The rise of CBDCs

April 22, 2022

Both in developed and developing economies, cash usage is declining as people increasingly use digital forms of money (such as credit/debit cards, payment apps). Combined with the rise of decentralized cryptocurrencies and stablecoins, this trend shifts the balance between central-bank issued public money and private money. In response, central banks across the world are exploring central bank digital currencies (CBDCs), a new digital form of public fiat money. The number of countries exploring CBDCs has increased from only 35 in 2020 to around 100 in February 2022. Emerging markets with large unbanked populations are the most eager.

CBDCs have certain advantages for public policy makers: they would give central banks a new tool to directly influence the money supply and monitor how money is used. Moreover, CBDCs could increase financial inclusion and support citizens in time of need by enabling governments to directly transfer funds, even if people have no (access to) commercial bank accounts. Because it is digital, the use case of money could be programmed into the issuing of welfare funds, e.g. a subsidy that could only be spent on specific goods and services. It could also increase the efficiency and stability of digital payment systems, with money-creating activity being redirected towards central banks instead of commercial banks, economic activity being brought out of the shadows into the tax net, reduced counterfeiting, and the fact that it will be much more difficult to use official money for illicit purposes (e.g. money laundering, drug trafficking, terrorist financing). As a result, CBDCs would significantly expand the central bank's toolkit for ensuring financial stability. Lastly, these developments motivate central banks to exercise discipline in order to maintain the value of their currency and prevent inflation.

However, CBDCs could also infringe upon our privacy, as transactions in which CBDCs are used are likely to be auditable and traceable, as no central bank would want to allow its money to be used for illicit transactions. Furthermore, CBDCs also pose risks for countries and companies, because if currencies are less convenient or volatile, they could be displaced by private stablecoins or CBDCs issued by large economies. This would result in a loss of monetary sovereignty. In terms of money as a medium of exchange, powerful private companies with strong digital ecosystems (e.g. Apple, Meta) could come to issue their own currency at the expense of smaller companies. 

Burning questions: 
  • What would the future mix of both private and public money look like?
  • What will be the future of centralized (e.g. CBDCs) and decentralized money (e.g. cryptos such as Bitcoin)?
  • Which countries will be likely to introduce their own CBDCs, and which countries risk losing monetary sovereignty? What about companies?

Series 'AI Metaphors'

1. The Tool
Category: Objects
Humans shape tools.

We make them part of our body while we melt their essence with our intentions. They require some finesse to use but they never fool us or trick us. Humans use tools, tools never use humans.

We are the masters determining their course, integrating them gracefully into the minutiae of our everyday lives. Immovable and unyielding, they remain reliant on our guidance, devoid of desire and intent, they remain exactly where we leave them, their functionality unchanging over time.

We retain the ultimate authority, able to discard them at will or, in today's context, simply power them down. Though they may occasionally foster irritation, largely they stand steadfast, loyal allies in our daily toils.

Thus we place our faith in tools, acknowledging that they are mere reflections of our own capabilities. In them, there is no entity to venerate or fault but ourselves, for they are but inert extensions of our own being, inanimate and steadfast, awaiting our command.
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2. The Machine
Category: Objects
Unlike a mere tool, the machine does not need the guidance of our hand, operating autonomously through its intricate network of gears and wheels. It achieves feats of motion that surpass the wildest human imaginations, harboring a power reminiscent of a cavalry of horses. Though it demands maintenance to replace broken parts and fix malfunctions, it mostly acts independently, allowing us to retreat and become mere observers to its diligent performance. We interact with it through buttons and handles, guiding its operations with minor adjustments and feedback as it works tirelessly. Embodying relentless purpose, laboring in a cycle of infinite repetition, the machine is a testament to human ingenuity manifested in metal and motion.
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About the author(s)

Pim Korsten has a background in continental philosophy and macroeconomics. At the thinktank, he primarily focuses on research, consultancy projects, and writing articles related to technology, politics, and the economy. He has a keen interest in the philosophy of history and economics, metamodernism, and cultural anthropology.

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