Negatives, Drawbacks, Disadvantages, and Issues of Central Bank Digital Currencies (CBDCs) (2024)

FAQs

Negatives, Drawbacks, Disadvantages, and Issues of Central Bank Digital Currencies (CBDCs)? ›

Difficulty in implementing anti-money laundering and counter-terrorism financing measures: CBDCs could be more difficult to monitor and regulate than physical cash, which could create challenges in preventing money laundering and terrorism financing.

Difficulty in implementing anti-money laundering and counter-terrorism financing measures: CBDCs could be more difficult to monitor and regulate than physical cash, which could create challenges in preventing money laundering and terrorism financing.

The price volatility, alleged use in criminal activities that may not be easy to map and high energy consumption for mining of the coins are considered some of the key challenges to the acceptance of cryptocurrencies besides these coins not having any sovereign guarantee or approval.

Central Banks have limited control over the economy. They can influence it through monetary policy tools like interest rates, but they cannot directly control factors like consumer spending, business investment, technological changes, etc. The effects of monetary policy changes take time to work through the economy.

The looming specter of CBDCs isn't just about digital innovation; it's about surveillance, loss of privacy, and an iron grip on financial transactions. With 130 countries, representing 98% of the global GDP, sniffing around CBDCs and a projected global value hitting $213 billion by 2030, the stakes couldn't be higher.

Cyber attacks, internet connectivity issues, and interoperability with existing payment systems are challenges for the efficiency of CBDC. Finally, central banks must also ensure the privacy and safety of a CBDC, which are necessary for gaining public trust and protecting citizen's rights.

ABA President and CEO Rob Nichols said, “ABA has long believed that a CBDC would pose significant risks to our financial system that would outweigh any potential benefits, including undermining the critical role that banks play in extending credit and powering the economy.

Cryptocurrencies can be vulnerable to hacking and theft. Cybercriminals employ various techniques, including phishing attacks, malware, and exploiting vulnerabilities in exchange platforms or wallets, to steal funds.

Privacy is a significant concern regarding CBDCs. Critics fear that a government-issued digital currency could lead to increased surveillance and control over financial transactions.

In each case where data exist to assess the situation, the public demand for CBDCs has been extremely low. Experience suggests that CBDCs do not offer tangible benefits which existing alternatives cannot already deliver. One might speculate that future CBDCs will fail for similar reasons.

What are the cons of digital banking? ›

Con: No Personal Relationships

Additionally, if you need to make changes to the terms of your account, a bank manager usually has some discretion if your personal circ*mstances do change. Additionally, digital banking platforms may not be as accessible for some people and can be difficult to navigate and understand.

A key risk are the potential gaps in central banks' internal capabilities and skills. While many of the CBDC-related activities could in principle be outsourced, doing so requires adequate capacity to select and supervise vendors.

High asset prices, high private leverage, and liquidity dependence suggest the central bank could face financial dominance—where monetary policy responds to financial developments, such as a sharp fall in financial asset prices, rather than inflation.

One of the disadvantages of CBDCs is the potential for privacy risks. Digital currencies are vulnerable to cyberattacks, which can result in the loss of funds or sensitive information. The impact of CBDCs on privacy is vast, as they can be used to track individuals' financial activities.

A U.S. CBDC could affect the financial structure of the U.S. and alter the duties and responsibilities of the private sector and the central bank. The safety and stability of the financial system could be compromised during the conversion process from another form of money to a CBDC.

Will a U.S. CBDC replace cash or paper currency? The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.

The ABA estimates that even with a CBDC framework that caps deposit accounts at $5,000 per customer, or “end user”, would result in $720 billion in deposits leaving the banking system. That would severely impact banks as drivers of the economy.