What Are Central Bank Digital Currencies (CBDC) and How it Would Affect You

A central bank digital currency (CBDC) is a digital form of money issued by a country’s central bank. CBDCs are similar, in some ways, to cryptocurrencies in that they are purely digital, but differ in that they are centralized and their value is fixed by a central bank and is roughly equivalent to the country’s fiat currency – but that is always subject to change. While some claim that a CBDC would not replace cash or the current monetary system, others say that the goal is to completely eliminate physical money and transition to a entirely digital system. 

CBDCs are a liability of the central bank, similar to how deposits in bank accounts are a liability of the bank. CBDCs could offer potential benefits for financial inclusion, but there are many concerns that would need to be considered. 

More than 130 countries and currency unions, representing 98 percent of global gross domestic product, are exploring a CBDC. Jamaica’s JAM-DEX launched in June 2022 and is the first CBDC to be ratified formally as legal tender. Nigeria, the first African country to roll out a CBDC, launched eNaira in October 2021. 

How Are CBDCs Different from the Current Physical Money System

In the United States, there are two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve. A CBDC, however, would greatly differ from the digital money that Americans currently have in bank accounts, payment apps, and online transactions. CBDCs, actually, are very different in nature from our current concept of money. Let’s see why and how.

1. Digital Nature: CBDCs exist solely in digital form, meaning they don’t have a physical counterpart like cash. They are typically stored and transacted electronically, either through mobile apps, digital wallets, or other online platforms.
2. Centralized Issuance and Control: Unlike cryptocurrencies such as Bitcoin, which operate on decentralized networks, CBDCs are issued and regulated by a central authority, typically a country’s central bank. This allows the central bank to maintain control over the money supply and implement monetary policy as needed.
3. Legal Tender Status: CBDCs are recognized as legal tender, meaning they can be used to settle debts, including taxes and other obligations, within the issuing jurisdiction. This gives them a status similar to physical currency.
4. Regulatory Framework: CBDCs operate within a regulatory framework established by the central bank and other relevant authorities. This framework helps ensure compliance with laws and regulations related to financial transactions, such as anti-money laundering (AML) and know your customer (KYC) requirements.
5. Privacy and Transparency: Depending on the design, CBDCs can offer varying levels of privacy and transparency. Transactions may be recorded on a “blockchain” or distributed ledger, providing some measure of transparency to the central bank and other authorized parties. However, the central bank could implement measures to protect users’ privacy, such as using techniques like cryptographic protocols to ensure anonymity.
6. Interoperability: CBDCs can be designed to be interoperable with existing payment systems and infrastructure, allowing for seamless integration with the broader financial system. This can facilitate faster and more efficient transactions compared to traditional payment methods.

Overall, CBDCs represent a digital evolution of traditional fiat currencies, offering potential benefits such as increased efficiency, transparency, and financial inclusion, while also posing concerns related to privacy, security, and regulatory compliance.

What is the Downside of CBDCs

Transitioning to a Central Bank Digital Currency (CBDC) from a system primarily based on physical currency would have several potential downsides, including:

1. Privacy Concerns: CBDCs could potentially offer less privacy compared to physical cash transactions. Depending on the design, transactions with CBDCs could be more easily monitored and tracked by authorities, raising concerns about individual privacy and surveillance.
2. Cybersecurity Risks: CBDC systems would be vulnerable to cybersecurity threats such as hacking, data breaches, and other cyber-attacks. A successful attack on the CBDC system could have widespread and disruptive consequences for the economy, potentially leading to loss of funds, financial instability, and erosion of trust in the currency.
3. Exclusion of the Unbanked: A digital currency system may exclude individuals who do not have access to banking services or digital technology. This could exacerbate financial exclusion and widen the gap between those who have access to the digital economy and those who do not.
4. Dependence on Technology Infrastructure: CBDCs rely on digital infrastructure, including internet connectivity, electricity supply, and technological devices such as smartphones and computers. Any disruptions to this infrastructure could disrupt access to CBDCs and hinder economic activity.
5. Centralization of Control: CBDCs are issued and controlled by central banks, which could concentrate power and control within a single authority. This centralization could lead to concerns about potential abuses of power, lack of accountability, and limited diversity in monetary policy decision-making.
6. Transition Costs and Disruption: Transitioning from a physical currency system to a CBDC system would involve significant costs and logistical problems. It would require extensive updates to infrastructure, technology, regulations, and consumer education. The transition process could also disrupt existing financial systems and payment networks, leading to temporary instability and uncertainty.
7. Potential for Negative Interest Rates: CBDCs could enable central banks to implement negative interest rates more effectively, as they could directly impose fees on digital holdings. While negative interest rates can stimulate spending and investment, they could also discourage saving and have unintended consequences for savers and financial stability.

Overall, while CBDCs offer potential benefits such as increased efficiency, transparency, and financial inclusion, their widespread adoption would require careful consideration of these downsides and the implementation of appropriate safeguards and policies to mitigate risks and ensure a smooth transition.

If CBDCs Are Implemented, What Can You Do

Alternative economic models like time banking could complement the implementation of Central Bank Digital Currencies (CBDCs) by offering additional avenues for economic participation, social cohesion, and community empowerment. Here’s how time banking could be beneficial within a CBDC framework:

1. Complementary Economic System: Time banking operates on a system where individuals exchange resources based on the time spent rather than the conventional monetary value. It can exist alongside CBDCs as a complementary system, providing an alternative means for people within communities.
2. Promotion of Social Capital: Time banking fosters social connections and trust within communities by encouraging reciprocity and mutual support. Participants in time banking communities build relationships and networks of trust, which can enhance social capital and community resilience.
3. Inclusion of Informal Economy: Time banking recognizes and values the contributions of individuals and communities beyond traditional economic metrics. It allows people to exchange skills, services, and resources that may not be valued in the formal economy, thus promoting inclusivity and recognizing the diversity of talents within a community.
4. Addressing Unmet Needs: Time banking can address unmet needs within communities by mobilizing resources and talents that may otherwise go untapped. It provides a platform for individuals to offer their skills and services in exchange for assistance or support in areas where they may lack resources or expertise.
5. Supporting Local Economies: Time banking promotes local economic development by encouraging exchanges within the community. This can help support small businesses, artisans, and service providers by creating a local market for their goods and services, albeit in a core economy-based framework.
6. Enhancing Well-being: Participating in time banking can have positive effects on individuals’ well-being by providing opportunities for social interaction, skill development, and meaningful engagement. It can contribute to a sense of belonging, purpose, and fulfillment within the community.
7. Supplementing Government Services: Time banking can complement government services by addressing unmet needs and providing support to vulnerable populations. It can serve as a grassroots mechanism for delivering social services, caregiving, and community development initiatives.

While CBDCs offer benefits such as increased efficiency and financial inclusion, alternative economic models like time banking provide a complementary approach that focuses on social capital, community empowerment, and inclusive economic participation. By integrating both CBDCs and time banking within the broader economic framework, governments can create more resilient and inclusive economies that serve the diverse needs of their populations.

Since CBDCs may be an inevitability, perhaps we should all be thinking about how this will impact our individual lives, our families and our communities – and now is the time to prepare for the soon coming changes by building your social network. A social network is the first step for ensuring the financial security of your family and your community. Click the button below to find out how you can do that.