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Retail CBDCs

Retail CBDCs
By Conor Svensson • Issue #42 • View online
Debunking the privacy concerns

In my last issue, I debunked why concerns of privacy campaigners over CBDCs should not be of concern with respect to wholesale financial markets. I now shift the focus to retail digital currencies, which is where much of the anti-CBDC rhetoric is aimed.
The concern that proponents of decentralised cryptocurrencies have is that were we to have a central bank issue a digital currency for retail users, it could be controlled by the state in a way that cash cannot be currently.
It’s important to note that a retail CBDC would be considered e-cash — much like cash today, its supply is controlled by the central bank who guarantees its face value, and the user can use it as they see fit.
This is different to e-money which is a digital representation of real money but only exists on account with an institution that holds it on your behalf, such as the funds you hold in Paypal. You cannot send this money to someone outside of the Paypal ecosystem.
This is also different to stablecoins such as USDC which are in no way guaranteed by a central bank, they are backed by the company that issues them, Circle in the case of USDC. USDC only remains solvent as long as Circle is still in business. This is unlike a retail CBDC which would be backed by a central bank.
If a retail CBDC were created in a tokenised form, campaigners have raised concerns that the state would be able to exert too much control over how such a currency is used. As demonstrated by the anti-CBDC posters below, one could not just track where and how you’re spending your funds, but also apply stealth taxes too.
This approach would require the roll-out of a retail CBDC managed by the central bank, where all consumer transactions take place on-chain. Such a platform would be far from trivial to do and change the role of many of the existing financial platforms we use today.
With this approach, privacy campaigners have a right to be concerned as all of their financial activity would appear in one single location instead of being spread between multiple institutions as they are currently (for a breakdown of different approaches to retail CBDCs, I encourage you to refer to the report on project Aurum undertaken by the BIS Innovation Hub and the Hong Kong Monetary Authority).
We already have multiple platforms and providers handling consumer transactions at point of sale and online, be that Paypal, Visa, Mastercard, Square, Stripe and others.
These platforms are already tracking every activity you undertake on them, they will disclose this information to the government or third parties if required by law, and they can also lock you out of their platforms should they see fit.
A central bank-issued retail CBDC would aggregate such information into one place, but it would also disintermediate the role of banks and payment providers which doesn’t seem like a sensible or popular end-state.
Hence a more likely end state is where we have retail CBDCs that are issued by commercial banks, which back these CBDCs by wholesale CBDCs which are managed by the central bank. On the surface this seems similar to stablecoins, however, these retail CBDCs would be backed by wholesale funds governed by the central bank, not collateral holdings held by a single entity like Circle in the case of USDC.
Privacy is also a commonly cited concern with respect to retail CBDCs. Even the Bank of International Settlements acknowledges the importance of privacy for consumers — it should not be public information what groceries you purchase each week, and central bankers know this is not an option but essential.
With our existing monetary systems, privacy is controlled by financial institutions, not individuals. With a retail CBDC, you would likely have a far greater grasp of how your data is being used than what you have currently where you’re at the mercy of an endless number of different platforms, which suffer platform breaches that have resulted in sensitive data about your online activity or identity being stolen.
Whilst it is speculative to outline the final form of a retail CBDC, I think it’s fair to say that many of the criticisms against them are unfair — our digital lives can already be closely monitored and this trend will continue regardless if we have CBDCs.
For those who remain firmly against them, cryptocurrencies will likely remain the most viable alternatives. They are unlikely to be outlawed in most jurisdictions. However, the hoops that are required to jump through to be fully anonymous are significant.
However, it’s important that any anti-CBDC views are framed correctly. Just because we have decentralised networks powering cryptocurrencies, DeFi and other innovations, doesn’t mean that all future currencies should migrate to this model.
After all, the stabilising asset of the crypto ecosystem is those stablecoins which rely on U.S. dollars to underpin them. Without these, it’s likely that cryptocurrency markets would have been able to flourish to the level that they have.
In order to have safer cryptocurrency markets, we need to have not just stablecoins which are stable by name, but not always in nature, but coins that are stable in name and nature, and for that retail CDBCs will need to co-exist that play nicely with the crypto and web3 ecosystems.
Yes, there will be a need to compromise with these, as states do not transcend borders as a decentralised network can. However, it’s important to keep in mind that for the majority of the population creating a frictionless an experience between our different monetary platforms will be the biggest benefit of all, and CBDCs are one component that can help us get there.
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Conor Svensson

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