CBDC: Threat or opportunity?

With myths on digital currencies being a threat to financial freedom dominating social media, Dominika Duziak, of OneStep Financial, explains why government must address this narrative and discuss its advantages.

Numerous announcements made at the beginning of 2023 suggest that the era of Central Bank Digital Currencies (CBDC) has fully begun. We’re all keeping a watch on the Chinese and Indian pilots. This topic is investigated by the Bank of England, Bank for International Settlements (BIS), European Central Bank (ECB) and practically every other central bank in the globe. CBDCs are the talk of the town, and with all this attention, one may wonder – is CBDC a threat or an opportunity?

While industry experts and central bankers publish reports on CBDC designs, social media is filled with tweets and videos claiming that it is the greatest threat to our financial freedom, intended to control and manipulate society and ultimately “gridlock us in a digital prison of surveillance and tyranny,” says Russell Brand.

Given the influence of social media on public opinion (remember, Gen Z is primarily absorbing knowledge through TikTok and Youtube, and they will likely be the first adopters of new forms of digital money), policymakers should make addressing this fearmongering, myth-filled narrative their top priority right now.

I have seen videos and articles claiming that CBDCs will disintermediate banks, that consumers will have to hold their deposits in the central bank accounts, that fintech and big tech will take over the retail banking space, and that traditional banks will cease to exist.

Critics are even saying that CBDC empowers totalitarian governments, which are going to utilise digital currency mechanisms to track their citizens’ spending, block their accounts, and essentially deprive them of their basic civil rights.

There is so much to unpack here.

The belief that central banks will store money and open accounts for individuals is a significant misunderstanding.

Central Bank Currency, similar to cash, is only going to be “minted” by the central bank. Central banks, however, are not designed to serve individuals and it’s very unlikely that they want to turn into retail banks.

The CBDC will be distributed through the financial sector. Banks and non-bank providers will be able to integrate with the digital currency ledger of the central bank and offer digital services to end users, such as account opening.

Yes, the transactions will be recorded in that ledger, but so are today’s electronic payments. Money is never fully anonymous (and nor it should be in my view) and even the biggest cryptocurrency supporters can’t deny the fact that Bitcoins can be traced and seized.

Today, a bank or card provider may be forced to disclose transaction details in response to a valid warrant if a crime is committed. Similarly, traditional accounts can be blocked by law enforcement authorities.

In the CBDC world, the account holders’ names and details will only be available to the providers that  they select. Some even argue that our sensitive financial data will be better protected by regulated institutions.

While this is unlikely to convince conspiracy theorists, the majority of CBDC designs do emphasise the anonymity of transactions recorded on the core ledger, the use of cryptography, privacy and data protection as the most important guiding principles.

Contrary to some opinions, the CBDC initiatives are not the result of power-obsessed regimes that seek to control our lives. Central banks do not wish to regulate how you spend your money. CBDC offers programmability, but programmable money and programmable payments should not be confused.

Both the ECB and the Bank of England have recently confirmed that programmable money – defined as money with specific rules or restrictions attached (for example, you can only spend it on particular goods or in particular stores, similar to food stamps), is not within the scope of their research. This, however, does not exclude programmable payments, which offer organisations and individuals a world of new potential.

Programmability in this sense allows to predefine conditions and times of payment execution and once these conditions are met by the receiver, the funds are immediately available for them to collect and use at their discretion.

Think about government benefits or energy credits that are delivered to you immediately after you submit a request and relevant evidence of entitlement online. Or imagine you’re a temporary worker or a freelancer. You want to get paid immediately after the job is done.

With programmable CBDC, you can trigger the payment based on the proof of task execution and receive your payment much faster. Your employer doesn’t have to spend days on internal validations and other steps that are needed to execute this transaction, that in today’s world is very complex.

These solutions will significantly increase efficiency and cut payment processing costs. Ultimately, the programmability of payments enabled by CBDC rails will result in more financial inclusion and security for recipients, particularly those in the gig economy.

Another common misperception is that CBDCs will disrupt the financial system, naturally in a bad way. Disruptive innovation is a change that has a significant influence on the market or business models. It has been used in the past to characterise a variety of new breakthroughs, including blockchain.

Blockchain appears to be a suitable point of reference here. Despite its many advantages and huge potential, blockchain (outside of the crypto space) has not yet taken the world by storm. In contrast, as it matures and develops, blockchain proves to be a foundational technology that will have an immense impact and enable further breakthroughs, such as new types of digital currencies, utility non-fungible tokens (NFT) and programmable payments.

Similarly, CBDCs on their own will not significantly alter the status quo. The way in which we use money certainly will continue to evolve – as it has for generations. The financial services industry is ever-changing.

In the past decade, for example, we’ve seen a number of game-changing innovations, including the move from batch processing to real-time payments. The number of mobile and electronic wallet users is growing faster than accounts at traditional financial institutions. The financial services industry is moving towards Banking-as-a-Service and embedded finance, in which fintech technologies complement bank offerings and enable the generation of greater value at a lower cost.

These trends will influence the entire ecosystem, and CBDCs will play an important role in this change, facilitating innovation but on a foundational rather than disruptive level.

It is understandable that the subject of CBDCs raises a few concerns. Currently, there are certainly more questions than answers and speculations are inevitable at this stage. Clarifying them will require tremendous effort from regulators and the broader financial sector.

Industry organisations such as The Payment Association and the Digital Pound Foundation will play a crucial role in not only advising policymakers on the design of central bank currencies, but also in explaining to the public why digital currencies are being proposed and what benefits they will bring. And in doing so, they should probably turn to TikTok.

Dominika Duziak is head of product and strategy at OneStep Financial.