Central Bank Digital Currencies (CBDCs) are emerging as a potential evolution in the world of finance. These digital representations of national currencies – issued and regulated by central banks – have the potential to change the way we transact, invest, and save money.
In a test this week, the Bank for International Settlements (BIS) and the central banks of France, Singapore, and Switzerland successfully conducted cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs) between financial institutions using smart contracts and an automated market maker (AMM) on a public blockchain. This demonstrates the potential for using CBDCs in decentralized finance (DeFI) applications.
CBDCs offer several potential advantages, including financial inclusion, efficiency, fraud reduction, more responsive monetary policy, and data analysis.
However, as governments worldwide explore the viability of implementing CBDCs, there are signs of concerns among citizens fuelled by distrust of government surveillance.
US Resistance to CBDCs
Even as discussions surrounding the implementation of Central Bank Digital Currencies (CBDCs) gain momentum worldwide, the US is lagging behind other countries when it comes to developing a CBDC. The Federal Reserve has indicated that it is a long way from introducing a digital version of the dollar and would only go ahead with “clear support” from the president and Congress.
Earlier this year, a survey by the libertarian think tank Cato Institute found that only 16% of Americans supported the adoption of a CBDC, and twice as many – 34% – oppose it. However, 49% have not formed an opinion. Around 78% would be unlikely to use a CBDC, and 55% would be “very unlikely” to use one.
Why is the US, known as a global hub for technological innovation, hesitant to advance a CBDC?
The answer is partly rooted in US political and historical traditions emphasizing personal freedoms’ importance. A majority (53%) of Republican respondents to the Cato survey opposed a CBDC, while 56% of Democrats had no opinion and 22% were opposed. Conservatives are wary that CBDCs could facilitate government surveillance and control citizens’ spending.
In September, the Financial Services Committee in the Republican-controlled House of Representatives passed the CBDC Anti-Surveillance State Act to the full House for consideration.
The bill would prevent the Federal Reserve from issuing a CBDC to individuals directly or through an intermediary and prohibit the central bank from using any CBDC to implement monetary policy.
“A central bank digital currency is government-controlled programmable money that, if not designed to emulate cash, could allow the federal government to surveil and restrict Americans’ transactions. This is not just alarming – it’s downright un-American,” said Republican Majority Whip Tom Emmer of Minnesota, who introduced the bill.
Are CBDC’s Good for the World’s Reserve Currency?
One driver of resistance to CBDCs in the US is rooted in its decentralized and complex financial system. The United States has a strong banking sector and a well-established network of payment processors. Its financial infrastructure is critical to its economic identity and global influence. The US dollar is the world’s reserve currency. Some policymakers argue that CBDCs could disrupt this system, potentially destabilizing financial markets. CBDCs from other countries could gain traction and reduce the dollar’s influence on the global stage.
Additionally, the country’s economic philosophy of limited government intervention in financial services has historically fueled skepticism toward government-controlled currencies. In a society that highly values individual privacy, the concept of a digital currency that government agencies could closely monitor raises significant concerns.
Another factor contributing to resistance is the regulatory challenges of implementing a CBDC. The US has a complex regulatory landscape involving multiple agencies and jurisdictions, and adjusting the regulatory framework could present challenges.
Distrust of Government Surveillance Through CBDCs
US citizens are not alone in expressing concerns about government surveillance and control associated with CBDCs. Issue includes:
- Privacy: CBDCs could provide governments with direct access to individuals’ financial data, which could be misused, violating citizens’ privacy rights.
- Control: Governments could use CBDCs to control individuals by freezing accounts or censoring transactions.
- Political misuse: In some countries, CBDCs could become tools for political repression, tracking and punishing dissidents, or controlling money flow in ways that violate human rights.
- Cybersecurity: CBDCs could become targets of cyberattacks, potentially exposing sensitive financial information and causing economic instability.
Nigeria’s eNaira Struggles to Gain Acceptance
An example of citizen concerns hindering adoption is Nigeria’s eNaira, the first CBDC in Africa, introduced in October 2021. The Central Bank of Nigeria (CBN) promoted three objectives for the digital currency – increased financial inclusion, facilitating remittances, and bringing people into the formal economy. The country’s informal economy accounts for over half of its gross domestic product (GDP) and 80% of employment.
However, an IMF report a year after the launch showed that only 860,000 wallets were created – accounting for just 0.4% of the 224 million population. That soared to 13 million wallets in March 2023, as the country faced a cash shortage driven by the CBN replacing the naira notes in circulation. But that still represents usage of just 6%.
Nigeria has become one of the biggest cryptocurrency markets in Africa, as individuals use digital coins and tokens to hedge against a rapidly depreciating fiat currency, avoid capital controls, and generate income amid high unemployment.
But the eNaira launch came nine months after the CBN effectively banned cryptocurrencies, which were used to fund anti-police brutality protests that swept the country in late 2020. The CBN claimed crypto jeopardized the financial system and could be used to fund terrorism and froze protestors’ bank accounts.
Critics of the eNaira point out that it runs on a private blockchain network with nodes only operated by the CBN and its trusted parties rather than the public blockchains that crypto users are familiar with. Unlike decentralized cryptocurrencies, the eNaira works like a regular, centralized banking app.
“The government effectively knows every transaction you carry out [with a digital currency], and in a place like Nigeria where there’s a bit of mistrust between ordinary Nigerians and the government, there may be skepticism in terms of adoption,” Ronak Gadhia, an analyst for investment bank EFG-Hermes, told the Financial Times. “The eNaira actually makes it even easier if the government wants to shut down someone’s account . . . or even the whole system.”
How Can Governments Address Citizen Distrust of CBDCs?
Governments and central banks will need to address citizens’ concerns in several ways if they choose to adopt CBDCs:
- Transparent regulations must be in place to govern the use of CBDCs and protect individuals’ privacy rights.
- Strong, robust cybersecurity measures should be implemented to safeguard CBDCs from potential threats and attackers.
- Strict data protection laws must be enacted to ensure that sensitive financial information is not mishandled or misused.
- Checks and balances should be established to prevent governments from abusing their power, including independent oversight.
- Public education campaigns will be needed to inform citizens about the benefits and risks of CBDCs.
The real-world use of CBDCs will depend on how governments address citizens’ concerns about government surveillance. While CBDCs can potentially increase financial inclusion and efficiency, distrust of government surveillance could undermine their adoption.
Striking the right balance between innovation and privacy is essential to ensure that CBDCs align with citizen’s interests rather than becoming a source of discontent and resistance.