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Crypto Is No Substitute for Cash. Enter CBDCs

It’s only (digital) money

The rise of cryptocurrencies, declining use of cash, and emergence of stablecoins have led governments worldwide to consider issuing their own forms of electronic money. Those efforts have picked up momentum lately, with India announcing this month that it will issue a digital rupee by early 2023 and China testing its digital yuan at the 2022 Beijing Winter Olympics. And they raise fundamental questions about money and what consumers need from it.

Cash has survived for thousands of years because it’s convenient as a means of payment, relatively safe and also preserves people’s privacy. Crypto advocates aim to elevate that anonymity to the digital realm while wresting control from central banks (though transactions are often traceable back to individuals). But not even Bitcoin is widely accepted enough to be useful for payments. Stablecoins, which are typically pegged to a hard currency like the dollar, seek to address those issues but create inefficiencies and risks elsewhere in the financial system, for instance by unnecessarily tying up liquidity.

Are central bank digital currencies the answer? On the surface, they appear similar to the electronic money we keep in our bank accounts and spend on our smartphones. The key difference is the absence of a commercial bank intermediary — CBDCs are a direct liability of the government, like cash. In places where financial instability is a threat, such a safe form of electronic money can be appealing.

There are other benefits. In Europe, payments are largely handled by foreign, private service providers, placing a range of activities at the behest of potential protectionist policies, as sanctions and even exclusion from payment systems in recent years have shown. A digital euro would allow the economy to keep running in those situations. There are also benefits for quickly increasing access to payments, as the Eastern Caribbean Central Bank demonstrated last year when it expanded its Dcash to Saint Vincent and the Grenadines following a volcano eruption. And China’s efforts to roll out the digital yuan are in part a response to the threat of large technology firms dominating payments, which could magnify issues such as abuse of market power, ownership of critical data and illicit activities.

CBDCs have challenges, though. For one, they risk cutting out commercial banks, a vital funding source for the economy, which is why many central banks are discussing capping how much digital currencies can be held by users. Insufficient technological infrastructure in developing countries could also contribute to financial exclusion if CBDCs became widely used. Also, and perhaps most worryingly, CBDCs open up avenues for government surveillance, as well as increased vulnerabilities to cybersecurity risks.

How central banks go about mitigating these risks will be crucial. But one can’t be blamed for hoping that CBDCs might in the end make the world’s financial plumbing cheaper, safer, faster, and more reliable — an area where cryptos and stablecoins have yet to completely prove themselves. 

It’s a very idealistic technology. The idea is good, the theory is good, but in practice it’s rubbish.

Expert on computing and social responsibility at De Montfort University in Leicester, U.K.

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