I suspect that most of you here view Central Bank Digital Currencies (CBDCs) with a tinge of suspicion. Given that cryptocurrencies are meant to be decentralized and deregulated, having central banks try to introduce their own CBDCs seems to be antithetical to what cryptocurrencies are all about. However, since China has already introduced the e-yuan since April 2020 and most central banks around the world have expressed interest in following suit, I thought I would keep an open mind and research on why these financial institutions wish to introduce CBDCs. This article aims to explore the advantages and disadvantages of CBDCs,

Advantages of CBDCs

1) CBDCs are attractive on various fronts: central bank issued, token-based, digital and widely accessible. To illustrate further, they are not only recognized as legal tender like fiat currency, but are also as convenient as a payment app. Plus, they can be utilized for decentralized finance (DeFi) applications as they tap on blockchain technology. 

2) CBDCs are backed by the central bank, which cannot be bankrupt. This may help bring about peace of mind to some consumers out there.

3) CBDCs are distributed through commercial banks and thus, alleviate the problem of too much disruption to the financial system. The Chinese government, for instance, is intending to introduce its digital wallet for the e-yuan.

4) Even in the United States, more than 6% of Americans do not own a bank account. The problem of the unbanked is aggravated across the globe as 1.5 billion adults do not have a banking account. CBDCs could help alleviate their plight by helping them get paid electronically. Additionally, should recessions happen, central banks can deploy CBDCs quickly to give out stimulus checks to the lowest-income groups who need government handouts the most. Such targeted and timely payments could be facilitated with the availability of CBDCs.

5) CBDCs could pose a viable combattant against other digital assets like stablecoins which may be difficult to regulate and pose risks to the financial system. In fact, the heads of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission of the United States just met recently to discuss the potential threats stablecoins could pose to capital markets.

Disadvantages of CBDCs

1) CBDCs are frankly central banks' strategy to wrestle control back from the hold cryptocurrencies have on the general public. If central banks gain valuable user data from their blockchain technologies, this could lead to intrusive financial surveillance as our financial transactions could now be easily tracked.

2) CBDCs allow central banks to exert a greater influence over the country's monetary policy - to the extent of imposing negative interest rates.

3) Unlike Bitcoin which has a finite supply of 21 million Bitcoins, CBDCs make it easy for central banks to drop helicopter money as they airdrop new tokens to their consumer base. 

My View on CBDCs

Through my research, I realized that central banks have a mounting uphill task ahead of them. They not only have to contend with increasingly digital savvy and educated populations who much prefer to use crypto as a means of gaining supersized profits, but also have to compete against emerging fintech companies who take entire nations by storm with their digital payment systems.

I know this is not a popular view but I think with the influx in crypto-related scams, sometimes the government needs to protect its citizens against themselves. In Singapore, $29 million was lost to crypto scams from 2018 to 2020. And it seems that people get scammed of their hefty life savings ever so often through scams like Ponzi schemes and fake coin offerings. Should central banks introduce CBDCs, this could protect citizens' financial welfare to a certain extent. I guess the question is: to what extent are we willing to trade free will for security? Here, while I am supportive of governments' efforts to implement CBDCs, I want to be given the freedom to decide where I choose to park my money. So, authoritarian governments who ban cryptocurrencies in favor of their own CBDCs are a no-go for me. 

So I welcome CBDCs on the condition that cryptocurrencies are not ruled out in that country. Is my balanced view too naive? Or am I being too greedy by just wanting the best of both worlds?

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