The Prospects, Possibilities, and Dangers of CBDCs

Source: Adobe/elvistudio

Suren Ayriyan is the Managing Partner and CEO at TEMPO Payments, a digital money transfer company.


Today, 15 countries – including China, Saudi Arabia, and South Africa – are testing their own centralized digital currencies: Central Bank Digital Currencies (CBDCs). Another 87 countries are exploring the virtual minting process and how they can adopt a national electronic currency. 

CBDCs are often touted as a panacea for achieving financial exclusion, fighting fraud, and enabling greater currency stability. At the same time, experts have concerns about data privacy, power abuse by central banks, and technology adoption in areas without internet/phone access. 

Let’s explore the benefits and risks of CBDCs, as well as their aptitude for large adoption.

The basics of CBDCs 

Central banks are currently overburdened with cash currencies due to prominent bureaucracy and difficulty managing cash flows. Digital currencies allow storing data centrally, eliminating unnecessary complexity and money-printing. Moreover, by enabling citizens to deposit and hold funds in a central bank account, countries could improve access to financial services for members of society who are unbanked or underbanked.

Usually, CBDCs are powered by blockchain technology. Blockchain enables the issuance and control of the money that can then be used by payment institutions, banks, retail customers, and anyone who participates in the country’s financial system. As transactions on the blockchain – both nationally and globally – do not require an intermediary or communication between competing banks to complete a transfer, users of CBDCs will benefit from real-time processing and easy accessibility.

Citizens of early-adopting nations can access their digital currency through an e-wallet – no cash or credit cards involved. Right now, the typical processing fee for credit cards ranges from 1.3% to 3.5%. Using CBDCs, neither consumers nor merchants will need to pay a fee, reducing the high cost of transfers for economic activity of all kinds.

The power conundrum: CBDCs must be resilient against misuse

Private cryptoassets have stoked fears among financial regulators: What if countries lose control of the money supply? With CBDCs, governments are looking for a way to provide a digital currency regulated and controlled by the state – taxable and subject to legal obligations. 

Most macroeconomic theories have taught us a great lesson: when the government has too much control over spending and misuses that power during the economic recession to spur growth without addressing debt, inflation is an immediate risk. Countries like Venezuela or Argentina, polluted by hyperinflation and a staggering poverty rate, are good examples of the consequences of uncontrolled governmental spending. 

Secondly, the more transactions are conducted through CBDCs, the less money will be available to the private financial system to lend to people and businesses. This means that the central bank will have to centralize the credit system and give loans to companies, leading to corruption risks in the long run.

Before CBDCs can become a widely adopted currency, we must address the dangers of politicizing the coin. In any future scenario where people use CBDCs daily, the central bank will need to take an independent approach to fiscal policy. If governments want a say in overarching monetary policy, a dual system with a technocratic element, similar to the European Central Bank, can help mitigate risks of politicization.