CBDC: What Are the Biggest Risks of Using Central Bank Digital Currencies?

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Great promises are placed in Central Bank Digital Currencies (Central Bank Digital Currency, CBDC). Revolutionizing money, eliminating cash, preventing crime, enhancing financial inclusion, and promoting efficiency are just some of the frequently mentioned benefits. This ‘promising’ new product is essentially digital money issued by a central bank, pegged to the country’s fiat currency. In other words, it is a banking stablecoin.

According to the Atlantic Council, 114 countries representing over 95 percent of global GDP are exploring CBDCs, with as many as 60 countries in advanced stages of research.

In 2023, more than 20 countries plan to take significant steps toward implementing CBDCs. Australia, Thailand, Brazil, India, South Korea, and Russia intend to continue or start pilot testing this year. The European Central Bank is also likely to launch a pilot project next year.

According to Juniper Research, the value of payments via CBDCs will reach $213 billion annually by 2030. This value currently stands at $100 million in 2023. That is an increase of 260,000 percent in seven years!

For governments, the message is clear – no cash, no organized crime. However, a cashless world also means no personal privacy. For governments, this may not be a big deal, but for the rest of us, it should be a major concern and the most important priority.

According to the International Monetary Fund (IMF), CBDCs could ‘accumulate sensitive payments and user data on an unprecedented scale.’ However, this data could be used to spy on citizens’ private transactions, obtain security-sensitive information about individuals and organizations, and even for stealing money. If the IMF is concerned, then we should all be worried.

And privacy is not the only thing that CBDCs could eliminate. The freedom to buy, sell, and travel could be restricted by this technological infrastructure. In theory, the central bank or government would have all the tools necessary to ‘turn off’ someone’s ability to spend money. This type of programmable money should concern everyone.

It is hard to find advantages alongside the many concerns that are not just conspiracy theories but grounded facts.

Loss of privacy, reduced financial freedom, cyber risks, and worsening financial inequality are the biggest risks of CBDCs.

Loss of Privacy

One of the most significant dangers of CBDCs is the potential loss of privacy for users. Unlike physical cash transactions, which can be anonymous, digital transactions can be easily tracked. This means that governments could have unprecedented access to citizens’ financial data, leading to concerns about surveillance and the erosion of financial privacy.

With the ability to track digital transactions, governments may be tempted to use that information for citizen surveillance, leading to potential abuse of power. This could include monitoring political dissidents and whistleblowers or simply tracking the spending habits of ordinary citizens.

– CBDC can allow government agencies and private sector players to program targeted rule functions. By programming CBDC, money can be precisely directed to what people can own and what people can do – stated Bo Li, Deputy Managing Director of the IMF.

The potential for abuse raises serious concerns about the infringement of privacy rights in a digital currency environment.

In addition to government surveillance, CBDCs could expose users’ financial data to third parties, such as corporations or advertisers. This could lead to leaks of personal financial data as companies seek to exploit that information for targeted marketing or other purposes.

Reduced Financial Freedom

Aside from privacy concerns, CBDCs could undermine financial freedom. With the potential for increased government control over financial transactions, individuals’ ability to conduct transactions could be limited.

CBDCs could facilitate the government’s freezing or seizing of assets. Freezing physical cash assets requires a court order, but CBDCs could simplify that process. This raises concerns regarding due process and individual property rights.

Federal Reserve Governor Michelle Bowman argues that this type of control could lead to the politicization of how money is used.

– A CBDC that would allow this type of control not only has the potential to enable the government to restrict certain types of private spending or limit access to bank accounts, but it could also threaten the independence of the Federal Reserve – said Bowman.

Central banks could also more easily implement negative interest rate policies, effectively punishing savers and forcing them to spend or invest their money.

U.S. Congressman Tom Emmer believes this could deeply impact individual financial decision-making and autonomy. He argues that CBDCs represent government programmable money that can easily be turned into a surveillance tool.

Cyber Risks of CBDCs

The digital nature of CBDCs makes them more susceptible to cyberattacks. Japan’s Deputy Minister of Finance for International Affairs Masato Kanda considers cybersecurity one of the main challenges facing CBDCs.

Hackers could target the central bank or individual user accounts, potentially causing widespread disruptions in the financial system.

A successful cyberattack on CBDC infrastructure could lead to systemic risk, resulting in a loss of trust in the currency and the broader financial system. This could have serious economic consequences as trust is a fundamental component of a functional financial system.

Cybercriminals could also direct their attacks at individual users. They may exploit security vulnerabilities or use social engineering techniques to gain access to accounts. This could lead to significant financial losses for victims and undermine trust in digital currency.

Worsening Financial Inequality

The implementation of CBDCs could exacerbate financial inequality by increasing the digital divide. Not everyone has access to the technology needed to use digital currencies, such as smartphones or reliable internet connections. This could disproportionately affect low-income communities and rural areas, leading to further financial exclusion.

While some advocates argue that CBDCs could promote financial inclusion, they may leave behind those who are already marginalized.

The Deputy Director of the IMF stated that ‘if poorly designed, CBDCs could pose risks to financial stability.’

Individuals without access to digital devices or internet connections could find themselves at a significant disadvantage. They may be unable to participate in the digital financial ecosystem.

CBDCs could also foster dependence on technology for accessing financial services. In the event of technical failures, natural disasters, or other disruptions, this reliance on technology could leave vulnerable populations without access to their funds and increase existing financial inequalities.

The transition to CBDCs could also negatively impact small businesses and economies that primarily use cash. As digital transactions become the norm, businesses that rely on cash transactions could face challenges.

Small businesses may encounter increased costs during the transition to digital payment systems, including hardware, software, and transaction fees. This could further financially burden businesses struggling to compete with larger, more technologically advanced companies.

Is CBDC the Next Iteration of Money?

While many central banks are exploring and considering the development of CBDCs, a final decision has yet to be made in many regions, including the U.S. and the EU. The future of CBDCs depends on thorough analysis and consultation with key stakeholders to ensure that the benefits outweigh the risks.

As technology advances and the demand for digital financial services grows, the idea of CBDCs is gaining increasing attention. However, the path to widespread adoption remains uncertain, and policymakers must consider the potential consequences of implementing CBDCs.