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The world is heading towards CBDCs: the inevitable future of finance or new form of dystopian control?

Exchange office is seen in Cairo, Egypt. [Stringer - Anadolu Agency]
Exchange office is seen in Cairo, Egypt. [Stringer - Anadolu Agency]

It is the unfortunate – or fortunate, depending on one's propensity to autocracy – nature of every decentralised system in this modern age to become centralised under the scope of governmental regulation or private sector control. That has been true for taxation, data, health and safety legislation, construction permission and a host of other matters deemed regulatory for a safe and ordered society.

Some of that is a blessing as it ensures the minimalisation of death and the guarding of life, yet some is just plain unnecessary bureaucracy that seems to serve the age-old attributes of those who enforce them: greed for revenue and lust for authority.

An emerging example of that may be the current and looming alterations to national and the global financial systems.

Back in 2021, I wrote on the possibility of crypto currencies being a saviour of the economic woes that many in developing and Middle Eastern nations have been facing amid record inflation and currency devaluation, such as Lebanon and Turkiye.

That view had truth in it, but it may have been overly optimistic of the widespread effect crypto currencies could have. It was also somewhat ignorant or overlooking of a major piece of the economic puzzle which is increasingly rearing its head – Central Bank Digital Currencies (CBDCs).

As digital assets of a nation's Central Bank, CBDCs are set to have significant legitimacy when it comes to their rollouts over the coming years. They will first reportedly be voluntary and subject to pilot schemes and limited trials before going national.

Businesses and citizens will then be encouraged and heavily incentivised to use them, initially as an alternative form of payment and then as the primary or sole form of payment. Finally, as critics warn and proponents rejoice, societies will become cashless and all will be digital.

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The development and use of CBDCs are lauded by their proponents as the future of finance, as if they are the only possible method of payment and transaction to be used in our digitalised world. Anything less or any continued use of physical cash will, it seems, be backward.

It is not only the loss of coins and notes one can tangibly feel and touch which so concerns CBDCs' critics, nor is it any sentimentality towards the past or tradition, necessarily. Rather, it is the threat to individual privacy, along with the potential for expanded government and Central Bank control, which are the primary concerns.

A national CBDC – a digital pound, euro, dollar, etc – would operate through the same blockchain system which crypto currencies are famed for being run on. The main difference between how the two systems utilise the blockchain is that, with crypto, the records are able to be – and often are, depending on the crypto currency – anonymous and difficult to trace back to senders and receivers and the exact transaction details. That is a reason so many governments and financial authorities have accused the network of hiding the activities of criminals, terrorists and rogue states.

With a national CBDC, however, every single purchase and transaction could be trackable and seen by banks or governing authorities, along with their source and destination details. That is not all: they could also be "programmable", meaning the providers and regulators will be able to program the digital currencies to accept or refuse payments for certain items or services. Critics even warn that this could be tied to a 'social credit score', in which an individual's ability to purchase something will be dependent on their behaviour, political views, history of political protests and much more.

Under such a system, the idea is that a citizen with a poor score will be unable to book flights abroad or pay for things beyond the bare essentials. That is not difficult to imagine, as the system is already in place and functional throughout parts of China, where the digital yuan is currently being rolled out.

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That scenario is, no doubt, a terrifying one, and would be a significant hit to liberty and freedom of choice on multiple levels. CBDC proponents and advocates, though, insist that the issue is not so black and white.

Dr Jonas Gross, the Chairman of the Digital Euro Association, told Middle East Monitor that the privacy and surveillance concerns over transaction data being collected centrally by a Central Bank "is only one side of the medal". A digital currency, he said, could "also increase privacy … if a proper CBDC design is chosen. Thus, the degree of data privacy depends on the CBDC design – and the preferences and policy goals of the Central Banks."

Gross emphasised that currently, "there are technologies that actually allow [us] to issue a CBDC that provides high privacy guarantees while complying with regulation. Examples include zero-knowledge proofs, blind signatures or secure hardware solutions."

With such solutions, there will be "no way for third parties, such as banks or Central Banks, to observe the transaction data or track users. No confidential transaction data is shared – only proofs of the correctness. Thus, privacy is ensured by cryptography and mathematics." He clarified that "As a consequence, such privacy solutions allow trustless privacy, i.e., privacy that does not require trust in another party to preserve privacy."

Privacy and respect for individual freedom of choice, then, can be guaranteed by building them into the infrastructure of CBDCs. Yet, that would still be entirely reliant on the government or Central Bank – not all are independent from government coercion – actually abiding by such a policy.

Countries throughout the world are already jumping on the bandwagon of opportunities that CBDCs offer, with 114 altogether exploring their use. Out of those, 39 are conducting research, 33 are in the development stage, and 17 are piloting their digital currencies at the time of this writing.

Those countries are not only democratic ones. More authoritarian states such as China, Russia, Middle Eastern and Gulf States, and countless others are digging into the concept, and they can hardly be expected to implement privacy policies into their digital monetary systems.

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Even supposedly democratic Western nations can be suspected of using those newfound capabilities to their advantage. One has only to look at US intelligence agencies' blatant breaches of rights and legislation in accessing the financial and transactional activities of hundreds of millions of people over the years, in a massive collaboration between the intelligence community and big tech.

Another more frightening example was seen in the Canadian government's freezing of bank accounts linked to citizens who protested against vaccine mandates a year ago. Such harsh and debilitating measures are sufficient not only to crack down on political dissent, but also to paralyse one's very life and financial capabilities in the process.

Those actions taken by government and intelligence agencies, in line with banking services, were able to be conducted under the current monetary system which is still only partly digitised. Imagine the capacity of control and financial limitations that could be imposed in a wholly digitised system. Now, one could still somewhat manage to live their lives by spending physical cash, with authorities only able to track them through a long process of sourcing the receipts and monitoring camera footage.

Under a CBDC system – particularly one that does not respect the rules of privacy afforded to users – that individual's activities and movements could be monitored in a state of constant surveillance, their funds can be seized, and their ability to spend limited to where, what, when and how much.

Throughout this decade, we can wholly expect states and banks to continue with the adoption and development of digital currencies. How they develop them, what policies they establish for their use, and at what level they are implemented will vary. There will, no doubt, be a myriad of benefits offered by CBDCs, especially through the blockchain network.

While the crypto community has long advocated the value of decentralisation, these centralised national digital currencies will be far from that. Their rollout may apparently be inevitable, but perhaps not at the cost of eliminating cash altogether. Even more importantly, respect for privacy and freedom from control should be at the heart of their creation, or else they will only be the seeds of a more surveiled, repressive and dystopian future.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.

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