Why Central Bank Digital Currencies Cannot Replace Cash

While central bank digital currencies (CBDCs) often position themselves as ‘digital cash’, they lack key benefits of physical currency, meaning they will never be a replacement for it. As CBDCs come online, discussion of their features and limitations will be important in enabling people to make informed decisions about if and when to use them.

CBDCs are—as the name suggests—digital currencies issued by central banks, with a value linked to their issuing country’s official currency. Beyond these basics, a variety of implementations are under consideration worldwide, with the Eastern Caribbean piloting a system under which consumers will hold accounts directly with the central bank, and China exploring a version reliant on private-sector banks to distribute and maintain accounts. The European Central Bank is weighing various approaches, reportedly including one that would see licensed financial institutions operate nodes within a blockchain network that would administer a digital euro.

A major advantage of cash is that it can be used entirely offline, enabling infinite transactions in which value is physically exchanged between parties. While offline-available CBDC structures are being explored, they would create the risk of double spending when no online connection is available, transactions cannot be confirmed and logged by the central ledger. Additionally—as this remote ledger must be updated with transaction data at some point—CBDCs cannot operate indefinitely offline.

This tracking of transactions fails to replicate another defining feature of cash: financial privacy and anonymity. As the Bank of England pursues a digital pound, financial services minister Andrew Griffith has suggested ‘Britain should be cautious… given privacy and other issues involved.’

Writing for Gript.ie, psychosocial researcher and essayist John Mac Ghlionn recalls a quote from James A. Garfield, the 20th President of the United States: ‘He who controls the money supply of a nation controls the nation.’ Mac Ghlionn warns that ‘by default, a cashless society becomes a more surveilled society.’ CBDCs would enable tracking of a person’s movements and transactions, and this data could be bought, sold and stolen—as is the case with currently-available cashless options—but could also be used to rate people’s behaviour (whether their spending is considered positive or negative for society) with potential punishments for ‘bad behaviour’ being controls placed on what they can purchase, or even denial of certain services and freedoms, such as bank loans or entry to certain venues.