If the development of blockchain technology was a financial revolution, central bank digital currencies (CBDC) are a counter-revolution. Their development intensified in 2023 around the world, and now it is more important than ever that the world knows what may be behind this acronym.
While there are those who believe that central banks can be trusted, the facts speak against them. This technology would give central banks unprecedented control, could pose a serious security risk, and is also completely unnecessary.
If you understand blockchain, you also understand the privacy risks associated with government-issued digital currencies. Every detail of every transaction would be available to state regulators such as tax authorities. In the case of the UK, the tax authority would not need any additional legal powers to investigate all the details of each CBDC transaction.
One might say that these powers will not be used. However, these investigative powers not only exist, they are used and abused. Take the Powers of Investigation Act, introduced in the UK to combat terrorist threats. Soon local councils began using the new powers to spy on people walking dogs, feeding pigeons and dumping garbage.
Related: British think tank launches crusade against ‘surveillance’ CBDCs
It is also a big assumption that state regulators will be able to keep CBDC information confidential. In the UK, state agencies lose data all too often – accounting for 54% of all data breach fines. Not long ago, HM Revenue & Customs managed to lose the records of 25 million taxpayers.
But the threat from hackers is also significant. Centrally collected data will be a huge trap for hackers and hostile states that support them.
As the director of the UK’s cyber intelligence agency, Government Communications Headquarters, commented, the CBDC “gives a hostile state the ability to oversee transactions. It gives them an opportunity […] to be able to exercise control over what happens in these digital currencies.” Obtaining CBDC data would be tantamount to hitting the bull’s eye for hostile countries. We can also assume that hacking won’t be their only approach. For example, a recent congressional investigation revealed that Chinese agents attempted to infiltrate the US Federal Reserve.
Unelected bureaucrat declaring willingness to trade your right to financial privacy for surveillance-style US CBDC https://t.co/TKqpTtCNWQ
— Tom Emmer (@GOPMajorityWhip) March 3, 2023
CBDC can also be programmed to meet various government goals. Some central bankers want to use CBDCs to conduct monetary policy by imposing negative interest rates by withdrawing funds from CBDC accounts. Taxes could be levied at the time of the transaction, and purchases of certain items could be prevented or restricted to support rationing. The possibilities for increasing government control are endless.
The key question asked by the House of Lords Committee on Economic Affairs in a fascinating report on CBDC is: What problem are they really trying to solve?
Former Bank of England governor Mervyn King pointed out in the House of Lords earlier this month: “CBDCs are about how payments are made; they are not a new currency. […] What are the problems in our payment system that CBDC can be the answer to?” He concluded: “There are no problems to which CBDC is the only, or even the most obvious, answer. Our payment system is more efficient than most other countries.”
Lord King has revealed the emptiness of the whole drive to create a CBDC. They are little more than a central bank takeover, with the risks far outweighing the benefits, if any.
Proponents of CBDCs argue that they would improve the efficiency of the payment system, promote financial inclusion, and make cross-border transactions easier and cheaper. What they won’t tell you is that all of these features are already being offered to consumers today in the form of fiat-backed stablecoins issued by private companies. Examples such as Euro Coin (EUROC) Circle and GBPT Poundtoken provide many of the same use cases as both wholesale and retail CBDCs for both the Eurozone and the UK.
Related: CBDCs require governments to place a special emphasis on security
Make no mistake: central banks know this. Private stablecoins have already gone mainstream in parts of the world, such as Latin America, where the devaluation of the local currency has led to more than a third of people purchasing with stablecoins. International Monetary Fund economist Eswar Prasad even predicted last year that in regions facing similar problems, “national currencies issued by their central banks […] could be replaced by stablecoins.”
It should come as no surprise that the recent rise of CBDCs around the world has coincided with unprecedented scrutiny of stablecoins and legal action by government regulators.
What can we do? Above all, we need to spread a better understanding of these issues, both among politicians and the general public. Let’s get the facts out. The best way to do this is through an international awareness campaign that takes place before CBDCs take root. This issue is too important to be left to vested interests, such as central banks, to decide.
Konrad Young is the co-founder of Athena Labs, a global Web3 communications agency. He serves as a digital asset advisor to the UK-based Tax Reform Council think tank and its activist unit Cut My Tax, and has worked at the intersection of blockchain and public policy throughout his career. He graduated from the University of Bristol in 2017.
This article is informative and not intended to be, and should not be construed as, legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.