Central bank digital currencies are on the rise. That could be bad news for freedom.

Op-Ed written by Lars Gumede for News24. Article link: https://www.news24.com/fin24/topstories/opinion-central-bank-digital-currencies-are-on-the-rise-that-could-be-bad-news-for-freedom-20221008-3

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By Lars Gumede

With the global cryptocurrency market valued over $1 trillion, central banks around the world are scrambling to create their own digital currencies to compete. As the world moves towards cashless societies, central bank digital currencies (CBDCs) will become the primary form of money, sooner than most people expect.

 Central Bank Digital Currencies (CBDCs) are a digital form of government-issued currency (fiat money). Currently, one has money (rands) in an account with a commercial bank such as Standard Bank or Absa. These rands are issued by the South African Reserve Bank (SARB).

 The way CBDCs work is that one has an account directly with the Reserve Bank. In that account you will have digital money that can be spent with smartphones or other devices and without the use of cards, private financial institutions or even internet. Although, commercial banks would most likely still handle the customer facing aspect.

 CBDCs are distinct from and not to be confused with cryptocurrencies. Cryptocurrencies, such as Bitcoin and Ethereum, are unregulated, decentralised and not reliant on any central authority. CBDCs are digital forms of fiat money. This means central banks can issue more currency at any time making CBDCs inherently inflationary (loses value over time). On the other hand, CBDCs are safer than volatile and risky cryptocurrencies as they are backed by the government.

 So, what’s the case for CBDCs? Like any innovation, there are benefits, drawbacks and various important considerations. The benefits include increased inclusion and participation in the economy, greater currency stability, lower transaction costs and increased market efficiency. South Africans will not need a bank account with a commercial bank to use CBDCs - only a smartphone. This is significant as over 90% of South Africans have access to a smartphone according to the Independent Communications Authority of SA (ICASA), and 80% to bank accounts.

 CBDCs are safer as they would be issued and held by the SARB. Therefore, the public will have a claim on the Reserve Bank which is at the least risk of default. This means you will never lose your money.

 Moreover, transaction costs will be lowered as there will be less links in any transaction chain. This is important as the International Monetary Fund (IMF) estimates the average transaction costs to send and receive money in Sub-Saharan Africa to be 8 percent of the sending amount - more expensive than any other region in the world.

 Whilst the pros are significant, so are the potential cons. Critics of CBDCs argue that they are potential avenues for government overreach. These are valid concerns as your money will be under the control of the country’s central bank.

 The most concerning element of CBDCs is programmability. The Bank of England, for example, is considering making CBDCs programmable – which allows the issuer control over how that money is spent. Sir Jon Cunliffe, a deputy Governor of the Bank of England stated that, “you could think of giving your children pocket money but programming the money so that it couldn’t be used for sweets.” Whilst great for your children’s teeth, consider what this means.

 Programmable currencies give control over how your money is spent to an employer or the state. Following a natural disaster, the government may issue relief funds that are only spendable on certain foods. Or perhaps to save the planet from climate change, governing bodies could put a limit on expenditure related to CO2 emissions. Once you have met your monthly limit for petrol or beef, your money will no longer work purchasing these goods – forcing you to satisfy yourself with a bicycle and vegetables. Programmability has potentially serious ramifications on individual freedoms if not implemented carefully.

 According to the Atlantic Council, CBDCs are being explored by 105 countries as of July of 2022. The Bank of International Settlements (BIS) puts that figure at over 90% of central banks. So far ten countries have fully launched digital currencies including Nigeria, which launched its eNaira in October of 2021. Although, only eighty merchants had funded their wallets as of May 2022, as reported by Business Day, Nigeria.

 Moreover, the IMF cautioned that eNaira is at imminent risk of cyber-attack. In 2021, South Africa was ranked 95 of 110 countries for cybersecurity by the Digital Quality of Life Index (DQL) – far below Nigeria (48th). South Africa suffers over five hundred cyber-attacks per hour costing the economy over R2 billion annually, as found by Interpol’s African Cyberthreat Assessment Report 2021. The issue of cyber security will be paramount for any South African digital currency.

 SARB has been investigating the viability of a CBDC since 2018 under Project Khokha. However, the country is still several years away from issuing a digital currency according to Kuben Naidoo, a deputy governor of the South African Reserve Bank.

 CBDCs are the financial system’s response to the rise of cryptocurrencies and will become the main currencies in the future as we move towards a completely cashless society. Cryptocurrencies’ will continue to attempt to challenge the fiat money system as a possible alternative with its decentralized and liberty-based proposition. However, the primary financial systems of the future are likely to revolve around central bank digital currencies.