FinTech expert Jason Simon discusses the pros and cons of central bank digital currencies

Bitcoin may not have been the first instance of an attempt to introduce a digital currency, but it has been the most successful. For slightly more than a decade, Bitcoin and similar cryptocurrencies have become extremely popular and continue to gain support for being able to co-exist alongside traditional fiat. A new version of digital currency, the central bank digital currency (CBDC), is now being tested and implemented around the world. Jason Simon, a FinTech and cryptocurrency expert, explains some of the advantages and disadvantages of CBDCs for consumers.

A recent YouTube vlog posted by CNBC provides an excellent primer on what CBDCs are and how they are being implemented. They are essentially a type of cryptocurrency that is issued, distributed and managed by a government’s central bank, the same way fiat is currently handled. However, this is both a positive and a negative. Explains Simon, “One of the reasons digital currency has become popular is because it is a peer-to-peer currency controlled by consumers, not governments. It is also decentralized, but any government-led CBDC will inherently be centralized. This can lead to the same issues entering the digital currency ecosystem that Bitcoin has intended to resolve.”

A number of countries are already in various stages of development with their own CBDC programs. Sweden has already issued the eKrona and China has a digital yuan. The Bank of England and the European Union are in advanced discussions and experimentation with CBDC solutions, while the US is only just now beginning to explore its options.

The US didn’t feel it was necessary to take digital currency seriously almost until it was too late. China’s introduction of the digital yuan, its centralized digital currency, and the revelation by Citibank that “Bitcoin could become the currency of choice for global trade” led to the realization that something had to be done. Adds Simon, “Now, MIT is working with the Federal Reserve of Boston to explore a hypothetical CBDC. It’s still in the research phase and a lot more work is needed, but a prototype and whitepaper could be released this summer.”

Digital currencies, including CBDCs, make cross-border payment transactions easier and cheaper. Typically, these types of transactions incur fees of 5% or more and can be held up for several days. However, digital currency transactions are virtually instantaneous to any point in the world and even transactions worth millions of dollars can be completed for just a fraction of the cost associated with conventional money-transmitting methods.

Compared to other digital currency solutions, CBDCs have a few glaring issues that will prevent them from becoming hugely popular. The centralization of the money system is one of the bigger ones, but another is potentially more hazardous. Should the government decide to issue the digital currency accounts to consumers, instead of allowing banks to continue to serve the role, all consumer data and all transactions would be centrally located. This means that governments would know exactly when and where each individual is spending his or her money. In addition, it would also lead to catastrophe should the data repository become compromised through a hack or through equipment failure. If governments have trouble managing the current financial systems, allowing them to have greater control can only lead to greater failure.