Stay tuned with CashEssentials news ! - beyond payments
By subscribing, you accept our Privacy Policy.

Looking at Both Sides of the Coin: A Technical Discussion about CBDCs

Categories : Cash is a public good
January 31, 2023
Tags : Cash, CBDC, Cryptocurrencies, Public good
As an increasing number of central banks investigate the opportunity and feasibility of a CBDC, it appears that they are not a silver bullet and present both pros and cons. The key to their success comes from properly designing these digital currencies and the core motivations and use cases behind their adoption.
Carlos Leon

Director of Financial Market Infrastructures & Digital Currency Solutions at FNA

This post is also available in: Spanish

CBDCs are, at this stage, a broad concept. They come in different shapes, sizes, and flavours, and each central bank’s flavour will ultimately determine whether a CBDC will work for the people. Here are some standard features:

The slow adoption of CBDCs in the Bahamas and Nigeria suggests that the use case is unclear and that central banks must work harder to understand consumers’ and merchants’ needs. Likewise, after more than a decade, bitcoin and alike have failed to turn into money – they remain as assets to invest or bet, with no clear case for the medium of exchange, store of value, or unit of account, even where declared as legal tender (e.g., El Salvador).

CBDCs are not a silver bullet.

CBDCs are not a silver bullet; while they have flaws, they also have significant advantages. I believe it is imperative that when making a case for or against CBDCs, at a time when more than 90 central banks are looking to introduce them shortly, we present a balanced argument for and against them.

The motivations behind the design and adoption of CBDCs must be better understood and clarified. It has been suggested that a prime basis among governments is to inflict ultimate control over societies through social engineering. This could be said of any fiat-based payment system in place today. The CBDC architectures currently being discussed do not necessarily involve having access to all the details of how, when or where people use CBDCs. A tiered anonymity architecture, with anonymity depending on the value of the transaction, could favour privacy while complying with anti-money laundering (AML) and combating the financing of terrorism (CFT) mandates—similar to what we have today with cash transactions at commercial banks. If banks and payment system providers are the distributors of CBDCs, this could work even better.

We must focus on championing the responsible and proper design of CBDCs to alleviate the fears associated with the unknown. We need a discussion on technical grounds that outlines the facts rather than makes presumptions based on broad negative sentiment—what bitcoiners usually call spreading FUD (fear, uncertainty, and doubt).

The pros…

Let’s look at the pros to begin with.

And the cons

On the other hand, there are some drawbacks to consider.

The key to the success of CBDCs is the proper design of these digital currencies and the core motivations and use cases behind their implementation. Central banks must clearly understand the pros and cons to alleviate concerns and reservations, backed up by a clear vision of how a CBDC will be adopted based on its multiple design options.

Talking about Orwellian nightmares, it is true that a CBDC could be mismanaged by a government, either democratic or authoritarian. Likewise, it is also true that other forms of money could be misused, including cash–did you know that some ATMs can read serial numbers on bank notes? But bitcoin can be misused for Orwellian purposes too. In the wrong hands, even the pseudo-anonymous and allegedly decentralised bitcoin could turn against the public. Not long ago, a Latin American country gave bitcoin legal tender status and offered U$30 worth of bitcoin to people to download and register to Chivo, the government’s mobile wallet; to me, giving a bait equivalent to almost three days’ minimum wage to force people to surrender personal and transactional information to an app that is owned and managed by a government which has been accused of authoritarianism is pretty Orwellian.

Perhaps the payment instrument or the form of money is not what we should fear. It is payment instruments’ design and their potential misuse by governments and central banks. Adequate consumer protection, regulation, and oversight of the payment system are always needed for any form of money (or technology!) to work for–not against–the public.


This post is also available in: Spanish