Why Central Bank Digital Currencies are a Bad Idea

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Digital fiat currency, also known as central bank digital currency (CBDC), is the idea that central banks might issue their own digital currencies. While digital fiat currencies would have many potential benefits for consumers and the financial system, they are a terrible idea for a variety of reasons. Most of these are practical, but there are also broader issues with central banks as institutions and the stability of fiat currencies. This article provides an overview of central bank digital currencies, their potential benefits, and their disadvantages.

What is a Central Bank Digital Currency?

Central banks are the most powerful institutions in the world. They maintain the global financial system and manage the currency used by billions of people. If a bank collapses or goes under because of bad business decisions or fraud, the central bank can step in and guarantee deposits or loans to ensure financial stability.  Central banks also control the supply of money. When the economy is weak, the central bank can lower interest rates and increase the supply of money to boost growth. When inflation is high, the central bank can raise interest rates and shrink the supply of money to reduce prices.  In both cases, the central bank can try to influence the economy in a way that benefits the public. In recent years, many central banks have experimented with digital fiat currency projects. The most prominent example is the experiment with the Bank of Japan’s (BOJ) negative interest rate experiment. In this article, I’ll review the potential benefits of central bank digital currency projects and discuss the many problems with CBDC.

Potential Benefits of CBDC

One benefit of central bank digital currency projects is that they can reduce the costs of issuing and managing currency. For example, issuing currency is a logistic nightmare. The process involves printing currency, transporting the printed currency to banks, and collecting the currency from the banks. This process is expensive and takes time. It can also have environmental impacts. Managing the currency system is also complicated. The central bank has to handle the currency supply and interest rates to ensure the public knows about and uses the currency. This is a costly process. Digital fiat currencies can reduce these costs and simplify the currency system. With fewer costs and less complexity, the central bank can focus on maintaining financial stability and keeping inflation low.

Disadvantages of CBDC

Central bank digital currency projects also come with downsides. The most obvious is that we don’t actually know if digital fiat currencies would work. For example, the Bank of Japan’s negative interest rate experiment was the first large-scale use of digital fiat currency. We don’t know how the experiment and other experiments would have worked without fail. Critics argue that creating a central bank digital currency is easier than creating an effective digital currency. For example, central banks have years of experience managing currency systems. They also have the political power and connections that large companies don’t. So even if CBDCs have some potential benefits, we can’t know if they work effectively.  Central banks also don’t have the security of a private company. The Bank of Japan and other central banks have already lost data due to cyberattacks. The Bank of England recently had data from its stock market auctions stolen. With CBDC, the central bank would operate a new and potentially weaker system. The central bank would also have to handle security for a new system. This is difficult, time consuming, and expensive.

Why Central Bank Digital Currencies are a Bad Idea

Central bank digital currency projects have many potential benefits. But these projects also have many disadvantages when it comes to government power and control over behavior. This model will allow governments to have unprecedented control over what you can or cannot purchase.

Digital fiat currencies are more portable and can be used across borders. They also have more privacy and security than fiat currency, and they are backed by precious metals. Digital fiat currencies also avoid some of the disadvantages of fiat currency, such as price volatility. The Bank of Japan’s experiment is just one example of a potential digital fiat currency. The BOJ tested a blockchain-based digital currency. The BOJ also tested a digital token issued on the Ethereum blockchain. The Ethereum token was supposed to be backed by an asset called the Japanese government bond. The Japanese government bond is a country’s debt obligation, which means the BOJ would have taken on the risk of default. But the bonds were later downgraded to junk bond status and there were questions about the bonds’ liquidation value. There are also questions about the security of a central bank digital currency.

Final Words: Is CBDC the Future?

Digital fiat currencies and central bank digital currencies sound like a good idea. But one of the main problems with CBDC is that there are many questions about how they would work. We don’t know if digital fiat currencies would be effective or if the government and financial system would accept them. It’s possible that digital fiat currencies could work well. But there are also many potential problems and disadvantages with digital fiat currencies. For now, fiat currency is the most effective method for managing currency and has the best security and privacy. Digital fiat currencies are a bad idea, but they aren’t necessarily a bad idea for the future.

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