Earning trust: The path to central bank digital currencies

In an age of rapid digitization and as people use physical cash less and less, countries around the world are exploring the implementation of central bank digital currencies (CBDCs). These CBDCs would be a digital version of cash, issued by the country’s central bank.  

More than 130 countries are exploring the idea, while some have already introduced CBDCs.  

These efforts have prompted serious questions around privacy, security, accessibility and trust.   

Ori Freiman studies the responsible implementation of emerging technologies, including CBDCs.  

Freiman, who is a postdoctoral fellow at the Faculty of Social Sciences’ Digital Society Lab, as well as The Centre for Governance Innovation’s Digital Policy Hub, shares his thoughts around what a world with CBDCs might look like, what it could mean for national economies, and what needs to happen to get citizens to adopt them.  

Note: This interview has been edited for length and clarity.  

Q: What is a CBDC and how does it differ from the kinds of electronic payment systems we already use?  

Freiman: Like many concepts in development, there’s no one definition that everybody uses. However, I think everyone would agree that it is a digital currency issued by a central bank.  

We do already have digital money — in our bank accounts, through our credit cards and other payment services. However, that is commercial bank money — money the commercial banks are liable to. 

When I go to my bank and I tell them, ‘I want this $100,’ and it’s issued as a banknote, the central bank is liable to that note and has to make sure that everyone can accept that. 

Q: If we already have alternatives to cash in our society, why would we need a CBDC?  

This is a really good question that many in this field are asking.  

Proponents of CBDCs would say that it would allow for a safer society because it could be used to fight money laundering, financing of terrorism and organized crime. It would also be much easier to fight tax evasion or the underground economy.  

There’s also the ability to program the currency to support social policies that the government would agree are desirable. So, for example, they can dedicate money only to rent, or food or to medicine. Or, for example, someone under a certain age would not be able to buy alcohol. 

We’re also gradually seeing more and more digital transactions and electronic means of payments, and CBDCs would be a way to keep central bank money in the economy.  

Q: Can you explain that further? What would less central bank money in the economy mean?  

There are several issues. First, as digitalization happens, less physical bank notes are expected to circulate in the economy. Second, central bank money is considered much more reliable than commercial bank money because commercial banks can collapse. Central banks cannot collapse and serve as lenders of last resort — being in charge of bailing out, or not bailing out, commercial banks.  

However, if we were to convert all our economy to central bank money, it would take business from the commercial banks and would have a huge impact on lending and credit. So, any solution must be balanced.  

Here in Canada, for instance, the Bank of Canada has said that if a CBDC were to be implemented, it would not bear any interest, meaning the central bank wouldn’t compete with commercial banks over deposits.  

In the News

Learn more from Freiman about the Bank of Canada’s work to address distrust around a digital Canadian dollar in the Globe and Mail and on CTV News 

Q: How do cryptocurrencies fit into this landscape?  

Part of the motivation that drove central banks to develop the central bank digital currency is what we call ‘losing monetary sovereignty.’ This is a term that describes when people start using currencies that are not under the control of the central bank and the government. So, for instance, the widespread use of a cryptocurrency like Bitcoin, or say if a tech company were to issue a global cryptocurrency.  

Their widespread use would mean an economy wouldn’t be able to be controlled from within a country.  

Q: This issue of control has led to criticism of CBDCs. Can you explain some of the concerns around financial surveillance and CBDCs?  

There are issues of access, control and surveillance of data — all due to the inherent digital nature of these currencies. And these are real worries that people in all sectors are aware of and trying to mitigate. 

Think about, for example, the problematic scenario where the transactions of individuals are kept in some kind of a centralized ledger and a future government decides it wants access to it to surveil the citizens.  

Opponents of CBDCs often also point to the Government of Canada’s freezing of hundreds of bank accounts of protesters during the so-called ‘Freedom Convoy’ protests in Ottawa in 2022 as an example of a government using financial instruments to fight political dissent. And these opponents argue this would be even easier with a CBDC. 

There’s also the reverse side to the ability to program money. While yes, it can be used for social policies we find desirable, we can also think of scenarios where governments could use it as a tool to restrict certain populations, like minorities. 

So, there needs to be mechanisms that would guarantee that such scenarios would not be able to happen. 

Q: What could some of those mechanisms look like?  

They can, for example, include privacy-enhancing technologies and oversight committees that can supervise the infrastructure and look at how the CBDC works and who controls it and how it is governed.  

CBDCs could perhaps work without saving the data of the transactions. It all depends on the design and implementation of these safeguards.  

Q: What do you see happening around the global adoption of CBDCs in the coming years?  

It’s a very loaded topic and there are a lot of question marks around its future.  

Most of the countries are preparing CBDCs in case their government requests them. There is also a bandwagon effect, with countries wanting to be prepared in case other countries go ahead.  

But what is clear is that if people don’t have trust in the currency, it won’t be used. A recent report by the Bank of Canada that followed a public consultation revealed people will mistrust such a digital currency. So, there’s a lot of work to do in this space.