The Truth About CBDCs: Who Really Benefits? Hint: It’s Not You

In the Brief:

  • CBDCs may increase government control and may not benefit the public
  • They're not a solution for financial inclusion as they lack trust and anonymity
  • A no-fee CBDC account is not a full integration into the monetary system
  • Governments use CBDCs to maintain control over money and payments, and it can impact cross-border transactions

4 - 6 minute read

A new era of digital currencies has dawned upon us, and with it comes the prospect of central bank digital currencies (CBDCs). While some politicians and government cronies believe that CBDCs are a critical step towards the future of money, critics suggest that the public will find few, if any, perks in this new financial system. Instead, they will be subject to increased government control over their finances and bear the risks of potential abuse.

Nicholas Anthony, a policy analyst in the Cato Institute’s Center for Monetary and Financial Alternatives, and Norbert J. Michel, Vice President and Director of the CMFA, argue that governments will reap the lion’s share of potential CBDC benefits. Their paper for the Cato Institute, a libertarian think-tank, advocates for a prohibition on the creation of any form of CBDC by the Treasury and Federal Reserve. In their analysis, the potential benefits that CBDCs claim to offer are not exclusive to the general public. As Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said, “I keep asking anybody… to explain to me what problem [CBDCs are] solving, and all I get is a bunch of hand-waving.”

CBDC proponents claim that digital currencies will increase financial inclusion. Still, this is hardly the solution when surveys show that people commonly distrust banks, do not have enough money to meet minimum requirements, or want to maintain their privacy. This attitude poses a significant obstacle for CBDCs as people do not trust the government either, further complicating the issue.

Moreover, while banks are privacy intrusive, much of the personal information that they collect is to comply with regulations like the Bank Secrecy Act, which aims to thwart financial crimes. Although privacy-enhancing technologies are available, central bankers are resolute in not offering anonymity. Therefore, a CBDC may only serve to reinforce the Bank Secrecy Act regime.

Lastly, while a no-fee CBDC account may encourage more impoverished people to join the financial system, it may not merge money and finance, and many people might still not be fully integrated into the monetary ecosystem. Critics of CBDCs argue that providing prepaid cards instead of issuing CBDCs can solve this problem and urges lawmakers to re-evaluate the need for such a currency in a bid to support greater financial inclusion.

The Need for CBDCs?

While the majority of people who know about CBDCs do not support them, it’s hard to ignore the fact that governments, CBDC advocacy groups, and government contractors are keenly pushing for them. Governments perceive them as a means of maintaining control over money and payments and improving on current regulation. The potential of CBDCs replacing cryptocurrencies only adds to their appeal. A former advisor to President Biden recently testified before Congress that a CBDC would be the “single best step” to crowd out cryptocurrencies. European Central Bank President Christine Lagarde shares similar views stating that if central banks do not establish CBDCs, then they risk losing control over payments and money altogether.

Traders are keeping a close eye on the development of CBDCs as the technology has the potential to transform financial markets. Investors are concerned about the effects of CBDCs, and there are several risks that they should be aware of. One of the main challenges is the possible loss of privacy as financial transactions would be more visible than ever, which could lead to more government surveillance. Traders should, therefore, ensure that they take steps to safeguard their financial privacy.

Moreover, the introduction of CBDCs could lead to central banks being more aggressive in raising interest rates, leading to more market volatility. As such, traders should prepare to adjust their portfolios or holdings accordingly. Furthermore, central bank digital currencies could impact cross-border transactions, including nefarious activities like money laundering and terrorist financing, making transactions more secure for traders. In the short term, investors could see a potential increase in demand for cryptocurrencies as CBDCs become prevalent.

The Bottom Line

Despite the potential benefits of CBDCs, critics of this new financial system argue that the interests of the public are not at the heart of this digital currency’s creation. While governments perceive the benefits of CBDCs, such as maintaining control over money and payments and crowd out cryptocurrencies, traders are left with several risks to consider. Therefore, traders should keep a close eye on market developments and prepare to adjust their portfolios and holdings accordingly.

Disclaimer: The content in this article is provided for informational purposes only and should not be considered as financial or trading advice. We are not financial advisors, and trading carries high risk. Always consult a professional financial advisor before making any investment decisions.

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