CBDCs: A Wolf in Sheep’s Clothing

6 min read

In the next decade, physical cash will no longer exist in most major economies.

While most of us have grown accustomed to tapping our phones to make payments instead of handing over coins and notes, what’s coming in place of cash is something very different, and it’s something we should scrutinize.

Central Bank Digital Currencies (CBDCs) will be the replacement for cash, and while at first glance they may seem like just an extension of your existing online banking, the reality is that they’re a wolf in sheep’s clothing.

Now, before I get into the explanation of this statement, I just want to clarify that I’m by no means a staunch libertarian. I’m an advocate for the disintermediation of finance as well as the proliferation of decentralized digital assets, but I’ll do my best to avoid some of the wilder rhetoric that I’ve seen positioned as arguments against CBDCs.

That’s right, I don’t believe CBDCs are part of an “ESG agenda” as Ron DeSantis would have you believe[1], nor that this is all part of a plot to put microchips under our skin to track us, as Marc Friedrich suggests[2].

What is a CBDC?

A CBDC is a virtual currency issued directly from the central bank. It’s most often a digital version of a country’s fiat currency (e.g. pound sterling, euro, dollar). It replaces cash. Instead of printing physical money, the central bank issues digital currency to individuals that’s also a claim on the central bank.

I know what you’re thinking, “Matt, we already have digital versions of our cash – that’s what sits in our bank accounts, right?” Wrong. The cash sitting in your bank account is held and owned by your bank. CBDCs, on the other hand, represent physical cash (you know, the notes and coins you rarely use) and would be held in a digital wallet outside of your bank account. Unlike the money in your bank, they’re issued directly by your central bank (e.g. the Bank of England, Federal Reserve, etc.).

I appreciate that it’s a little hard to see the difference between the cash held in your bank and a CBDC stored in a digital wallet, but alongside some important nuances that I’ll come to, you can simply view this as a complete replacement for physical cash.

It’s reasonable to believe that in the next decade, most major economies in the world will have a CBDC and will be transitioning physical cash out of circulation. In fact, 130 countries, representing 98% of global GDP, are exploring a CBDC. 11 countries have launched one, while 19 of the G20 countries are in the advanced stages of deployment[3].

I don’t use cash. Why should I care?

The COVID-induced global pandemic was a huge accelerant in moving towards a cashless society. Norway has become somewhat of a poster-child for this with only 4% of transactions using physical cash[4]. This is the lowest volume recorded globally. That said, cash is still frequently used in most major economies. The UK is a good example of this where 14% of all transactions were made with cash[5], and 40% of UK residents surveyed said that they use cash at least once per week[6].

Putting usage to one side, an important thing to understand is that cash is the only form of money issued within your country that you truly own. Money in your bank is owned by the bank. Yes, that’s right, you don’t own the money in your bank account. This is why there’s so many horror stories from banking collapses where people have lost their life savings.

This is one of the catalysts behind Bitcoin’s early traction. It’s a completely decentralized digital currency that you have complete ownership of. You custody your own bitcoins and have full control of them. CBDCs, on the other hand, are centralized. The systems powering them – in many cases, blockchains – are wholly run and owned by the central bank. The only similarity that CBDCs and bitcoins share is that they use a blockchain.

Cash, while it gets a bad rep for being a tool that can be used to facilitate tax evasion or to pay for illegal goods, is ultimately relied upon for those most in need. Low-income and underprivileged individuals like the homeless, refugees, and many more who don’t have access to bank accounts or sufficient IDs to obtain them, rely completely on cash. Removing this can be catastrophic for them.

CBDCs may seem like a natural progression toward a cashless society, but the reality is that they offer very little in terms of real benefits while significantly decreasing the financial freedom of individuals and leaving those most in need of financial support in an even more perilous situation.

The case against CBDCs

The demise of physical cash is one reason to be concerned, but there’s also a wide range of other tradeoffs that come with CBDCs, most notably in their potential to facilitate state overreach.


CBDCs bring with them new possibilities from a technological standpoint that simply aren’t possible with either physical cash or the money sitting in your bank account. This includes the ability to set rules or logic to the way in which the currency functions. For example, payments to individuals on sanctions lists could be blocked automatically. Similarly, payments to certain products or services could be programmatically blocked. All of this would be controlled by the central bank. It’s not hard to imagine how this could enable overreach.


This also brings additional levels of surveillance into play. Governments would have visibility into every transaction being made using a CBDC, which has some positive use cases, but for those concerned with the already low level of individual privacy that exists today, this is a further step back.

Not Your Money

Now, when you look at some of the reasons being given for why CBDCs could provide value, one of those is that it will give Central Banks a more direct route to influence monetary policy. In particular, this paves the way for driving down inflation through negative rates. What this means is that instead of simply increasing interest rates to squeeze the economy and drive down inflation, they’d simply shrink the balance of CBDC-holding wallets. Yes, you read that correctly… they could reduce the money supply simply by removing funds from your account. This is, of course, still theoretical at this stage, but Central Banks will have the ability to do this (and a whole lot more).


Monetary policy isn’t the only way you could have cash removed from your account. One of the greater concerns with building private, permissioned blockchains is that they are nowhere near as secure as decentralized ones. In fact, this just creates yet another giant honeypot waiting to be breached. The traditional banking sector sees large data breaches occur on a weekly basis, and governments aren’t much better. The UK government recently shared that over 40 million UK residents’ personal data was breached in a hack on the electoral register[7]. I don’t hold much hope for CBDCs to be much different.

Retail Bank Flight

Finally, an area that’s been much spoken of when it comes to CBDCs is the potential for this to drain liquidity from the retail banking sector. We’ve seen what happens when retail banks face liquidity issues, most notably during the start of this year when several large US banks collapsed[8].

Why would this happen? Well, in times of crisis, most capital moves to the safest areas. In the US, this is often treasuries because it’s a claim on the US government. CBDCs would be a claim on the central bank, making it substantially safer than cash sitting in a retail bank that could feasibly collapse during a crisis. This could become a self-fulfilling prophecy in that as retail banks struggle, they see greater outflows to CBDCs which worsen their situation and lead to their eventual demise. This would, in the best case, put a squeeze on retail banks’ ability to lend.

It’s worth calling out that some central banks have been looking at ways to mitigate this issue. The Bank of England has suggested[9] that they’d implement a limit on the amount of currency that anyone could hold at one time of either £10,000 or £20,000. Any additional deposits to your wallet would be swept into your retail bank. While this solves some of the problems, it begs the question of whether this would even be useful in practicality with spending caps in place.

What is it good for? Absolutely nothing.

It’s hard to make a compelling case for why a CBDC would be beneficial to individuals. As an episode of Money Talks from the Financial Times[10] early this year proposes, it seems as though CBDCs are a solution looking for a problem.

Nobody can deny that physical cash is on the decline. Consumers prefer to make payments digitally, the data tells us this[11]. That said, we have ample avenues through which we can make digital payments. Physical cash still has a valuable place in society, especially for those in the most underprivileged circumstances. Even if the argument isn’t in favor of keeping cash, the tradeoffs – most of which the majority of the population will not realise until it’s too late – don’t even remotely outweigh the upside.

Time and time again over the past two decades we’ve traded our personal privacy and security for a minor additional convenience. Hopefully, we learn from our past mistakes this time.

  1. https://www.ft.com/content/ab8fbe73-34bf-4624-b394-97f995551f7a
  2. https://www.politico.eu/article/digital-euro-currency-conspiracy-theory-marc-friedrich-jorg-meuthen-european-central-bank-surveillance/
  3. https://www.atlanticcouncil.org/cbdctracker/
  4. https://www.norges-bank.no/en/news-events/news-publications/Speeches/2020/2020-11-05-bache/
  5. https://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/watching-our-pennies-how-consumers-feel-about-cash
  6. https://www.ukfinance.org.uk/policy-and-guidance/reports-and-publications/watching-our-pennies-how-consumers-feel-about-cash
  7. https://www.electoralcommission.org.uk/privacy-policy/public-notification-cyber-attack-electoral-commission-systems
  8. https://en.wikipedia.org/wiki/2023_United_States_banking_crisis
  9. https://www.bankofengland.co.uk/speech/2023/february/jon-cunliffe-speech-at-uk-finance-update-on-central-bank-digital-currency