Market Insights

The Threat of Central Bank Digital Currencies  

Gold Alliance disclaimer
Central banks are looking to create their own digital currencies. Are you ready for more eyes on your assets?

When Bitcoin was created in 2009, the idea of cryptocurrency quickly gained traction among younger generations, and a host of other cryptocurrencies have exploded into existence, driven by enthusiasm and euphoria.  

Advocates of cryptocurrency claim that the new form of money provides a digital version of gold and that it’s the answer to the government’s massive money printing and the devaluation of the dollar. Some are even predicting that digital currency will replace fiat currencies (money issued by a government). Banks and their complicated, expensive transaction systems will disappear and be replaced by cheaper peer-to-peer transactions using cryptocurrencies, they say. 

Time will tell if all this is true. So far, we are seeing a lot of volatility in cryptos as they have tracked the performance of tech stocks more than they have performed like money. 

Central banks are jumping onboard  

Motivated by the global interest in cryptocurrencies, the repercussions on financial systems, and their agenda for tighter monetary control, central banks worldwide are experimenting with central bank digital currencies (CBDCs), investigating their use to replace or complement the countries’ fiat currencies.  

In theory, the central bank would issue a digital currency (e-money), allowing citizens to do transactions on a peer-to-peer basis and bypass private banks and financial institutions.

Central banks are experimenting with digital currencies, and CBDCs are spreading across the globe.
Several central banks have already launched a digital currency, while others are piloting or developing one. Source: Atlantic Council

China’s e-yuan cryptocurrency 

Advocates of cryptocurrency report the success of China’s digital yuan, which was used by visitors to the Beijing Winter Olympics. It was the first large-scale rollout of a (CBDC) in the world.  

To clear the way for its central bank digital currency, China banned all cryptocurrency transactions in September 2021 for their role in committing financial crimes, threatening the country’s financial system, and facilitating capital flow beyond its borders. Similar arguments are being used by CBDC advocates in the US. 

While central bank cryptocurrencies could make transactions cheaper and faster for the public, CBDCs also offer several benefits for the government that may not be beneficial for you. 

CBDC is a means of control and surveillance 

Fiat currencies are legal tender typically insured by the government, secured by regulations, and subject to oversight. The existence of privately issued digital money, like Bitcoin and its cohorts, threatens government-sponsored financial systems and limits consumer protections.  

One of the reasons is that privately issued cryptocurrency is typically unsecured — there are no guarantees or physical assets securing their value. (Some cryptocurrency creators designed the currency to have a stable price by pegging it to a commodity or a fiat currency, but two of these so-called “stable coins” — Luna and UST — imploded in May and June this year. Back to the drawing board.) 

A US CBDC or a “digital dollar” would not only extend government control over the US financial system, but it would also allow digital surveillance of citizens. In the same way that your debit card transactions are visible to your bank, with CBDCs your financial activity will be visible to the central bank. Lawmakers in the US are advocating for privacy in rolling out a CBDC, but we’ll have to wait and see if these privacy concerns will be addressed in legislation. 

Such financial surveillance enables the government to know each item or service you purchase in addition to the transaction time, amount, and location. They’d be able to track your purchasing behavior in great detail, and more scrupulous governments could use such data to take action against you:  

  • It could result in rewards or punishments for politically or socially desired or undesired behavior.  
  • Donations to the wrong group could spark FBI investigations or worse.  
  • The government could freeze or confiscate your money with the flick of a switch, and you wouldn’t have any way of avoiding it since physical cash would no longer exist.  
  • As China did during its pilot program, money received from a government program such as the Covid direct relief payments might be restricted to a specific use or even expire.  

CBDCs are a mechanism for levels of central control that are hard to imagine for anyone who has grown up in a free country.  

A solution looking for a problem 

Republican Senator Marco Rubio called the digital yuan a “tremendous security risk to individual users.” Sir Jeremy Fleming, Director of the UK’s intelligence, cyber, and security agency, warned that the technology could allow Beijing to monitor users and exert control over global transactions. The same could be said about a possible US CBDC. 

The Fed itself seems wary too. Many US Federal Reserve governors have been publicly skeptical of CBDCs. Chair Jerome Powell observed that the US already has a “safe, effective, dynamic, and efficient … domestic payments system [capable of serving] the needs of households and businesses.” Fed Gov. Christopher Waller questioned whether “CBDC would solve any existing problem that is not being addressed more promptly and efficiently by other initiatives.” 

Nevertheless, the Fed is continuing its research into CBDCs, and when other countries implement their own digital currencies, the US might not be far behind. We might not have a choice. And the next time there’s a political push to increase surveillance “to fight crime and defend America,” launching a CBDC could very well be on the bill. Now may be the time to consider a solution that is not looking for a problem