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Breaking Barriers: Why Global Policymakers Refuse to Give Up on CBDCs

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Despite the risks and the failures associated with central bank digital currencies (CBDCs), global policymakers are pushing forward to make them a reality. 

In November alone, officials from the International Monetary Fund (IMF), Bretton Woods Committee, and Bank for International Settlements (BIS) issued rallying calls for governments to push forward on CBDCs with courage and determination. But rather than double down on a bad idea and waste further resources in this pursuit, policymakers should let this idea go and focus on more fundamental reforms that would create a freer financial system.

The November CBDC campaign began when IMF managing director Kristalina Georgieva told policymakers, “If anything… we need to pick up speed [with CBDC development].” Bretton Woods Committee chair Bill Dudley likewise called not only for the United States to develop a CBDC, but for the BIS to establish an international standard for CBDCs. And BIS Innovation Hub head Cecilia Skingsley told an audience that CBDCs should not be dismissed as a “solution in search of a problem” because they might be useful one day.

Related: Milei vowed to close Argentina’s central bank — But will he do it?

These calls come at a strange time. As the Human Rights Foundation’s CBDC Tracker indicates, nine countries and the eight islands that compose the Eastern Caribbean Currency Union have launched CBDCs; 38 countries and Hong Kong have CBDC pilot programs; and 68 countries and 2 currency unions are researching CBDCs. Yet, none of these projects have proven worthwhile.

CBDC activity by country. Source: Human Rights Foundation

Yet, some governments may not even have the money to give away. In Thailand, plans to give citizens 10,000 baht ($288) through a CBDC were delayed partly because the government had not identified where the 548 billion baht ($15.8 billion) needed to cover the handout would come from. Worse yet, others warned that the handout may not even be legal. It wasn’t until later that the prime minister announced that it would be funded by government loans.

Elsewhere, the CBDC experience has been much worse. Nigeria’s CBDC struggled to gain adoption so much that the Nigerian government started pulling cash off the streets. Within weeks, it created a cash shortage so severe that it led to protests outside of banks and riots in the streets. Still, CBDC adoption only increased from 0.5 percent to 6 percent.

So at best, the CBDC experience seems to be one of government waste. At worst, the CBDC experience is one of government control. And it is against this backdrop that it is difficult to understand why international organizations like the IMF, the Bretton Woods Committee, and the BIS are still calling for policymakers to charge ahead with CBDCs.

Related: History tells us we’re in for a strong bull market with a hard landing

After seeing the failures in practice and considering the risks still looming, neither the U.S. government nor governments abroad should launch a CBDC. Put simply, the costs outweigh the benefits. There’s no doubt that central banks and other organizations have invested their time, resources, and reputations in developing CBDCs. However, it would be a mistake to let those investments be a reason to fall victim to the sunk-cost fallacy.

With that said, if policymakers are eager to transform the financial system in a way the benefits everyone, there is much that can be done to create a freer, more accessible, and open financial system.

In fact, there is no shortage of policy reform ideas on the table. From strengthening financial privacy protections to establishing oversight of federal regulators, there are many opportunities to reform the financial system today.

For example, consider just the idea of reigning in the financial surveillance currently taking place. U.S. financial institutions spent an estimated $46 billion complying with financial reporting requirements in 2022. These are costs that end up making their way down to people trying to open accounts or acquire loans. More so, there is also the unseen costs of delays in transfers and payments as institutions work to verify identities, spending habits, and issue individual reports to the government. Reforming financial policy alone holds the potential to create a cheaper and faster financial system.

Perhaps best of all, reforming financial privacy does not require reinventing the money in everyone’s pockets.

Nicholas Anthony is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives. He is the author of The Infrastructure Investment and Jobs Act’s Attack on Crypto: Questioning the Rationale for the Cryptocurrency Provisions and The Right to Financial Privacy: Crafting a Better Framework for Financial Privacy in the Digital Age.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Breaking Barriers: Why Global Policymakers Refuse to Give Up on CBDCs

As the world becomes more technologically advanced, the conversation around digital currencies has become increasingly prevalent. One form of digital currency that has gained significant attention is central bank digital currencies (CBDCs). These are digital representations of a country’s fiat currency, issued and controlled by its central bank. CBDCs have been a hot topic in the financial and economic sector, with many policymakers and experts debating their potential benefits and challenges. Despite the many barriers and challenges these digital currencies may face, global policymakers are determined to push forward with their development and implementation.

In this article, we will explore the reasons behind why global policymakers are refusing to give up on CBDCs and why they believe these digital currencies hold tremendous potential for the future.

Benefits and Practical Tips for CBDCs

Before delving into the reasons behind the determination of global policymakers to develop and implement CBDCs, let’s first understand their potential benefits.

1. Financial Inclusion

One of the main advantages of CBDCs is their potential to increase financial inclusion. With CBDCs, individuals can access financial services and make transactions without needing a traditional bank account. This ensures that the unbanked and underbanked populations have access to safe and efficient payment systems, thus promoting financial inclusion.

2. Reduced Transaction Costs

Traditional financial transactions involve a complex network of intermediaries, resulting in high transaction costs. CBDCs, on the other hand, operate on a decentralized system, reducing the need for intermediaries and ultimately lowering transaction costs.

3. Enhanced Payment Systems

CBDCs have the potential to significantly enhance the speed and efficiency of payment systems. The use of digital currencies allows for instant settlement of transactions, eliminating delays and reducing the risk of fraud.

4. Improved Monetary Policy

CBDCs also have the potential to improve a country’s monetary policy by giving central banks more control and flexibility. This is because CBDCs can be easily tracked and traced, providing policymakers with real-time data on the economy, allowing them to make more informed decisions.

Case Studies: Countries’ Experiences with CBDCs

Several countries around the world have already started experimenting with CBDCs, giving policymakers valuable insight into their potential benefits and challenges. Here are a few examples of countries that have taken significant steps towards developing and implementing CBDCs.

1. China

China has been at the forefront of CBDC development, with its central bank, the People’s Bank of China (PBOC), working on the digital yuan or e-CNY since 2014. The digital yuan is currently in a trial phase in several cities, and the Chinese government plans to fully implement it by 2022. This will make China the first major economy to launch a CBDC.

2. Bahamas

The Bahamas became the first country in the world to fully implement a CBDC, known as the Sand Dollar, in October 2020. The Sand Dollar aims to promote financial inclusion in the archipelago by providing a safe, low-cost, and efficient means of conducting financial transactions.

3. Sweden

Sweden’s central bank, the Riksbank, has been conducting research on an e-krona, its proposed CBDC, since 2017. The e-krona aims to reduce the country’s dependence on cash and enhance the efficiency of its payments system. However, the Riksbank has stated that the decision to issue an e-krona has not yet been made.

First-Hand Experience: The European Central Bank’s Take on CBDCs

In recent years, the European Central Bank (ECB) has been conducting extensive research on CBDCs, with European policymakers expressing their interest in issuing a digital euro. In a digital conference held in April 2021, ECB President Christine Lagarde declared that the ECB will make a decision on whether to launch a digital euro by mid-2021.

Lagarde has previously stated that the ECB’s main reason for considering a digital euro is to ensure that the eurozone population has access to central bank money in digital form. This comes as a response to the increasing use of private digital currencies in the region, such as Facebook’s Libra, which poses a threat to the Eurozone’s monetary sovereignty.

The ECB has also stated that a digital euro has the potential to enhance financial stability, as well as reduce transaction costs and fraud risks. However, the ECB remains cautious, stating that there are many technical and policy issues that need to be addressed before a decision can be made.

Barriers and Challenges: What’s Holding Back CBDCs?

While the potential benefits of CBDCs are evident, there are still several barriers and challenges that need to be overcome before they can be successfully implemented.

1. Technical Challenges

Developing a CBDC requires a complex technical infrastructure, including a secure payment system and digital wallets for users to store and transact with their digital currencies. This may prove to be a significant challenge for central banks lacking the expertise and resources to develop and maintain such a system.

2. Privacy Concerns

CBDCs operate on a decentralized system, meaning that the central bank will have access to detailed information about citizens’ transactions. This has raised concerns about privacy and surveillance, which will need to be addressed before CBDCs can be widely accepted.

3. Cybersecurity Risks

Cybersecurity risks will undoubtedly be a significant challenge for CBDCs. Any system that operates online is vulnerable to hacking and other cyber attacks, putting users’ funds at risk.

Conclusion

Central bank digital currencies have the potential to bring about significant changes in the global financial system by promoting financial inclusion, reducing transaction costs, and enhancing payment systems. While there are challenges that need to be addressed, global policymakers remain committed to exploring and implementing these digital currencies. As the world continues to advance technologically, it is essential to keep an open mind and adapt to the changing landscape of finance and economics. Only time will tell if CBDCs will live up to their potential and become the future of currency.

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