The road to central bank digital currencies – Brighter World

In an era of rapid digitization and as people use less and less physical cash, countries around the world are exploring the implementation of central bank digital currencies (CBDCs). These CBDCs would be a digital version of cash, issued by the country’s central bank.

More than 130 countries are exploring the idea, while some have already introduced CBDCs.

These efforts have raised serious questions about privacy, security, accessibility and trust.

Ori Freiman studies the responsible implementation of emerging technologies, including CBDCs.

Freiman, who is a postdoctoral fellow at the Faculty of Social Sciences‘ Digital Society Lab, as well as The Center for Governance Innovation’s Digital Policy Center, shares his thoughts on what a world with CBDCs could look like, what they could mean for national economies and what needs to happen to get citizens to adopt them.

Note: This interview has been edited for length and clarity.

Q: What is a CBDC and how is it different from the types of electronic payment systems we already use?

Freiman: Like many concepts in development, there is no one definition that everyone uses. However, I think everyone would agree that it is a digital currency issued by a central bank.

We already have digital money — in our bank accounts, through our credit cards and other payment services. However, this is commercial bank money – money for which the commercial banks are liable.

When I go to my bank and I tell them, ‘I want this $100,’ and it’s issued as a bank note, the central bank is responsible for that note and has to make sure that everybody can accept it.

Q: If we already have alternatives to cash in our society, why would we need a CBDC?

This is a very good question that many in this field are asking.

Proponents of CBDCs would say that they enable a safer society because they can be used to fight money laundering, financing of terrorism and organized crime. It will also be much easier to fight tax evasion or the underground economy.

There is also the ability to program the currency to support social policies that the government would agree are desirable. So, for example, they can devote money only to rent, or food or medicine. Or, for example, someone under a certain age will not be able to buy alcohol.

We are also gradually seeing more and more digital transactions and electronic means of payment, and CBDCs will be a way to keep central bank money in the economy.

Q: Can you explain this further? What would less central bank money mean to the economy?

There are several issues. First, as digitization takes place, fewer physical banknotes are expected to circulate in the economy. Second, central bank money is considered much more reliable than commercial bank money because commercial banks can collapse. Central banks cannot collapse and act as lenders of last resort – in charge of bailing out commercial banks, or not bailing out.

However, if we were to convert our entire economy to central bank money, it would take business from the commercial banks and have a huge impact on loans and credit. So, any solution must be balanced.

Here in Canada, for example, the Bank of Canada said that if a CBDC were to be implemented, it would bear no interest, meaning that the central bank would not compete with commercial banks for deposits.

In the News

Learn more from Freiman about the Bank of Canada’s work to address mistrust surrounding a digital Canadian dollar in the Globe and Mail and so on CTV News

Q: How do cryptocurrencies fit into this landscape?

Part of the motivation that drove central banks to develop the central bank digital currency is what we call ‘losing monetary sovereignty’. It is a term that describes when people start using currencies that are not under the control of the central bank and the government. So, for example, the widespread use of a cryptocurrency like Bitcoin, or say if a technology company were to issue a global cryptocurrency.

Its widespread use will mean that an economy cannot be controlled from within a country.

Q: This issue of control has led to criticism of CBDCs. Can you explain some of the concerns about financial oversight and CBDCs?

There are issues of access, control and oversight of data – all due to the inherent digital nature of these currencies. And these are real concerns that people in all sectors are aware of and trying to mitigate.

Consider, for example, the problematic scenario where the transactions of individuals are kept in some sort of centralized ledger and a future government decides it wants access to monitor the citizens.

Opponents of CBDCs also often point to the Government of Canada’s freezing of hundreds of protestors’ bank accounts during the so-called ‘Freedom Convoy’ protests in Ottawa in 2022 as an example of a government using financial instruments to fight political dissent. And these opponents argue that it would be even easier with a CBDC.

There is also the flip side of the ability to program money. Although yes, it can be used for social policies that we find desirable, we can also think of scenarios where governments can use it as a tool to limit certain populations, such as minorities.

So, there must be mmechanisms that would guarantee that such scenarios could not happen.

Q: What might some of those mechanisms look like?

For example, they can include privacy-enhancing technologies and oversight committees that can oversee the infrastructure and see how the CBDC works and who controls it and how it is controlled.

CBDCs may work without storing the data of the transactions. It all depends on the design and implementation of these safeguards.

Q: What do you see happening around the global adoption of CBDCs in the coming years?

It is a very charged topic and there are many question marks about its future.

Most countries are preparing CBDCs in case their government requests them. There is also a bandwagon effect, with countries wanting to be prepared in case other countries go ahead.

But what is clear is that if people do not have confidence in the currency, it will not be used. A recent report by the Bank of Canada which followed a public consultation revealed that people would distrust such a digital currency. So, there is a lot of work to be done in this space.