Most central banks around the world are currently in various stages of evaluating the conditions for introducing national digital currencies. Some of them successfully completed pilot projects that encouraged them to engage fully in this process.
In short, these currencies will be exclusively digital, which means that there will be no physical copies of them, and at the same time they will be programmable, that is, certain information could be embedded in them.
This change underpins the idea that has emerged and waned at the same rate in recent years, the idea of a so-called cashless society. However, this is the first time that there is a solid foundation on which this idea can be built.
What are its pros and cons, what does CBDC introduce into the financial system, and many other questions we asked cryptocurrency expert and vice president of the Bitcoin Association of Serbia, Arvin Kamberi from DiploFoundation.
“Cashless society – a sense of security or dystopia?”
When you first heard about the idea of a cashless society, how did it sound to you? And what do you think of it now?
– The digital form is the natural evolution of money as a mean of payment, from shells to precious metals, to paper money and finally contactless payments by cards. In addition to the form, money also changed its functionality, adding a layer of complexity as the human economy expanded. When I first heard the term cashless society, it seemed to me as a great solution for that small, personal convenience and comfort such as carrying a wallet. The term itself gives you a special sense of security that no one will rob you on the street or slip you a fake 100 euro note. Now that I’m older, I realize I’ve been thinking about the wrong kind of benefits that money provides. At this point, that idea sounds like a dystopia that, I hope, is still far in the future. In an environment that is almost completely digital, the ability to transfer money instantly, across the planet, at any time, seems like a big novelty in our lives. However, as is the case with all technologies (which are usually neutral in themselves), the way we use them makes them good or bad.
Due to cash payments, on an annual basis, each individual has financial expenses that s/he’s not even aware of, especially since we usually lose coins around the house or don’t even take them as change, so we exchange large denomination banknotes into smaller again and again. Do you think this is one of the problems that CBDC could solve? And for what other problems could it be useful?
– Digital money differs in one important characteristic. It has no physical manifestation. Therefore, it will not happen that you misplace the money or that you do not know where you left it. That’s just one of the benefits that CBDC provides, but, of course, there are those that are much more important for the new digital age. First of all, the CBDC will enable the “global economy” in the true sense of this compound (the ability to sell your goods beyond the borders of your country). In addition, it will allow for the reduction, or total disappearance, of commissions levied on cross-border or transfers between resident banks. It will bring the freedom to carry our money with us without the risk of them being stolen.
Arvin Kamberi. Screenshot: Youtube/Partners Serbia
– One of the major novelties that CBDC presents is the so-called “smart” money, or the ability to program money, which will allow for its specific uses (e.g. that you can spend it only for a specific purpose or in a specific way). Opportunities for further development and concrete examples of application are ahead of us. Many of them we can’t even imagine now, and they concern the future society. One of the applications that we haven’t had so far is the ability to develop networks of IoT devices that could communicate with each other and even exchange transactions. IoT networks in the smart cities of the future will consist not only of phones, computers but also of other facilities such as parks, streets, infrastructure, roads (e.g. when you are in a hurry, your autonomous car can offer and transfer to make a small sum of money to the autonomous car in front of you, to let you pass it).
“CBDC allows central banks to cooperate directly with citizens”
What do banks gain from the introduction of this system, and what do citizens gain?
– In this case, we need to distinguish between two types of banks with which citizens cooperate. On the one hand, there are commercial banks with which citizens and businesses have the most contact. They provide loans to citizens and companies, maintain accounts and facilitate business related to the economy. In addition to them, almost all countries around the world have a central bank that serves as the main financial institution in the country, makes decisions about the movement of the national currency, affects the flow and control of money, as well as factors that lead to general financial stability in a country. Central banks do not cooperate directly with citizens but with other commercial banks, which then pass the money on. One of the basic ideas of the system behind CBDC is that, with this technology, the central banks would be able to cooperate directly with citizens, that is, it would allow every citizen to have an account with the central bank of their country. With this practice, central banks would have levers for direct financial assistance or financial decisions at the level of each citizen. On the other hand, commercial banks would have real-time insight into each of their investments. Payments would be faster and with fewer “parties to the transaction”. This would lead to rationalization in the banking sector and probably a new boom for participants who will remain on the scene.
What can we learn from the practice of the countries that introduced this system?
– So far, few countries have adopted CBDCs, but over 40 of them have implemented a full CBDC pilot project, and about 90 central banks have announced such a project, according to data from the Bank for International Settlements (BIS). Judging by the announcements and plans, we can distinguish three basic cases of using digital currency:
- CBDC as a way to control central emissions and control consumption. In this case, central banks will use CBDCs as leverage to control money movements and control inflation or other economic parameters. A good example of this is the Nigerian e-Naira CBDC project that came to life last year. The Nigerian government has already resorted to elements of control through this mechanism. This has provoked a lot of reactions within the country, as well as among foreign observers.
- CBDC in the function of wider social control, such as in PRC. The People’s Republic of China has launched an e-renminbi (digital yuan) in several cities in China, selected for its high level of card and online transactions. The Chinese economy and citizens are quite focused on online shopping and online payments. China’s super-app WeChat has integrated several identification and payment functions through the app, and is the largest “banker” for Chinese citizens. The Chinese government has announced that the pilot project has gone according to plan and that the first amounts of CBDC will be delivered to commercial banks. According to experts from China and the rest of the world, China will somehow merge the CBDC with its “Social Credits” program in which every citizen is rewarded or “punished” according to the country’s current laws.
- CBDC as an aid to international trade. Many governments around the world hope to use an electronic version of their money to compete more successfully in the international market and become competitive for their citizens who, using them, could reduce the use of foreign currencies (such as the dollar or the euro).
“Aversion is justified, this technology provides an opportunity for complete financial control of citizens”
Decentralization is becoming an imperative in the field of data protection, so it inevitably leaves a mark on how we make financial transactions. CBDC is definitely revolutionizing the existing way, so do you expect that there will be resistance from the general population? And how can we help reduce this aversion?
– First of all, we need to understand why this aversion even exists. This technology provides opportunities for complete financial control of citizens, and they have every right to be concerned for their privacy. The European Central Bank (ECB) project for launching an electronic version of the euro emphasizes special attention in this area. ECB cited privacy as a main characteristic that EU citizens pointed out as the most important one in polls related to the creation of the e-Euro. These ideas will only be supported by citizens if responsible policies put privacy issues first. Moreover, the ECB has announced that it will not suspend the issuance of cash money alongside the CBDC (as recommended by citizens). This approach was announced by the central banks of England and Switzerland, as well as other central banks of countries outside Europe. Cash is the only way for private financial transactions, i.e. that only you and the buyer know that the transaction has taken place. As with any novelty, it will take time before citizens begin to fully trust such digital systems – rightly so, bearing in mind how the internet and the companies on it are regulated today. The development in this direction will vary greatly from society to society and will reflect the confidence of citizens in state institutions that will certainly have to cooperate with the private sector on the CBDC project (at least in the beginning).
Does the cashless society seem like a parallel universe that we’ve only seen in movies and that until recently we never thought we’d experience?
– In terms of money, I hope that the future won’t be Spielberg’s Minority Report or Niccol’s Gattaca, but a Star Wars serial in which, although “far far far away in the future,” there are still bags of physical money to pay someone. We must act now to secure the future we want. We need to put the issues that concern us first on the agenda in public debates. By running away from “difficult” questions, we only postpone them for a moment when we will not have the opportunity to influence them as much.