate innovation.
In the US, the FedNow program is announced to be instituted by July 2023. It enables real-time transfers of digital dollars between financial institutions. Could this be used at an institutional level to avoid bank runs? As we understand it, a CBDC wallet would prevent bank runs. It wouldn't be surprising if policymakers use this as an argument to "sell" this idea to the public.
In conclusion, while a well-designed CBDC has its benefits and applications, we must also be cautious of the potential negative impacts of this technology. As governments and central banks continue to explore and experiment with CBDCs, we must ensure that we strike a balance between the benefits and potential drawbacks of this technology and that we preserve our freedom and autonomy in the process.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.