Central Bank Digital Currencies vs. Cash: Which One is Actually Better for You & Why

Envision a world where your money is no longer a tool for personal freedom, where every purchase you make is tracked and added to your permanent record. Central Bank Digital Currencies (CBDCs) make that dystopian nightmare possible — and they’re coming. 

Much controversy surrounds the effort to enforce CBDCs. As 114 countries seek to introduce them, skeptics worry about CBDC tracking reducing our personal privacy and financial freedom. 

Central banks say CBDCs will safeguard your privacy and enhance convenience. However, it’s hard to see how governments having full access to your finances is good for privacy. Moreover, people are questioning whether the potential increase in convenience is worth it – we already have instant transactions for the majority of our daily activities that involve money.

Many privacy advocates and economic leaders warn governments may use CBDCs for control and heavy-handed surveillance. Governments have a history of wanting power over people. Currently, most countries don’t have the tools to take control of your purchases and lifestyle. What would happen if they did? Would they continue to present their classic campaign-ready altruistic fronts? Or would things quickly turn ugly?

Let’s answer some key questions, including what are CBDCs, how are they different from cryptocurrency, and what are the risks of CBDCs. Before we get into all that, here’s a quick history of money to give you some context about how significant CBDCs are.

A Brief History of Money

Trade is an integral part of human history and it existed even before cash. People exchanged goods in a value-based barter system and that worked for quite a long time. Dairy farmers could trade a gallon of milk with their neighboring chicken keeper for a handful of eggs. 

The barter system wasn’t centralized, and transactions weren’t overseen by any authority. People could exchange goods freely as long as both parties agreed on the deal. There were problems, sure, but the system still works on a small scale.

Physical currency first came on the scene more than 2500 years ago. Some debate exists about where the first coins were used. Most Western historians credit the Lydians with creating the first coins around 650 BC. Around the same time, China also started using coins which often featured a small square hole in the center for easier storage and transport. 

China was the first to introduce paper cash in the 7th century, although it didn’t become commonplace until the 11th century. Other countries began to adopt these systems which slowly led to trade conflict.

The absence of a global standard meant countries could assign higher values to their currencies to gain strategic advantages over trade partners. Countries would also print more money as they pleased, which wasn’t sustainable long-term as the increasing amount of a currency makes it less valuable.

Sir Isaac Newton is credited with creating the gold standard, which countries used to standardize currency value and make cross-border trade fairer. In the 1900s, the United States created the Gold Standard Act to combat inflation, which can work so long as the country does not print more money than its gold reserves. As you can probably tell, this was the downfall of the gold-pegged dollar, which had to be abolished 70 years later.

The need for a centralized money system led to the emergence of central banks, which according to American economist Michael D. Bordo, fulfill three key goals: 

1. Price stability
2. Stable real economy
3. Economic crisis prevention

The Swedish Riksbank was the first centralized banking system, established in 1668, followed by the Central Bank of England a few decades later in 1694. 

In 1913, the United States created the Federal Reserve System to increase financial flexibility and stability. Payment cards came soon after that, as two New York-based businessmen invented the first credit card — the Diners Club card.

The 21st century has seen the introduction of mobile payments and virtual currencies, with Bitcoin being the first cryptocurrency, in 2009. Cryptocurrencies created a whole new paradigm where people could make digital payments anonymously. They’re also completely decentralized and most are based on blockchain technology.

Although cryptocurrencies recently gained popularity, the proliferation of altcoins and crypto scams has resulted in significant losses for many individuals. With the looming introduction of Central Bank Digital Currencies (CBDCs), we’re about to enter a new chapter in financial history.

What Is a CBDC (Central Bank Digital Currency)?

Central Bank Digital Currencies (CBDCs) are a new type of digital currency created and issued by central banks and governments. CBDCs are designed to operate within a regulated system, giving central authorities greater control over your personal finance. 

Governments cite increased financial inclusion, transparency, and fighting financial crime as the main benefits of CBDCs. However, they raise big concerns about privacy rights, civil freedom, and excess government control through CBDC tracking.

As more countries explore CBDCs, many people worry about what an ultra-centralized currency system would mean. If you live in a country with a benevolent and corruption-free government, you won’t have a problem. But tell me, what government is 100% corruption-free?

You can track each country’s CBDC plan at the Atlantic Council CBDC tracker website. The majority of countries are in the research or piloting stage of development. Some countries, including China and Brazil, have already launched a CBDC program. 

If you want to know more about CBDCs (from a government perspective), watch Britain’s current Prime Minister and former Chancellor of the Exchequer talk about it.

How Do CBDCs Work?

CBDCs are a programmed currency created and regulated by central banks and governments. The value of the digital currency is linked to the issuing country’s currency. China’s Digital Yuan reflects the value of the actual Yuan, and Britcoin is based on the Pound Sterling.

The Financial Times reports CBDCs will likely be linked to your identity. This means your government will have information about every financial move you make. If it ever gets to a point where some purchases are more socially acceptable than others, it would be easy for authorities to restrict or discourage certain transactions.

Since CBDCs are programmable, it will be easy to program rules, regulations, and red flags on particular types of transactions. China is already doing this, and the Digital Yuan became another tool in the CCP’s citizen surveillance toolkit. 

CBDC vs Cash or Cryptocurrencies

CBDCs differ from cash and cryptocurrencies in several ways. While cash is still widely used, it’s becoming less common both in your pocket and in banks’ vaults. This is mostly because electronic payments are getting more popular and the fact that banks are not required to keep that much cash around.

Cash expenditures are difficult to track unless you leave a deliberate paper trail. You can spend your cash without anyone knowing how or where you spent it. CBDCs will be very different since all your transactions are recorded and accessible by a central authority.

You might be wondering what’s the difference between CBDCs and regular digital banking. Most banking is digital anyway, right? Well, the difference is the government can’t just snoop on or interfere with your bank account whenever they please. The financial privacy you currently enjoy will likely disappear if the world switches over and CBDC tracking will likely become normal. 

CBDC tracking might just be the first step, too. When your money is in full view and control of a single central authority, what’s to stop them from using that data for profit? Even minor transactions could be taxed, while “undesirable transactions” could be completely blocked. 

Your right to spend your hard-earned money how you want could be limited and even revoked at an authority’s whim.

CBDC Versus Cryptocurrency

When it comes to privacy and personal freedom, CBDCs are the virtual opposite of cryptocurrencies. 

Both are digital currencies, but cryptocurrencies operate on a decentralized blockchain system. They’re not controlled by a single entity and you can (at least theoretically) make transactions in private. In contrast, CBDCs are hyper-centralized and all transactions are tracked by your central bank.

Should We Worry About CBDCs?

A lot depends on how governments use CBDCs and whether they plan to mandate them by abolishing other forms of currency. If it stays optional, we have no reason to panic. However, based on how most governments say CBDCs will tackle illicit finance, we can expect they won’t be optional for long. Were they lying or not telling the full story when they said it would be?

CBDCs pose a substantial threat to financial privacy, financial freedom, and the very foundation of the banking system

Cato Institute

After all, if you’re going to launder money, you wouldn’t choose to do it through a government-monitored account. If CBDCs can tackle illicit transactions, it’s only because other ways to transact won’t be available.

Andrés Arauz, a former minister of Ecuador and general director at Ecuador’s central bank states “average citizens need to be private to ensure civil movements can be crowdfunded.” He also notes that “mass surveillance suffocates free thought and civil rights.”

Let’s explore the risks of CBDCs and how they could affect your life if governments choose to go Super Saiyan mode with them. 

Goodbye Privacy, Hello Surveillance

As it stands, governments can’t access your financial transactions. In most countries, they need judicial consent on a case-by-case basis, and they need a good reason for it. For example, if you’re suspected of tax evasion, a judge might give authorities permission to investigate by checking your bank records.

If CBDCs become normal, your government can have direct access to all your financial records at all times. Average people will be treated like criminal suspects without due cause.

It’s no secret that intelligence agencies target and monitor people they don’t like. And they often do so outside the law. In light of this, how much can we trust their security systems? Are we really going to trade bank security and privacy for government security and privacy? Governments are often incapable of guarding their own private documents. 

With banks, we know they’re at least somewhat experienced with securing money and have effective systems to keep money safe. Of course, there are numerous instances where banks,  even central banks, have failed, but this doesn’t mean more centralization and less transparency is the way to go.

Program Your Money? Program Your Behaviour

Current cryptocurrencies are programmable, which means CBDCs can have the same features. If CBDCs are programmable, authorities could embed rules about how you can spend your money. Something being discussed a lot is a “carbon allowance system” which calculates your carbon footprint based on your purchase history. 

The World Economic Forum (WEF) discusses plans to redefine social norms through an individual carbon allowance and tracking program. Mastercard is also working on a similar program to calculate carbon footprints. 

Finding new ways to save the planet is fantastic and something everyone should get on board with. However, it’s tough to ignore the hypocrisy of WEF attendees taking private jets to meetings where they plan carbon allowance programs for people who can barely afford their living expenses. 

A programmable currency also lets governments flag and block certain transactions. Want to send your sister $100? The government can tax you on it, ask questions, and keep logs of exactly when and how much you did. Want to buy a plane ticket to visit your family? Sorry, you’ve exceeded your monthly carbon allowance — you’ll have to pay 20% more to offset the additional carbon emissions or spend Christmas alone.

With a power like this, governments can directly influence what people buy and if they can buy anything at all. You might no longer have autonomy over how you spend your hard-earned income.

Social Credit Scoring

China was the first country to experiment with a government-controlled digital currency. Is it worrying that the rest of the world wants to follow in its footsteps? The Digital Yuan hasn’t yet been integrated into China’s notorious social credit system. However, when it is, the government can enforce its reward and punishment system more deeply into people’s lives. 

When a Chinese citizen does anything contrary to the CCPs ideals, they’re punished in a variety of ways. For example, if a person’s score falls below a certain value, they’re blocked from domestic and international travel. Their employment prospects are also seriously hampered and their children are excluded from high-ranking schools. 

Once you’ve crossed party interests in China, life becomes extremely difficult and you’re effectively ostracized from society. If the world adopts CBDCs, it makes it easy for governments to enforce similar systems. Am I right to assume nobody wants that?

You might think governments of “free” countries would never use these types of underhanded tricks, but you may find the truth shocking. If you protest against public policy in Canada, the Canadian government may freeze your accounts. A full-blown social credit system isn’t a big conceptual leap away from that.

Limits on Saving

The UK openly discusses plans to limit saving with CBDCs, referring to it as “hoarding.” While saving limits don’t mean anything if we keep access to our commercial bank accounts, it’s devastating if CBDCs fully take over and other methods of holding currency don’t exist. 

Again, the key question is whether governments plan to make CBDCs the only form of currency. If they don’t, we lose nothing, if they do, we lose everything. Is it wise to simply take their word for it?

Not a Solution to Inflation

When governments can simply create money when they like, inflation is a bigger threat. The idea of governments causing inflation by creating money out of nowhere isn’t new. 

UK Prime Minister Rishi Sunak, one of the biggest CBDC advocates, has been widely accused of causing inflation by printing money to offset pandemic-related economic issues. If he’s spearheading CBDCs in the UK, it’s not unreasonable to think governments will keep doing what they have done (print money), which means inflation will continue to happen regardless. While people are debating whether CBDCs will help or harm inflation, we can’t know until it happens. 

The effects of inflation are serious and extremely relevant to everyday life. Between rent prices increasing, food getting more expensive, and life becoming unaffordable for the working class, we have many good reasons to reject any new system that could increase inflation. 

CBDCs Are Not Legal — Yet

According to a paper by the International Monetary Fund, most central bank laws don’t currently allow for the issuance of a CBDC. Without a legal framework, using CBDCs could be complicated. The study also states that in monetary law, CBDCs are not a “currency”.

It would take a lot of legal reform to make CBDCs legally sound and functional, especially on an international level. You would think something as huge as changing laws to create a brand new currency system deserves a public vote. However, no such referendum exists. 

Challenges With CBDC Control & Privacy

The vast majority of governments and central banks are taking interest in new digital currencies. As much of the world edges closer to a more centralized model, questions arise about what CBDCs will mean for freedom and privacy. The US is already looking to restrict which apps and services citizens can use. 

The US RESTRICT Act would allow the government to block any tech from “adversary nations”. As always, the language in the bill is vague, leaving ample room for them to misuse power through loopholes and ambiguities. 

New laws, acts, and regulations only seem to make life more strict, and CBDCs offer governments an avenue to enforce laws with ease. When your government has absolute control over your money, you won’t be able to move an inch without them knowing — to use China’s rhetoric.

If regulations to prevent CBDC tracking from getting out of control exist, a digital currency system could have benefits. However, it’s hard to imagine governments having such control and simply not using it. Blindly handing them the power to control your finances and ensnare you into a social credit system isn’t worth whatever benefits CBDCs vaguely claim to offer.

CBDCs aren’t the only threat to your banking privacy, and according to Global Banks, governments are already spying on you.

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