CBDCs: The Risks and Benefits Central Bank Digital Currencies

Hello everyone and welcome back to another episode of Breaking the Dollar. I’m your host Everett Millman and today we are tackling a cryptocurrency-related topic that really strikes at the heart of what this podcast is all about: the past, present, and the future of money as we know it. We’ve covered past money like gold and the gold standard, present money like fiat currencies, and future money such as cryptocurrencies.

In this case, I’m talking about central bank digital currencies, better known as CBDCs.

We will cover what CBDCs actually are, the latest developments in the space, and what this innovation is supposed to be used for.

So in past episodes I’ve discussed the supposed “death of cash” and, separately, how cryptocurrencies work. CBDCs are right at the intersection of both of those topics. Central bank digital currencies are the culmination of years of governments and regulators observing the crypto space and sort of figuring out how to leverage this technology for their own purposes.

The idea of a CBDC would be similar to existing stablecoin cryptocurrencies (for example, Tether), but they would be centrally controlled by the government. Each government that issues a currency could have its own CBDC. It would function as a fully digital version of their respective international currencies.

A central bank digital currency would still be base money; in other words, it isn’t credit and it isn’t the same as the digital balance you see when you check your bank account online. Such an idea would essentially give every individual their own account at the Federal Reserve (or whichever country’s central bank we’re talking about), although there could be a more indirect version where third parties like banks or payment processors still serve as intermediaries.

As of yet government-issued digital currencies may or may not incorporate a blockchain the way most existing cryptocurrencies do. Norway is actually building its CBDC directly on the Ethereum network, choosing to use that blockchain and building upon its infrastructure rather than creating their own from scratch. Brazil’s central bank has outlined a plan to do something very similar with a client on Ethereum. And again, in these early stages of development for central bank digital currencies, the blockchain aspect is apparently still seen as optional.

Nonetheless one can easily imagine that CBDCs will be able to implement crypto-like features that are monetary innovations—so in other words, innovations in the technology of money. For instance the Nigerian central bank’s digital currency, called the e-Naira, is actually programmable. What that means is it can function sort of like a virtual token would in a video game (except this is real money), in that the central bank, like a computer developer would for an in-game currency system, could program rules or characteristics into the digital money as they fit, or to achieve certain ends. Some use-cases or examples of use-cases that have been mentioned by officials in the Nigerian government are to restrict what types of purchases or activities are done with social welfare payments or government subsidies to farmers. That would seem to solve most or perhaps all of the compliance problem in how government funds are spent; it would almost certainly do so far better than the use of government-issued debit cards or vouchers, or other things that have been tried in the past—sort of the “government-coupons” approach to public spending. CBDCs could pretty effectively replace all of that.

There’s a lot to say about the proposed benefits of CBDCs, frankly. And on the whole, I’m mostly critical of them becoming a thing—I’m a critic of their implications or unintended consequences. I will get to my thoughts on that soon, but there are some very clear and very cool benefits that the technology of CBDCs offers. There’s a good reason basically every government on the planet is studying and exploring CBDCs: by my most recent count, there is over 80 different countries, including virtually all of the G-20 nations, the largest and most wealthy nations in the world. So we should stop and examine those positive reasons more first before I get into the bad news.

Another major use for CBDCs would be to more easily facilitate cross-border money flows—that is, the movement of capital across international boundaries, whether in trade or for investment. This is the main focus for the BRICS countries’ interest in CBDCs. To clarify, in case you’re unfamiliar, BRICS is an acronym for the loose alliance between Brazil, Russia, Iran, China, and South Africa. They hold a summit each year where the leaders of those respective countries meet to discuss economic policies and align their strategies in trade and other matters—again, it’s somewhat loosely coordinated. It’s not a binding relationship like the European Union or other supranational organizations like the World Bank; BRICS is really more just a trade bloc, a strategic partnership. But the BRICS have been in the news a lot lately because they might add a lot more members, and they’re the biggest competitor to what you might call the U.S.-led international order, and the U.S. dollar’s status as the world’s reserve currency.

There’s been a lot of discourse around and speculation about the BRICS countries sharing a CBDC—some suggesting it would be backed by gold, but that’s actually been outright denied by officials from several of the member countries. This year’s BRICS summit is actually coming up in a few days at the time of recording, and despite some of the hype it’s exceedingly unlikely that a CBDC will be unveiled at this year’s meeting, let alone a CBDC that is actually gold-backed currency announced. But the idea of a BRICS currency or “BRICS coin” if you will does make some sense based on another possible capability of digital currencies, as it pertains to trade, which is the automatic tracking of data, economic data. This could vastly improve the quality and accuracy of all of that economic data, which addresses one of the largest problems in all of economics: how do we truly measure all the activities people engage in that involve money changing hands? Sure, we have aggregate statistics like gross domestic product (GDP), and of course there are import and export numbers published by governments, but ultimately these are all estimates or projections based on some raw data and mathematical models. If CBDCs can provide a real-time record of all money flows, how the money was spent, etc.—then perhaps it could go a long way to solving the problem of economic measurement, and thereby empower policymakers to adjust their policy tools and approaches in a much more granular way. Theoretically an artificial intelligence or AI could even be trained to comb through the data and identify patterns that might be useful for perhaps supply-chain management or trade negotiations or something like that. It really could revolutionize the way economics and trade work, or even the way that money works.

As cool as all of that sounds, it does lead directly to my main critique of CBDCs. If you’re a skeptic by nature like I am, your mind may have already jumped to what I’m about to say: if digital currencies can be thoroughly tracked and programmed by the issuing government, then that opens the door for central banks and governments to engage in really severe financial surveillance and financial censorship.

You could have all of your funds frozen, or have specific transactions denied due to rules made by politicians. If we take this idea to its logical conclusion, virtually every totalitarian government policy you can imagine, at least with respect to money, could be automated into a digital currency. By some accounts, this sort of thing is already starting to happen in China with the government either providing benefits or restricting the privileges of its citizens based on a “social credit score.”

So on the one hand there are all these really neat breakthroughs and handy features that digital currencies can—and I think inevitably will—offer. It’s simple seems like a matter of time. We probably are looking at a 5 to 7 year time frame for development even as some countries, such as Jamaica, already have a CBDC in operation. Someone that I follow very closely online, John Paul Koning, writes an excellent blog about money called “Moneyness,” and his most recent post suggests that CBDC adoption will only follow a slow and arduous path, and it could come at a major cost of disrupting the status quo of the legacy banking system; so I don’t imagine that government digital currencies will rapidly and easily become a thing in the U.S. or Europe in the same way they’ve done in some smaller countries in the Caribbean, for instance. But as I said dozens of other countries are exploring CBDCs, and it’s not just some academic exercise; there are very good practical reasons why governments would want to leverage for themselves the new technologies and new capabilities that have come out of the crypto space. On the other hand, before we get to the point that CBDCs are fully incorporated into our monetary systems, we as citizens and consumers need to have this conversation about the potential for abuse that will come with central bank digital currencies.

It brings up very fundamental concerns about privacy and liberty. How much control should a government have over its money? I don’t necessarily mean how much de jure control—how much control it has by the letter of the law—but I’m more interested in how much de facto control a government could have. Left unchecked, there is no doubt that a CBDC would eventually be used for increasingly arbitrary or increasingly draconian forms of financial censorship, tracking, and just general invasions of privacy.

The key point here is that there’s still time for interested members of the public to advocate for some red lines to be created that will limit what kind of capabilities CBDCs will have—or at least impose limits on how those capabilities are used. The United States is a long way off from having its own “digital dollar.” The Treasury Department recently rolled out its FedNow instant payment system, though. FedNow is supposed to facilitate real-time payments in a manner that is similar to apps you might be familiar with like CashApp or Zelle. I have to imagine that the U.S. government is specifically looking into how it can incorporate web3 innovations into future versions of the emerging FedNow platform. So that could be the marriage where we see a U.S. CBDC spring from.

Speaking of services like CashApp, there is also the tricky question about what CBDCs will mean for non-government-issued digital tokens. And I’m not just talking about Bitcoin and Ethereum and cryptos more broadly. For instance, PayPal recently announced its coming out with its own stablecoin. There are also reports that the website formerly known as Twitter wants to allow financial transactions to be settled natively on its app, which does seem to lend itself to the idea of a Twitter cryptocurrency or stablecoin. Or I guess I should say an X cryptocurrency. (For the record I will never get used to calling the company “X.” I’m just going to keep calling it Twitter so you know what I’m talking about.) But PayPal and Twitter are pretty huge companies. So as CBDCs become a reality, could we see private enterprises compete with Uncle Sam and other governments for currency dominance?

I do tend to doubt that, but it’s still an open question. Obviously we’ll need more regulatory clarity from Commodities Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and especially from the U.S. Congress. Right now there is a stablecoin bill being debated in the House of Representatives, as well as the more comprehensive Lummis–Gillibrand bill that seeks to tackle the issue of how government agencies should treat cryptocurrencies. In general other jurisdictions like the European Union and nations in the Caribbean have been more welcoming to crypto innovations thus far than lawmakers in America have. And to return to the BRICS alliance for a moment, these countries are much more amenable to the idea of ABDCs, or asset-backed digital currencies that are actually backed by some tangible commodity like gold rather than a fiat currency. And again, to return to the “Moneyness” blog and JP Koning for a moment, he provides clear evidence that transition to a CBDC won’t be frictionless, and simply getting people to want it and use it will be a hurdle (unless the CBDC offers some kick-ass feature that your regular dollar simply doesn’t). To reach that point, it’s going to take time and research and development.

Of course, like most anything else in the world these days, the central bank digital currency question has become inescapably political. At least three U.S. presidential candidates have platforms in favor of cryptocurrencies: Robert F. Kennedy Jr. on the Democrat side and two candidates from here in Florida on the Republican side, governor Ron DeSantis and Miami mayor Francis Saurez. Now none of them are really making crypto policy a central focus of their campaigns, except for perhaps Saurez because Miami and South Florida have molded themselves into the “crypto capital” of the United States. But both DeSantis and RFK Jr. have come out against the development of a CBDC in the United States—I believe, if I’m not mistaken, that DeSantis went as far as saying he would veto any legislation that establishes a CBDC. I believe Kennedy made the same promise. Again, it’s not an issue that’s going to sway the 2024 election (maybe the 2028 election by the time we get there), but it’s interesting that it’s found its way into becoming a political position.

So to wrap everything up here, there is a lot happening—and happening fairly quickly—in the development of central bank digital currencies. I hope this has been a useful introduction to the topic for you, and if there’s only one thing you take away from this, it’s that we ought to be wary of the far-reaching powers a CBDC could afford to government bureaucrats to monitor, manage, and circumscribe your financial freedoms. We still have time to build awareness and influence public opinion because, as of now, the latest data from the IMF and the Cato Institute show that most people still really don’t care about CBDCs. Among those who are even aware of what a CBDC is, more than half of poll respondents expressed indifference about whether it would be a good or bad thing. As much as I think government digital currencies are inevitable, there is still time to mobilize public sentiment so that we don’t end up with the worst of what CBDCs can do.

Okay so now we will reach into our mailbag and take a question from the audience—in this case, it’s of course a digital mailbag, as this comment appeared on the Gainesville Coins blog back in May. The question comes from Danielle and she says:

“Hello nice article. I found a 1955 wheat penny with a strike on top of the head, and a double ‘in God we trust’ as well. I looked with my magnetic magnifying glass. But nothing on Google. Thanks.”

So that’s a great question. The most important thing to know about error coins (which is what this sounds like, Danielle) is that there are specific dates and varieties of the coin which have been well-documented and are pursued vigorously among collectors. So in this case the 1955 Lincoln cent is well-known to have a DDO—or a doubled die obverse, which is an error where the details of the coin appear to look like they are struck more than once, just slightly out of alignment. The trick with error coins is determining if they are really an error or they simply suffered post-mint damage: if the mistake on the coin or the damage on the coin happened at the mint, as with a coin that has been struck incorrectly, then that’s a legitimate error and is highly collectible. But if the coin simply endures damage after leaving the mint, that’s not considered an error coin and is actually probably worthless. So, yes, any 1955 penny with doubling should be submitted to a third-party grading service for authentication. Even in rather poor condition, a 1955 DDO Lincoln cent is at least a $1,000 coin. For a penny! So I absolutely recommend getting that coin professionally graded.

The rest of you are always welcome to email your questions to me directly at everett (dot) millman (at) gainesvillecoins.com, or like Danielle you can just comment on an article on our blog and eventually I will see it and might feature it in an episode. So thank you for listening and supporting the podcast, and thank you to our sponsors at Gainesville Coins.

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Everett Millman

Everett Millman

Managing Editor | Analyst, Commodities and Finance

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in Reuters, CNN Business, Bloomberg Radio, TD Ameritrade Network, CoinWeek, and has been referenced by the Washington Post.