CBDCs: Pros and Cons
A comprehensive list and discussion of the advantages and disadvantages of central bank digital currency

Patrick Schueffel

Abstract

Central bank digital currencies (CBDCs) have the potential to fundamentally alter the current monetary system. Potentially they could bring about a whole range of advantages compared to the status quo, yet they could also introduce a host of disadvantages. This text provides a comprehensive list of the pros and cons of CBDC along with a description of every single positive or negative outcome. Finally, it weighs the benefits and drawbacks of this new form of legal tender against each other.

Keywords: CBDC, central bank digital currency, central bank, monetary policy, legal tender, currency

A CBDC is managed by a central bank using a digital ledger. Hence, one single entity, the central bank, has control over the issuance and subsequent administration of this new type of currency. By contrast physical cash is also issued by a central bank, yet the bookkeeping of the currency as well as its management is executed by numerous parties, respectively middlemen, such as banks, businesses, and consumers. Ultimately the bearer of cash is also the custodian of the currency and may or may not keep track of it.

P. Schueffel is adjunct professor at the School of Management Fribourg, HES-SO, 1700 Fribourg, Switzerland (e-mail: patrick.schueffel@hefr.ch).

Received April 12, 2023; revised, July 12, 2023; accepted, July 15, 2023; published: August 8, 2023.

The bookkeeping itself can also vary widely, ranging from the meticulous bookkeeping of bank tellers to pocket money being kept in a piggy bank.
Should CBDC be introduced, the currently existing form of money issuance as well as accountancy will undergo a significant qualitative change: the central bank will not only be able to issue or redeem digital central bank money upon a keystroke, but it will also be able to keep track of any transaction conducted subsequently. Any payment from one party to another can be logged on a digital ledger. Should CBDC entirely replace cash, any transaction will be traceable, and any cash could be become programmable.
As mentioned, CBDCs will not only lead to a greater degree of centralization and control of legal tender, but also to disintermediation, new data archiving capabilities, and programmability. These characteristics will bring along several advantages. Those are laid out in the following table and described in subsequent sections, first on a societal level, then on an individual level.

Table 1. Pros and Cons of Central Bank Digital Currencies on societal and individual level

Financial inclusion, for instance, could be enhanced as this electronically issued legal tender can directly be credited to digital wallets which can be accessed via mobile phones or other digital devices. This may facilitate accessing financial services for individuals and businesses, especially those in remote or underserved areas provided they dispose of a mobile phone and network connectivity. This could make it easier and more convenient for citizens to access financial services and participate in the economy [2]. Moreover, CBDC would also allow for an efficient distribution of universal basic income should governments decide to introduce such subsidies [3].
A reduction in crime, especially financial fraud could be another advantage induced by CBDC: Should it become mandatory that digital wallets be linked to a person's national identification, allowing for easy verification of identity, financial fraud could be reduced substantially as all transactions would be traceable and thus adhere to higher AML and KYC standards as current cash [4]. Besides, physical cash, especially notes is prone to counterfeiting. Being digital and directly issued by the central CBDC would not be vulnerable to the conventional means of counterfeiting [5].
Moreover, if the CBDC design satisfies the public policy requirements of other supervisory and tax regimes, it is safe to say that a CBDC regime has the potential to induce a significant reduction of tax evasion as it would be the only legal tender in a scenario where CBDC has replaced physical notes and coins [6]. Moreover, the programmability of CBDC would allow entirely new and highly efficient methods of tax collection [7]. Virtually any tax could be charged at source, from VAT to income tax. Even import and export duties could be collected at source.
CBDCs are issued by central banks. This fact eliminates the risk of default or counterparty risk that exists in traditional banking systems. Transactions with CBDCs would be settled directly with the central bank. The user can therefore rest assured that he or she will always get paid the balance that they are due, and any transaction would thus bear zero counterparty risk with commercial banks [8].
Arguably this reduction of counterparty risk would also increase of the security and stability of the financial system and thus enhance the robustness of the financial system as it would scale down the role of banks in money creation and thus moral hazard [9].
Furthermore, it is argued that the CBDC would further contribute to the stability of the financial system as it provides more possibilities to implement efficient monetary policies not least because central banks can bypass intermediaries and directly target sectors or groups [10]. For instance, helicopter money could be distributed in a highly efficient manner [9], but governments could also take advantage of CBDCs’ programmability to manipulate the value of the currency which could be used to manage economic instability, stimulate economic growth, or support certain industries [11]. Most notably, however, central bankers suggest that it is easier to implement negative interest rates on cash holdings under a CBDC regime and thus reduce the money in circulation [12].
In general, it is also argued that CBDCs would boost the efficiency of payment systems altogether as CBDCs would lower not only settlement costs, but also reduce frictions and fees associated with payments as fewer middlemen are involved and thus risks reduced [13]. A consumer could for instance pay at the point of sale and the vendor would immediately receive the funds without delay and free of risk.
Since banks would be disintermediated their role in the monetary system in general and for money creation in particular would be significantly reduced. As a result, commercial banks would create less money and central banks would increase their money creation. Consequently, government, respectively the public would benefit from collecting increased seniorage instead of a range of privately owned commercial banks [9].
On an individual level then following advantages can be identified for the consumer: As all accounts and their balances are logged centrally, CBDC will also safeguard users from the loss of money. Should a device on which CBDCs are stored get lost or corrupted, the bookkeeping at the central bank will serve as a loss protection. A consumer could therefore no longer “lose” cash. [14, 15].
Another argument in favor of CBDC is convenience: CBDCs could potentially facilitate the development of new financial products and services, such as peer-to-peer transactions, digital payments, and micro-lending as it offers possibilities to aggregate balances in a fashion that do not exist for cash and traditional bank accounts [16].
Improved data privacy is oftentimes given as another argument for the introduction of retail CBDC: when a monetary transaction is made among contracting parties, banks or payment providers can gather information on the deal itself and on the buyer and seller. Gathered at large scale this information is extremely valuable and at times sold on to interested parties without the user profiting the sales of his or her data. CBDC would put an end to rent generation as central banks would not engage in such data gathering and sales thereof [17]. The end-user would no longer give away valuable information to private entities for free and run the risk that they are traded on.

As was shown a monetary system based on CBDCs has various advantages vis-a-vis the status quo. Yet, it also bears also many disadvantages. When weighing these pros and cons against each other it becomes apparent that a choice emerges between security, stability, equality, efficiency and convenience on the one hand versus surveillance, control and centralization on the other. The question that arises is essentially how many of the latter elements the sovereign citizen is willing to accept in order to reap the benefits of the former ones.
Should the central bank become the counterparty against which all transactions are settled going forward, and commercial banks disintermediated, the question arises which role commercial banks would play altogether. Further entertaining this train of thought, the question arises which purpose capital markets would have in the future as any means of payment that circumvent CBDC could also be banned under a tight CBDC regime, including the transfer of securities. As any monetary transaction would then be subject to approval of the central bank, and the value of such transaction could also be set by the central bank, free markets would no longer exist. Under these conditions the economy would effectively turn into a centrally planned economy.
But the economy is not the only field of concern. Among others, democracy rests on the principles of free and fair elections, the protection of human rights, and citizen participation. While it is not claimed that CBDC will necessarily undermine these principles, it has the potential to be a highly efficient tool to do exactly that:
CBDCs could hamper free and fair elections by enabling the governing administration to monitor and control the flow of money, which could be used to influence elections. For example, a government could use CBDCs to track the spending of political parties or individual candidates, and potentially limit their ability to spend money on their campaigns. CBDCs could also be used to impose transfer limits and blocks, which could restrict citizens' ability to financially support organizations or movements that promote freedom of speech. For example, governments could use CBDCs to block cross-border transactions to foreign organizations that promote freedom of speech and democracy. This could undermine the fairness of elections by limiting the ability of candidates to compete on an equal footing.
CBDCs could furthermore negatively impact human rights if they are used to restrict or monitor the activities of individuals or organizations. For instance, should transactions with CBDC be subject to surveillance or censorship, it could limit the freedom of speech, expression and movement of individuals who use them as this information could be used to track and monitor citizens' behavior, including their political activities and associations. What is more, if CBDCs are not designed to protect the privacy of individuals, this could expose them to surveillance and tracking, if not blackmailing by governments or other organizations.
Citizen participation is also at stake should CBDC not be equally accessible to all citizens. If CBDCs are only available to certain groups of people due to censorship or require access to technology that not everyone has, it could limit the ability of citizens to participate in the economy and influence the democratic process. Besides, if CBDC transactions are subject to surveillance providing governments with detailed information about citizens' financial transactions, including who they are sending money to and what they are buying, it could curb the willingness and ability of citizens to engage in free and open communication and participate in civic activities.

CBDCs do have the potential to provide substantial benefits such as financial inclusion, a reduced crime rate, more efficiency and convenience. Yet, this comes with a substantial price tag, that is compromised data privacy of citizens and ever greater centralization of powers with the government. What is ultimately at stake for western countries is not only the free-market economy but democracy itself. Simply hoping that nothing will go wrong once a such powerful tool such as CBDC is given to ones is in power, will not suffice. History is full of examples where innovative processes and technologies were eventually used by governments against their own people.

Patrick Schueffel holds a doctorate degree in business administration from the University of Reading, UK and further postgraduate degrees in business administration from Henley Business School, UK, the Norwegian School of Economics, Norway, and the University of Mannheim, Germany. Currently he is an adjunct professor at the School of Management Fribourg, Switzerland.