Is the world headed towards Central Bank Digital Currency? 

The Bank for International Settlements (BIS), is the governing body for most of the world’s Central Banks, including the United States Federal Reserve Bank. The BIS plays a pivotal role in the global financial system and has been actively involved in discussions and research regarding Central Bank Digital Currencies (CBDCs). One of the potential applications of CBDCs, as highlighted by the BIS and other financial authorities, is to enhance the monitoring and regulation of financial transactions to combat illicit activities such as money laundering, terrorism financing, and tax evasion. Here’s how CBDCs could facilitate this: 

Digital Traceability: CBDCs inherently possess a digital footprint, allowing transactions to be recorded on a blockchain ledger (think of it like an accountant’s ledger book), which could be either centralized or distributed. This digital traceability means that unlike cash transactions, which are anonymous and untraceable, CBDC transactions can be monitored and audited by the issuing central bank and other regulatory authorities. This makes it more challenging for individuals or entities to engage in illicit financial activities. 

Enhanced Regulatory Oversight: With CBDCs, central banks and financial regulatory bodies could have real-time or near-real-time access to transaction data. This capability would significantly enhance regulatory oversight, making it easier to identify suspicious transactions as they occur and take swift action. Advanced analytics and AI algorithms could be employed to detect patterns indicative of money laundering or other forms of financial crime. 

Implementation of Compliance Checks: CBDC platforms can be designed to automatically enforce regulatory compliance. For instance, transactions exceeding certain thresholds can be programmed to require additional verification before they are processed. Similarly, transactions involving entities on watchlists or sanctions lists can be automatically flagged or blocked, ensuring compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. 

Reduction in Anonymity: While the reduction in anonymity might raise privacy concerns, from a regulatory perspective, it limits the ability of criminals to operate undetected within the financial system. CBDCs can be designed to strike a balance between privacy and transparency, ensuring that while individual privacy is respected, there is enough transparency to deter and detect illicit activities. 

Global Cooperation and Cross-Border Payments: CBDCs can also facilitate improved cooperation between countries on financial oversight. With CBDCs, cross-border payments can become more transparent and faster, reducing the time window that criminals must move illicit funds across jurisdictions. Enhanced data sharing and cooperation between central banks and international regulatory bodies could further strengthen global efforts to combat financial crime. 

It’s important to note that while CBDCs offer these potential benefits for combating illicit financial activities, the implementation of such systems must carefully consider privacy rights and data protection laws. The challenge lies in designing a CBDC system that maximizes the effectiveness of regulatory oversight and crime prevention without infringing on individual privacy and freedoms. 

On October 19, 2020, the BIS General Manager, Agustin Carstens, called for “a unified programmable ledger in a public-private partnership”. He was talking about CBDC. Think of it as Bitcoin (blockchain) but without the privacy blockchain currencies afford. Mr. Carstens further stated, “for example, we don’t know who’s using a $100 bill today, we don’t know who is using a 1000 peso bill today. A key difference with the CBDC is that the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability and also we will have the technology to enforce that.”  

So, in essence, Mr. Carstens is talking about a bank account with digital money which can be programmed for specific use. For example, the entity which controls the digital $100 in a given bank account could put an expiration date on the money thus ensuring it will be spent by a specific date. Or it could be programmed so it can only be spent on food, or rent, or gasoline. This programmability is only limited by the imagination of the controlling entity. 

Whether this is a good thing or not is conjecture. Either the BIS will restrict itself to a reasonable amount of control over every digital dollar and allow citizens of each nation to continue private individual control of their own private earnings or they won’t. 

The original article from the Sierra Vista Herald can be found here.