Bitcoin, Stablecoins, and the Dangers of CBDCs

“Payments are a public good that is simply too important to be left to the market”
Christine Lagarde (2022).

“Money is too important to be left to central bankers”
Milton Friedman (2002).


Central Bank Digital Currencies are increasingly gaining attention. Although still unknown to the general public, these monetary novelties are being presented by many officials, academics and economic journalists as both the future of money and the logical next step in digital payment methods.

As the name clearly shows, a CBDC is a currency issued digitally by a Central Bank. Usually but mistakenly, they are compared to cryptocurrencies (Foundation for Economic Education, Undated). The increasing popularity of the latter since Bitcoin’s appearance more than a decade ago made Central Banks first ignore cryptocurrencies, then mock them, later fight them, and now embrace them, but in their own fashion.

However, CBDCs need not be cryptocurrencies, although they can be. Are they the same? Except for their digital nature, no. Essentially, they are opposites despite of the fact that they may allow value transmission to be easier and faster.

CBDCs are said to be created in order to reduce transaction costs, improve competition in the retail payments industry, promote financial inclusion, transparency, efficiency, safety, and many other related reasons. As early as 2016, a working paper produced by The Bank of England even claimed that the introduction of a CBDC could increase GDP by 3% (Gray, 2016). Others, such as Citi analyst Ronit Ghose, even claim that it will promote blockchain adoption (Velasquez, 2023).

At this point, these developments are not only hypothetical. According to The Atlantic Council, there are 119 CBDCs projects around the world, with 11 launched, 18 pilots, 32 developments, 39 research projects, and only 15 initiatives inactive and 2 canceled. China’s CBDC pilot alone reaches 260 million people.

Moreover, the War in Ukraine has undoubtedly increased the speed of these developments since more countries are considering alternatives to the US Dollar. This of course includes the development of cross-border CBDCs, and not only of local or national reach. The main Central Banks, including the Federal Reserve and the European Central Bank, are moving forward with their CBDCs projects, whether in research or development stages.

Among these projects, even SWIFT recently tested successfully a CBDC interoperability solution with 18 commercial and central banks, although yet in a sandbox environment. Among those involved we can find the Banque de France, the Deutsche Bundesbank, the Monetary Authority of Singapore, BNP Paribas, HSBC, Intesa Sanpaolo, NatWest, Royal Bank of Canada, SMBC, Société Générale, Standard Chartered and UBS, with other four Central Banks as observers. This would allow the use of CBDCs cross-border.

So, it is of the utmost importance to understand what CBDCs are, what are the differences between them and cryptocurrencies, and more importantly, what are the possible paths that these new monetary developments may entail.

To study these subjects, we will first deal with the nature of Bitcoin and cryptocurrencies. Second, we will analyze what CBDCs are and how and in what crucial respect they are different from cryptocurrencies. We will study what CBDCs are designed to accomplish, so we can later weigh their possible (and probable) risks. Then, we will briefly analyze the case of Nigeria with the eNaira and finalize with our conclusions.

Bitcoin and Crypto

Bitcoin was born after the 2008 financial crisis, and as a curious consequence of it. As the title of Bitcoin’s white paper clearly states, it was designed as a peer-to-peer electronic cash. Building on ideas previously developed by cypherpunks, software engineers, and even monetary economists like George Selgin (1988) and Lawrence White (1984 [1995]),1 the paper written by the mysterious Satoshi Nakamoto (2008) set in motion a revolution in both theory and practice.2

In theory, because it meant the development of a novel way to process and certify transactions in a decentralized way promoted by a clear incentive mechanism involving no intermediaries or regulators. All powered by blockchain technology. And in practice, because it implied the birth of a new industry, and thousands of projects surrounding different cryptocurrencies3 and blockchain companies and initiatives. But this is well known (Popper, 2015).

Despite of the excitement that market price4 increases brought to cryptocurrencies buyers and traders, the core to the project as proposed by Satoshi was not a get rich fast scheme. Rather, its core was in fact decentralization and privacy, in opposition to the centralization and government surveillance implied by fiat money and the modern financial system. The distributed-ledger technology that allows Bitcoin to operate is the key difference with other centralized value-transmitting mechanisms.

The narrative behind Bitcoin holds that there is no real financial privacy.5 Specific laws and regulations assure that the government continually compiles and monitors financial information of citizens and companies. Often, financial institutions inform governments about certain of its private client’s actions without these being notified or consenting to such privacy violations. Bitcoin was set to solve this.

Let us review some of its basic features. Bitcoin is permissionless since no one allows or forbids someone from participating and operating in its system. This assures a fundamental equality among participants, a pre-programmed rule of law. It also has a strict monetary rule (only 21 million units will ever be created), which reduces uncertainty with respect to its future operation. Moreover, it is essentially an anonymous project, which does not depend on any particular official or bureaucrat. The founder or founders of Bitcoin (i.e., Satoshi Nakamoto) stepped aside so there would be no place for arbitrariness. And all its main features were established from its inception, so it is what it was meant to be from the beginning. These principles are plain and extraordinary at the same time, assuring its functionality and scalability.

The attractive of the total transparency of its principles, the novelty of its technology, the immutability of its transactions ledger, the anti-establishment narrative behind it plus the public nature of blockchain had a feedback effect on its adoption. In other words, the characteristics of Bitcoin are primarily what made it grow in scale and interest and not the marketing techniques of its proponents. Price increases, of course, made their part. They can explain Bitcoin’s and cryptocurrencies’ increasing adoption, but they were neither the core of the project nor the spirit behind it.

It is not the goal of this paper to analyze if Bitcoin is money,6 or if it can be. Rather, it intends to identify the main feature of Bitcoin as a project. And this consists in that it would allow, at least theoretically, privacy in transactions while at the same time not depend on any central authority.

Central Bank Digital Currencies are, in essence, the opposite to Bitcoin in this respect. And we will try to show why next.

Central Bank Digital Currencies as the Anti-Bitcoin

The difference between Central Bank Digital Currencies and cryptocurrencies in general and Bitcoin in particular is explained by the former’s very name. As opposed to Bitcoin’s intended privacy and decentralization, a CBDC is by designed subject to Government surveillance and is issued by a central authority. It is, therefore, an anti-Bitcoin.

What is a CBDC? N.S. Lyons (2022) explains:

“As the term implies, a CBDC is digital money that a central bank issues directly. You might assume that you are already using ‘digital currency’ regularly if you rarely use physical cash anymore and instead buy almost everything with a credit card or a digital payment app. In truth, the process of moving money from A to B is vastly more complicated than that. It involves a tangle of payment processors, banks, financial clearinghouses, and, if your money is crossing borders, international communication and exchange systems, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT). The money itself doesn’t move anywhere fast, so each intermediary institution must assume risks to fulfill your transaction by accepting promises, sending transfers, verifying receipt of funds, and so on. Many fees get collected along the way for such services.

“A CBDC system would be radically simplified. A customer would open an account directly with a country’s central bank, and the central bank would issue (create) digital money in the account. Crucially, this makes the money a direct liability of the Fed, rather than of a private bank. Using a simple smartphone app or other tools, the customer can then initiate direct transactions between Fed accounts. The digital money is deleted in one account and recreated in another instantaneously. Moving money across borders no longer requires something as complex as SWIFT or wire transfers, and currencies can be exchanged instantly as long as friendly central banks have agreements to do so. No promises or trust are necessary; every transaction is permanently recorded on a digital cryptographic ledger in real time—a bit like Bitcoin, but exquisitely centralized rather than distributed.

“Such a system technically no longer needs such middlemen as banks or credit card companies. The Fed retains complete oversight and control over the creation, destruction, and ‘movement’ of money, no matter where it is ‘held’ or who ‘has’ it” (emphasis added).

CBDCs proponents hold that this new development could imply a better, more efficient, and safer way to make digital payments.7 But this is doubtful. On February 2, 2023, during the debate on the Economic Affairs Committee report Central bank digital currencies: a solution in search of a problem? (3rd Report, Session 2021-22, HL Paper 131) in the UK Parliament, Lord King of Lothbury explained:

“CBDCs are about ways of making payments; they are not a new currency. Whether a country needs a CBDC is really about the state of its current payments system, hence the title of our report, Central Bank Digital Currencies: A Solution in Search of a Problem?

“What are the problems in our payments system to which a CBDC might be the answer? The main conclusion of our report is that there are no problems to which a CBDC is the only, or even the most obvious, answer. Our payments system is more efficient than those in most other countries, certainly the United States. Most transactions are already digital, whether by tapping a card on a machine at the point of sale or making a digital payment on a computer for remote transactions. All of these are operated already by commercial banks and an increasing number of new payment vehicles.

“Competition has moved us from a system that used to be based on paper cheques, which often took five days to clear, to one driven largely by digital payments, with virtually instantaneous clearing. It would be somewhat odd to try to increase competition in this area by creating a state monopoly of the payment system, as opposed to the role of a central bank in determining the value of a currency. That is a quite different function” (emphasis added).

The former implies, in essence, a system where payment settlements are done faster than in the current system, and at the same time allows the Fed to obtain more information from transactions. However, it is not the same as a CBDC, where the Central Bank knows about every transaction immediately. That being said, Real Time Payments, a private sector alternative, would be a more preferable market alternative to FedNow (Beckworth & Selgin, 2019).

So, it is not the case that CBDCs would clearly imply any improvement in the payments sector.

Proponents of CBDCs also try to tackle the charge about the lack of privacy these would entail. But even they recognize that privacy would be limited. Christine Lagarde, President of the European Central Bank declared:

“We seek to ensure high standards of privacy for digital euro users. But full anonymity – such as offered by cash – does not appear a viable option in my opinion. It would contravene other public policy objectives such as ensuring compliance with anti-money laundering rules and combating the financing of terrorism. And it would also make it virtually impossible to limit the use of the digital euro as a form of investment – for example via holding limits or tiered remuneration – for which identities of users need to be known.

“…We should at least provide a level of privacy equal to that of current electronic payment solutions” (emphasis added) Lagarde (2022).

So, less privacy is to be expected from CBDCs, not more.

To assure adoption, CBDCs would most likely be gradually imposed on the public, through different measures. But legal tender laws would surely help in this regard. Again, Christine Lagarde declared:

“Moreover, a positive side-effect of a legal tender status may be that it facilitates network effects, allowing citizens to have the option to ‘pay anywhere’ and easily access the digital euro. Indeed, the digital euro can only act as a monetary anchor if it becomes a convenient digital medium of exchange that is part of the everyday lives of Europeans. It should be available in a broad range of market segments to achieve sufficient network effects. This should include digital payments in physical stores – which is the biggest segment accounting for 40 billion transactions in 2019 – but also E-commerce and peer-to-peer payments” (emphasis added) Lagarde (2022).

Another possible (although not necessarily probable) path could be related to stablecoins8 and the operation of banks themselves. After December 2017, the peak of the previous Bitcoin high close to $20,000, banks began to increasingly restrict operations related to cryptocurrencies.9 In that context, stablecoins10 began to thrive by providing liquidity to cryptocurrency markets. These products, which are cryptocurrencies that are pegged to fiat money (say, the US dollar), hold reserves and issue tokens on a 1:1 basis. For instance, the market cap of USDT Tether, launched in 2014, was of about 76 billion USD as of mid-March of this year. Another stablecoin, USDC of which Circle and Coinbase are responsible, had a market cap of around 36 billion USD at the same period.

Given that redemptions are low in relation to the reserves they hold, they usually invest a part of those holdings in different assets, such as Treasuries, money market funds, and commercial papers, among others. If rates go down, the companies that issue the tokens profit due to the capital appreciation of these assets. If rates go up, they of course make money as they roll their positions.

But the problem with this is naturally duration risk. As interest rates increase, the market value of these assets decreases, thereby creating a mismatch between present liabilities (the tokens), and the assets held in reserve. If these stablecoin companies face sudden large redemption requests, they could easily see their capital depleted, lose the peg, and face a run.11 Liquidity and solvency are two different things.

Paradoxically, the product that allows to provide liquidity to cryptocurrency markets and that on the surface operates similarly to a CBDC12 is what may allow regulators (or even scared depositors) to point to the alleged need for a CBDC. This is so because when facing a run13 or a de-peg, regulators will have the chance to argue that it is not only the case that stablecoins are not up to the task they said to be performing but are also putting depositors in danger. Facing this situation, they will buttress their claim that CBDCs are safer since they are issued directly by Central Banks.

Moreover, although unlikely, regulators would also be able to argue that uninsured deposits in commercial banks, i.e., not insured by the FDIC, are also more secure if held in CBDCs instead of as simple claims against banks. This is not hypothetical, since the fall of Silicon Valley Bank in March of this year allowed to entertain the possibility. Again, despite of the fact that this may be improbable, it is nevertheless allowed by CBDCs.

So, both centralization and lack of privacy are the possible (and almost certain) consequences of CBDCs. But these are neither the only nor the most dangerous possibilities that these may entail.

The Dangers of CBDCs

There are different ways in which CBDCs could be designed. These imply different levels of transaction scrutiny, retail or wholesale,14 volume limits, private financial institutions participation, among others. But by their very nature, CBDCs may enable regulators and officials to put in practice a diverse array of measures and policies that would be unprecedented in their scope and scale of reach in terms of intromission in private property rights and individual privacy.

It is important to bear in mind that these measures may never be implemented, but they are nevertheless possible under CBDCs. Hence, the degree of intervention in the lives of citizens will ultimately depend on the bureaucrat or regulator in charge. That is the greatest danger.

Let us now review some of these possible measures, which are enabled by the possible nature of CBDCs as programmable money. According to Bossone & Faragallah (2022a; 2022b), this consists of the following:

“Programmability could be applied to digital cash for all kinds of purposes, including to pay a positive interest rate or charge a negative interest rate on cash; to set conditions for the transfer of money to specific types of users or types of goods and services; to automate the transfer of specific values, such as tax payments for each purchase from a merchant, or to ban certain users from access to cash in a way similar to blacklisting. It can facilitate pay-per-use, for example for automated payment of rented items. It could facilitate so-called Internet of Things payments, where ‘smart’ machines make buying orders and authorize payments when needed (e.g., a refrigerator could automatically order milk from a grocer when running low, or a printer tracking toner usage could buy it via Amazon once it reaches a certain level). Digital money could be programmed to settle payments between systems that are exchanging currency, where a payment from one system in a specific currency is conditioned of another payment from the other system in a different currency.

“In all such cases, payments or transfers of value would be triggered based on preset conditions handled under ‘smart contracts.’ These are computer programs or transaction protocols that are intended to execute automatically to control or document legally relevant events and actions according to the terms of a contract or agreement. Smart contracts remove the need for trusted intermediators and arbitrations, reduce enforcement costs and fraud losses, and lower the risk of malicious or accidental exceptions.

“Programmable money could eventually allow for far-reaching scenarios where the government limits access to scarce resources, applying dynamic fees on the use of, say, electricity or tolled roads, based on their usage or carbon emission measurements, and attaching pay-per-use systems to houses and cars, as discussed by Casey (2020).” Bossone & Faragallah (2022a).

Thus, it is easy to see what the dangers of CBDCs could be. It would be possible to set CBDCs as smart contracts restricting specific transactions or money transfers depending on the identity of the receiver, what is being purchased, its quantity, the location, and the time of purchase. But that is not all. Programmable CBDCs may subsidize certain industries at the expense of others according to the guidelines of the regulator, including ESG policies, racial and religious considerations, among other criteria. At the same time certain industries or service providers could be de facto prohibited by restricting or forbidding transactions with them on the basis of lack of certifications or approvals, as well as due to offering specific products or services, or for having suppliers considered “politically incorrect”.

The subject of ESG is particularly on point, since Central Banks are increasingly taking environmental considerations as part of their mandates. For instance, the European Central Bank (2022) states:

“Climate change matters to us at the ECB because it affects: the economy, which in turn affects our goal of keeping prices stable; the banks that we supervise to keep them safe and sound; our own exposure to risk…

“We at the ECB have a strong interest in addressing climate risks within our mandate. Climate change affects how we keep prices stable, how we supervise banks and how we manage our own exposure to climate risks…

“We are implementing an action plan to incorporate climate change into our monetary policy and have made climate change a key priority in our role as a supervisor. We are improving our models, the quality of the data we use and the way we manage our own risks.

“We want to foster wider changes in behaviour. Our rules can encourage banks to be more aware of climate risks related to the assets they hold, to be more open about them and to tell us about them in a consistent way. If banks and companies are more aware of climate risks and more transparent about their effects, then everyone can properly take these into account and attach the right price tags. We are also sharing our expertise and the lessons we have learnt to encourage others to do their part in the fight against climate change.”

So, it would not be unthinkable for Central Banks to adopt and enforce environmental policies through CBDCs.

At the same time, CBDCs would enable the possibility of mandating a minimum of daily, weekly, monthly or yearly transactions by amount or quantity with the threat of “expiring money.” The excuse could be battling deflationary risks or increasing the velocity of money at specific moments, such as during a pandemic, climate disaster, or any other moment of distress. Certain money amounts could also be credited to every citizen’s account to further these policies, thus operating as real “helicopter money” (Friedman, 1969). Limiting the CBDCs amount to hold as savings is another possibility as well, as a means of “stimulating demand” and avoid “hoarding.”

Also, limits on daily, weekly, monthly or yearly transactions by amount or quantity could be enforced. This time with the excuse of “stabilizing” nominal spending, money velocity and/or decreasing inflation.

Of course, all other controls and regulations as applicable to fiat money and digital transactions of fiat money may apply as well, such as capital controls and foreign exchange controls. This would mean that informal exchange markets in countries where exchange controls are enacted would be almost completely closed, thereby destroying individuals’ only chance in those places to freely transact.

Privacy, as we explained, is one of the main victims of CBDCs. The holder of the CBDC will be likely known, so everything that it does with it could be known, allowing government to learn every consumption and saving pattern on an individual basis (instead of modern, macro analysis). This would also allow to feed models with data for behavior prediction and profiling. A real dream for central planners. Moreover, since the ledger containing all CBDC transactions will be administered and controlled by the Central Bank, it will also have the power to alter it.

Social credit policies could be implemented with CBDCs as well. Government may abrogate the permission of specific individuals to transact, and even confiscate their holdings depending on how these comply or not with specific government mandates. Not only financial privacy is at risk, but financial freedom as well. And this implies, of course, freedom itself. Hence,
“In the case of the government-mandated lockdowns during the COVID-19 pandemic, a CBDC could have been programmed to only exchange with ‘essential’ businesses or alert the authorities when citizens incurred travel expenses” (Anthony & Michel, 2023, 8).

Another privacy concern comes from the fact that if a requirement for the use of CBDCs will be that users need to have a bank account (thus establishing banks as intermediaries), that will automatically imply that they will have to comply with all the usual KYC and AML rules that apply for bank accounts. This of course means that the level of privacy allowed by the use of cash will never be met by CBDCs. Bank intermediation may give the appearance of a usual bank account, but it will not be the same, as the CBDC is controlled directly by the Central Bank. That is, a CBDC implies an account of the user in the Central Bank.

Fiscal control would be larger, since information of transactions would be instantaneous and direct. That may imply an increase in fiscal pressure, and a greater tax burden for those in underdeveloped countries with large informal economies. Although informal economies involve many economic inefficiencies, they nevertheless allow people in many countries to survive and bypass economic controls and regulations that would otherwise render them hopeless. In this respect, with CBDCs taxes could be charged from accounts directly, without notice, after the settlement of any transaction.15

As CBDCs would be issued and maintained by Central Banks, that would increase the monopoly these hold in money, reducing competition by private financial institutions and lowering innovation as well. This is so because greater controls and regulations would be expected for companies dealing with CBDCs, especially in the retail payments sector.

Interest rate policies would have a new reach, since negative interest rates policies could be more effective with CBDCs. This is something particularly attractive for regulators.

CBDCs also raise some questions on how banks will be able to function, especially regarding operations that up to now have been essential for their business model, namely, secondary money creation. Negative interest rates or charging fees for each account would be an alternative, but obviously a bad one for the user. Therefore,

“…if CBDCs do not incorporate commercial banks into their system designs, they risk depriving banks of their deposit base, thus destabilizing domestic banking systems. CBDC designs have countered this with mechanisms like balance caps and zero-interest deposits” (Chainalysis, 2023).

In a recent Cato Policy Analysis paper, Nicholas Anthony & Norbert Michel explain on this regard that:

“Perhaps because this departure is so radical, some CBDC proponents promote an ‘intermediated CBDC,’ where private financial institutions would ‘service’ the account. In this arrangement, the balance on the account remains on the Fed’s balance sheet (i.e., a liability of the Fed). However, a private financial institution would provide all necessary retail banking services (e.g., transferring funds and handling complaints). Most of the policy implications are the same for intermediated and nonintermediated retail CBDCs” (Anthony & Michel, 2023, 2).

Some argue that a CBDC will increase financial inclusion, since it will allow the unbanked to access a bank account. But one thing is to promote financial inclusion (for instance, by lowering regulations and thus increasing competition), and another is to make it mandatory. Valuing one’s privacy is no 19
less important than accessing a credit or debit card, nor this needs to be a dichotomy. But CBDCs make it one.

Contrary to what CBDCs promoters claim on their safety, the centralization implied by these may make the system unsafe regarding cyber-attacks (Disparte, 2021). So, that would be another clear problem in this regard.

Apart from opposition from the public, it is true that there may be some constitutional barriers for the implementation of CBDCs. It is conceivable that some governments will not be easily able to implement a CBDC simply by executive decree. It could be argued that since a CBDC is a form of money, it would have to be approved by congressional legislation, for instance in the USA. But a Central Bank could also argue that managing money is one of its exclusive prerogatives, thereby surpassing this barrier.

Given all these problems and slippery slopes, a regulatory framework for CBDCs would have to be extremely specific and their scope perfectly stated. But given all the mentioned and unmentioned consequences and possibilities of CBDCs, this is highly unlikely. There could always be a way to implement any of these policies by recurring to any imaginable loophole or exception.

N.S. Lyons (2022) further explains some of the ominous possibilities that CBDCs enable:

“Fines, such as for speeding or jaywalking, could be levied in real time, if CBDC accounts were connected to a network of ‘smart city’ surveillance.”

“Should people be encouraged to eat the foods decided best for them, such as a plant- or insect-based diet? CBDCs could do the trick. Should people be limited in how much they can spend per week on carbon-intensive purchases? CBDCs could help with that, too. But the government need not focus only on individuals. Preferential treatment could go to companies meeting environmental, social, and governance (ESG) goals.”

“At the same time, consumers could be nudged away from undesirable organizations and businesses. Why not collect additional fees for transactions with ‘risky’ businesses or charities that have low ESG scores? Or slow down their transaction speed to allow for greater ‘verification’? In fact, why not create comprehensive credit scores based on behavior and number of connections with risky individuals and organizations? It would be a logical next step.

“And if it were ever really necessary—if protestors were honking truck horns too many times in a row, say—then the most dangerous individuals or organizations could simply have their digital assets temporarily deleted or their accounts’ ability to transact frozen with the push of a button, locking them out of the commercial system and greatly mitigating the threat they pose.”

Even if some of these measures are introduced as forms of libertarian paternalism for the sake of citizens “improvement,” that would not make them less dangerous. The slippery slope is inevitable.

But, what if CBDCs be open, private and permissionless? Any or all these features are extremely unlikely. Even CBDCs that would be built with blockchain technology will most likely be permissioned and closed loop. For instance:

“The central banks of Sweden and France, for example, have moved forward with pilots of CBDCs that use permissioned blockchains – a centralized variation on the blockchain technology used by Bitcoin and Ether.

“A permissioned blockchain is a distributed ledger with an additional layer of access control. This means that certain actions – such as issuing tokens, validating blocks, or viewing transaction history – can be performed only by certain participants in a network. For CBDCs, this might be the central bank, commercial banks, or payment service providers.

“This centralized layer is appealing to bankers who want both the permissioning of traditional payment networks and the cryptographic security of blockchains” (Chainalysis, 2023).

However, what of those proposals that claim to defend individual rights, assure privacy and strictly limit the scope and scale of what CBDCs can do? Sean Fieler (2023), writing for The Wall Street Journal, explains:

“Some Republican proponents of a digital dollar say their party’s version of a CBDC would enhance liberty, not government control. They favor a two-tier system, using a CBDC exclusively between the Federal Reserve and providers of financial services. By having private enterprise serve as a buffer between the Fed and the American people, Mr. [Paul] Ryan argues that the centralizing power of the CBDC won’t be merely muted but inverted. We can ‘show the world how a free society should handle this challenge by having a two-tier system which guarantees the government has no role in the management of our money,’ Mr. Ryan said…

“This vision ignores the fact that financial intermediaries can’t protect their users’ data from the federal government…

“Even if Congress tightly circumscribes how a CBDC would operate, history suggests that when a fiscal crisis looms, Congress will look the other way as the Fed does whatever it takes to finance the federal government and protect its domestic money monopoly…” (emphasis added).

So, the dangers are real. And not easily avoided.16

But all of these are theoretical dangers. What about CBDCs in practice?

CBDCs in Action: The Case of Nigeria

The case of Nigeria seems to be a good example of some of the implications of CBDCs.

Nigeria has a long history of inflation and capital and exchange rate controls. In this context, Bitcoin was seen as useful by a part of the population. And this happened even though the Central Bank has prohibited financial institutions to operate with cryptocurrencies and cryptocurrencies exchanges (Avan-Nomayo, 2021). Thus, the country is positioned 11th in the Chainalysis 2022 Global Crypto Adoption Index.

In this context, the government implemented the eNaira, a CBDC. Naturally, authorities tried to promote citizens to use it, but without good results (Young, 2022). Less than 0.5% of population has used the eNaira.

An article published at Bloomberg (Osae-Brown, Fatunde & Olurounbi, 2022) explains that:

“A year after launching Africa’s first digital currency, Nigeria’s central bank is turning to the nation’s three-wheeler taxi operators to speed the adoption of the eNaira, as regulators across the world scrutinize its every move.

“It’s offering a 5% discount to drivers and passengers of the motorized rickshaws — known locally as Keke Napep — who use the eNaira.

“The results, so far, have been disappointing. While the eNaira uses similar distributed ledger technology to Bitcoin or Ethereum and can be saved in digital wallets, Nigerians’ passion for cryptocurrencies doesn’t extend to the central bank offering.”

“Virtual currencies have lured residents of Africa’s top oil producer as a hedge against inflation and currency depreciation, but eNaira is seen as a proxy for the challenges facing the continent’s biggest economy and a symbol of distrust in the ruling elite.”

Now, this is a case in point of why the charge that CBDCs would foster financial inclusion is wrong. Mainly because the unbanked usually don’t trust neither financial institutions nor the government. And this is why, in contrast, they do trust private cryptocurrencies such as Bitcoin. Again, the quest in this context 24
is not only for faster and safer digital payment or transaction methods, but fundamentally for privacy and decentralization. In this regard, the latter means the lack of control by any specific central authority.

More recently, Nigeria’s Central Bank decided to force a swap between old bills and new ones, thereby creating a shortage in cash. This generated a series of riots in Nigerian cities. AFP in Lagos (2023) reports that:

“The central bank said the policy was aimed at mopping up excess and counterfeit naira from the system as well as discouraging cash ransom payments to kidnappers and bandits. The policy was also to promote cashless transactions by limiting the use of cash for businesses” (emphasis added).

Excuses to promote the use of CBDCs could always be found. But that does not mean citizens will move forward to advance their usage. As the case of the eNaira shows, citizens are reluctant to use CBDCs. We will have to see what tool authorities use next in order to force them to increasingly adopt it, or if hopefully they abandon the project altogether. The latter is unfortunately unlikely.


As we have tried to show throughout this paper, CBDCs are a real danger. Moreover, its alleged advantages are also doubtful. There are private alternatives that can reduce transaction costs and enhance the functioning of the retail payments industry. It is also dubious that CBDCs will promote financial inclusion, efficiency and safety better than free market innovation and private enterprise. And the more concerning aspects of CBDCs, namely lack of privacy and possible individual rights violations may turn this Central Bank innovation into an Orwellian nightmare.

Those who support a CBDC believe, such as European Central Bank President Christine Lagarde (2022), that “Payments are a public good that is simply too important to be left to the market.” But those of us who care about privacy and freedom believe just the opposite. In the words of Milton Friedman (2002), “Money is too important to be left to central bankers.” This is why a CBDC must never be implemented.


Alan G. Futerman
XVII. International G.v. Haberler Conference
‘Taking Money out of Politics! On CBDCs and Concurrent Currencies’
May 12, 2023. Vaduz, Liechtenstein.



1 See also Dowd (1988; 1992) in relation to Free Banking.
2 In that paper, Satoshi explains the essence of its creation: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes” (emphasis added).
3 Such as Ethereum, Cardano, Polygon, XRP, aong many others.
4 See, among others, Caginalp & Caginalp (2018), Cocco & Marchesi (2016), and Hayes (2015).
5 For an analysis on the state of financial privacy in the USA, see Anthony (2022).
6 We do not believe so. An alternative and more accurate definition would be hyper liquid collectible (Futerman & Sarjanovic, 2022, 114). See also Selgin (2013).
7 FedNow has been presented by some people as the first step towards the implementation of a CBDC (or even that it is a form of CBDC, as Robert F. Kennedy Jr. mistakenly claimed;
8 On stablecoins, see White (2021).
9 “Overall, the level of involvement by the banking system in crypto-asset activities remains relatively low” (Financial Stability Oversight Council, 2022, 17).
10 Other projects, such as Libra (2019), did not finally prosper.
11 Although they may be insured against interest rate risk, the danger of a run still exists.
12 In essence, however, they are very different. For a comparison between the two, see Disparte (2022, 56).
13 On bank runs and its relation to crypto exchange runs (e.g., FTX in 2022) see Selgin (2022).
14 Retail CBDCs are for companies and users, and wholesale CBDCs are for financial institutions.
15 As it currently occurs in some countries with commercial bank accounts, e.g., in Argentina with the debits and credits tax.
16 There are voices against the implementation of CBDCs. For instance, Florida Governor Ron DeSantis. See “Governor Ron DeSantis Announces Legislation to Protect Floridians from a Federally Controlled Central Bank Digital Currency and Surveillance State.” March 20, 2023.


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