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The world could be facing a dark future thanks to CBDCs

From forcing people to spend their money to making them save it, central banks around the world could soon use CBDCs to create a dystopian nightmare.

During the financial crisis of 2007–2008, many people lost trust in traditional financial institutions and turned to alternative forms of currency, such as cryptocurrencies. It was a way for people to maintain their financial freedom and privacy in a system that had let them down. However, the rise of central bank digital currencies (CBDCs) raises serious concerns about privacy and freedom.

One of the most significant concerns with CBDCs is the death of anonymity. Currently, cash transactions offer the secrecy and anonymity needed for financial freedom. People can use cash to make transactions without leaving a paper trail, which is a fundamental right in a democratic society. However, the introduction of CBDCs could change this.

CBDCs would be fully traceable, meaning that every transaction would be recorded and monitored by the central bank. This would allow central banks to surveil and control financial transactions in ways that were previously impossible. While this may sound like a positive development, it raises serious concerns about privacy and civil liberties.

Related: CBDCs threaten our future, so it’s time to take a stand

CBDCs’ potential negative consequences can also be understood by examining the government’s response to the global financial crisis. For instance, in the aftermath of the crisis, governments all over the world established policies to stop the financing of terrorism and combat money laundering. Unfortunately, these regulations frequently came at the expense of people’s freedom and privacy.

For example, the Russian government has shrewdly used the Anti-Money Laundering framework to further goals unrelated to the fight against terrorism and organized crime. However, the research has revealed that the AML regime has been used by the Russian government to expand its strategic influence over domestic politics and business, as well as to try to restructure the banking system. The regime’s overall legitimacy is weakened by the inefficiency of AML rules and their use for covert purposes.

The 2001 Patriot Act led to abuses of power and violations of civil liberties in the United States. The Federal Bureau of Investigation’s Office of General Counsel found 13 cases of alleged FBI misconduct during intelligence operations between 2002 and 2004 alone, according to the Electronic Privacy Information Center.

Additionally, some policies implemented in response to the crisis led to restrictions on individual financial activities. For instance, some countries imposed capital controls in an attempt to limit the flow of money across borders and stabilize their financial systems. For example, as a November 2022 report by the Bank for International Settlements notes, “individual and merchant wallets of the eNaira” — Nigeria’s CBDC — “have different caps on daily transaction limits and the amount of eNaira that can be held in them, depending on their customer due diligence tier."

The ability to impose limits on people’s daily financial holdings and expenditures could serve to significantly erode privacy and freedom and have a chilling effect on free speech and political dissent.

Moreover, central banks could use CBDCs to implement negative interest rates, which would incentivize people to spend their money rather than save it. This could lead to a surge in consumption and inflation, which could destabilize the economy. This would also lead to a number of technical challenges. For instance, a cap on individual CBDC holdings could restrict the number or quantity of payments because it would be necessary to know the recipients’ CBDC holdings to complete the payment.

In addition to these concerns, CBDCs could also exacerbate existing inequalities. For instance, those without access to the internet or digital gadgets would be shut out of the financial system. This could apply to underrepresented groups like the elderly, the poor and residents of rural areas. CBDCs may potentially lead to new types of financial exclusion since central banks may decline to do business with those regarded as high-risk.

Related: Did regulators intentionally cause a run on banks?

For instance, the Bahamas implemented the Sand Dollar to address the fundamental problem of financial exclusion. However, Sand Dollar balances increased by less than $300,000 between January 2021 and June 2022, whereas the value of notes increased by $42 million — indicating that the Sand Dollar hardly qualifies as a means of payment.

Central banks should carefully consider the implications of CBDCs for privacy, freedom and financial stability. To make sure that CBDCs are created in a way that respects individual rights and freedom, they must also consider frequent consultations with stakeholders like corporations, civil society organizations and individuals.

Ultimately, the rise of CBDCs could be a double-edged sword. Government-backed digital currencies may result in speedier, less expensive, more secure transactions, but they also bring up important issues related to freedom, privacy and financial stability. The goal of financial stability could come at a significant cost in terms of personal freedom and privacy, as we saw in the global financial crisis. The defense of individual liberties and rights should be a top priority for central banks as they consider their approach to CBDCs.

Guneet Kaur joined Cointelegraph as an editor in 2021. She holds a master of science in financial technology from the University of Stirling and an MBA from India’s Guru Nanak Dev University.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Bank profits at risk from potential CBDC transformation of global economy: Moody’s

CBDCs are here to stay, it seems, and Moody’s is looking at their implications for the global economy and international banking.

Emerging central bank digital currency (CBDC) cross-border transaction technology could transform the global economy by providing faster, cheaper and safer services for many of its players. But banks may not fare as well in that new economy, Moody’s Investor Service said in a report dated March 21.

Many proposals for the domestic use of CBDCs foresee a crucial intermediating role for banks in their operations, but cross-border CBDC transactions would depend on entirely new infrastructure that reduced the role of banks more severely, Moody’s pointed out. Banks would see benefits from the new technology, too. Settlement risk could be reduced or eliminated:

“Banks would be able to make, clear, and settle cross-border payments at low cost and in seconds without needing to sign up to multiple payment systems or rely on correspondent banks in other countries.”

The same innovations would also “reduce banks’ profits from payments, correspondent services and likely also from foreign-exchange transactions.” The role of correspondent banks could be eliminated entirely. Not only that:

“In a CBDC-driven economy, banks may well need to redesign their operations. They may be obliged to join new networks and create the infrastructure necessary to support CBDC interoperability at scale, which will impose a burden on resources in the short term.”

Interoperability for both retail and wholesale CBDC is being worked out in experimental projects, often with the participation of the Bank for International Settlements. “Central banks may need to compromise on some of the decision-making to make their CBDCs interoperable,” Moody’s said. Otherwise, “digital islands” could be created among small groups of countries that can transact with each other but no other countries.

Related: India, UAE to explore CBDC bridge to facilitate trade, remittances without USD

Issues such as Anti-Money Laundering, sanctions and privacy would require a legal and regulatory framework, and support for CBDCs is not universal. “Financial incumbents who benefit from existing architecture will likely not help facilitate adoption,” the report said.

A U.S. CBDC faces opposition from some lawmakers because of privacy concerns. Direct exchange of currencies could also reduce the role of the U.S. dollar in the world economy, which does not add to its appeal in Congress.

Moody’s downgraded the U.S. banking sector to “negative” on March 14. It has examined the potentially disruptive effects of CBDC on commercial banking before. The present report came out nearly simultaneously with the U.S. Treasury report detailing potential effects a CBDC could have on the domestic banking system.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Texas Senator Ted Cruz Launches New Bill To Block US Government From Creating CBDC

Texas Senator Ted Cruz Launches New Bill To Block US Government From Creating CBDC

Texas Senator Ted Cruz is proposing legislation to prevent the Federal Reserve from creating a central bank digital currency (CBDC). CBDCs are the digital form of a country’s fiat money and unlike cryptocurrencies like Bitcoin (BTC), these assets are issued and backed by the government. Cruz argues that the creation of the CBDC will centralize […]

The post Texas Senator Ted Cruz Launches New Bill To Block US Government From Creating CBDC appeared first on The Daily Hodl.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

UAE central bank signs deal for CBDC strategy

The CBDC strategy was first unveiled in February as part of the central bank’s program to position the UAE as a global financial hub.

The Central Bank of the United Arab Emirates (CBUAE) is inching closer to fully launching its central bank digital currency (CBDC) — the digital dirham — for domestic and cross-border payments.

According to an announcement on March 23, the CBUAE signed an agreement with Abu Dhabi’s G42 Cloud and digital finance services provider R3 to be the infrastructure and technology providers of the CBDC implementation.

In addition to addressing the challenges of domestic and cross-border payments, the central bank says it will also help boost financial inclusion as the country looks to become a “cashless society.”

The first phase of the CBDC strategy consists of the soft launch of “mBridge,” which facilitates CBDC transactions for international trade, along with proof-of-concept work for bilateral CBDC bridges with India, and domestic CBDC issuance for wholesale and retail use. This stage is expected to be completed in the next 12–15 months, the announcement said.

During the initial unveiling of the strategy on Feb. 12, the CBUAE governor Khaled Mohamed Balama said:

“The launch of our CBDC strategy marks a key step in the evolution of money and payments in the country. CBDC will accelerate our digitalization journey and promote financial inclusion.”

While the UAE looks to push the boundaries of CBDC use cases, debates over the asset’s viability in the United States continue.

Related: India, UAE to explore CBDC bridge to facilitate trade, remittances without USD

On March 21, Republican Senator Ted Cruz introduced a bill to block the U.S. Federal Reserve from issuing a “direct-to-consumer” CBDC over fears of it becoming a spying tool.

Meanwhile, a study released by a division of the U.S. Treasury claimed that integrating a CBDC into the economy would destabilize banks, calling the harm it could cause to banking “significant” in times of stress.

Nigeria, on the other hand, Nigeria is witnessing increased adoption of its eNaira, as paper currency faces severe shortages. The total number of CBDC wallets in Nigeria sits at 13 million, growing more than 12 times compared with October 2022.

As of March, 114 countries, representing over 95% of the global GDP, are exploring CBDCs. 65 nations are already in advanced stages, according to the U.S.-based think tank, the Atlantic Council.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

US Senator Introduces Bill to Ban Direct-to-Consumer Central Bank Digital Currency

US Senator Introduces Bill to Ban Direct-to-Consumer Central Bank Digital CurrencyU.S. Senator Ted Cruz has introduced “legislation to prohibit the Federal Reserve from developing a direct-to-consumer” central bank digital currency (CBDC). The lawmaker warned that it “could be used as a financial surveillance tool by the federal government.” Another senator stressed: “The American people ought to be able to spend their money how they choose […]

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Adopting CBDC could destabilize banks, help households, US Treasury study says

When integrated into the economy, a CBDC or stablecoin would compete with bank deposits to the public benefit, at least until a financial crisis.

Fully integrating a stablecoin or central bank digital currency (CBDC) into the economy would destabilize banks but improve household welfare, a study released by a United States Treasury division has claimed. The harm to banking caused by the digital currencies could be “significant” in times of stress, it found.

The Office of Financial Research study considered a theoretical “stable state” in the financial sector, after stablecoin or CBDC had been successfully introduced. This contrasts with studies that looked at the risks of bank runs and disintermediation caused by the introduction of the digital currencies.

The authors of the present study saw a risk of systemic deleveraging, that is, a reduction in banks’ equity, leading to reduced stability in times of crisis after the introduction of a digital currency.

With a stablecoin or CBDC in place in the economy, they argued, bank deposits would “compete” with the digital currency within households’ liquidity portfolios. That would cause banks to reduce the spread between lending and deposit rates by raising interest paid on deposits, leaving them with less equity than they would have without digital currencies present.

Related: US exploring ways to guarantee the country’s 18T of bank deposits: Report

Households would benefit from the competition between banks and digital currency. The authors wrote:

“In our benchmark calibration, in which we calibrate the elasticity between digital currency and deposits to the estimated elasticity between deposits and cash, we find plausible welfare gains on the order of 2% in terms of consumption-equivalent.”

If digital currency competed too well with bank deposits, the resulting financial instability could have a negative effect on households, according to the study. Furthermore, even when that is not the case, the digital currencies may not be the best way increase public welfare. “Profit-maximizing issuers in a competitive market” might outperform digital currency. The authors concluded:

“Our results suggest that financial frictions may limit the potential benefits of digital currencies, and the optimal level of digital currency may be below what would be issued in a competitive environment.”

The study used dense and advanced mathematics and economic theory to advance its arguments. It appeared on March 22, the same day as the White House released Economic Report of the President. The presidential report also expressed concern over the potentially harmful effects of an economically integrated CBDC on the banking system.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

US Central Bank’s Fednow Payment Service to Launch in July, Economist Calls Timing ‘Suspicious’

US Central Bank’s Fednow Payment Service to Launch in July, Economist Calls Timing ‘Suspicious’According to the U.S. Federal Reserve, the central bank’s Fednow payment service will start operating in July, and participants will be certified in April to leverage the Fednow Pilot Program. Ken Montgomery, the Fednow program executive, is urging American financial institutions to make preparations to join the central bank’s new payment service. Economist Richard Werner, […]

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

Nigeria CBDC adoption spikes as fiat currency shortage grip the nation

The acute cash shortage in Nigeria was due to the central bank’s decision to replace older bank notes with bigger denominations amid rising inflation.

Nearly 18 months after launching its in-house central bank digital currency (CBDC), eNaira, Nigeria witnessed its massive adoption as national fiat reverses face severe shortages. 

The acute cash shortage in Nigeria was due to the central bank’s decision to replace older bank notes with bigger denominations amid rising inflation. While developing nations were among the first to acknowledge the importance of a CBDC in revamping fiat capabilities, the idea is yet to materialize.

However, in the case of Nigeria, the lack of physical cash forced citizens to opt for the eNaira. In a country where cash accounts for about 90% of transactions, the value of eNaira transactions increased 63% to $47.7 million (22 billion naira), revealed a Bloomberg report.

Moreover, according to Godwin Emefiele, governor of the Central Bank of Nigeria, the total number of CBDC wallets grew more than 12 times when compared to October 2022 — currently at 13 million wallets.

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

The demonetization reduced the circulating cash supply from 3.2 trillion nairas to 1 trillion nairas. Compensating for this decline, Nigeria minted over 10 billion nairas in CBDC. In addition, eNaira payouts in government initiatives and social schemes also contribute to the increase in CBDC’s adoption.

For developing countries, CBDCs present a way to overcome challenges presented by the fiat economy, which includes reducing operating costs and strengthening anti-money laundering (AML) initiatives.

“The eNaira has emerged as the electronic payment channel of choice for financial inclusion and executing social interventions,” concluded Emefiele.

Related: eNaira is ‘crippled‘: Nigeria in talks with NY-based company for revamp

Amid the cash crunch, Nigerians have been presented with another option for procuring cryptocurrencies. MetaMask’s parent firm ConsenSys recently announced a new MoonPay integration, which allows Nigerians to purchase crypto via bank transfers.

Screenshot showing option to buy crypto using fiat. Source: ConsenSys

As shown in the above screenshot, the new feature is available within the MetaMask mobile and Portfolio DApp, significantly simplifying the process of buying crypto without using credit or debit cards in Nigeria.

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say

‘Crypto FUD’ — Industry outraged as White House report slams crypto

The report included 35 pages seemingly aimed at debunking the merits of crypto assets.

Crypto executives have expressed irritation over the latest White House economic report — which notably features an entire chapter dedicated to casting doubts on the merit of digital assets.

The Economic Report of the President, released March 20, marks the first time the White House has included a section on digital assets since it first began issuing the annual economic policy report in 1950.

Co-founder of digital asset investment firm Paradigm, Fred Ehrsam, remarked that 15% of the Economic Report was dedicated to “crypto FUD.”

The report includes 35 pages dedicated to debunking the “Perceived Appeal of Crypto Assets” along with a short section on the FedNow payment system and central bank digital currencies (CBDCs).

The report’s main argument is that crypto assets fail to deliver on their “touted” benefits, such as improving payment systems, financial inclusion, and creating mechanisms to transfer value and intellectual property, stating:

“Instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices—and many of them have no fundamental value.”

It also argues that cryptocurrencies fail to perform the functions of sovereign money — such as the U.S. dollar — as crypto prices fluctuate too wildly to be a stable store of value, nor can they function as a unit of account or medium of exchange.

Excerpt from Chapter 8: Digital Assets: Relearning Economic Principles Source: Economic Report of the President

The report also takes aim at stablecoins, which it argues are subject to run risks, and is thus too risky to satisfy their role as a “fast payment” instrument.

Blockchain Association CEO Kristin Smith called the latest presidential report “disappointing,” saying it shows that some in the government appear “increasingly allergic” to the burgeoning crypto industry, adding:

“We urge the Biden administration to consider how it will be remembered: as a leader of profound innovation or a roadblock to a global tech revolution.”

Decentralization is also highlighted in the report, which argues that “despite claims of being decentralized and trustless, blockchain-based applications are in practice neither.”

Users access crypto assets by going to a limited set of crypto asset platforms, while a small group of miners performs the majority of mining in most crypto assets, it argues.

Related: House Republicans directly criticize Biden administration for digital asset policies

The latest annual economic policy report was published some two weeks after the collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank — all three of which served aspects of the crypto industry. 

Dan Reecer, chief growth officer at decentralized finance (DeFi) platform Acala Network, claims the report comes “just days” after Operation Chokepoint 2.0 was executed on crypto-friendly banks.

Source: Twitter

He also noted an “obvious early warning” of an upcoming United States CBDC, or digital dollar, referencing a section of the report that seemingly touts the benefits of a U.S. central bank-controlled currency. 

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

‘Surgical removal’ of crypto will only weaken USD dominance, commentators say