Dmitry Bondar: If There Is Time to Be Afraid of CBDCs, It Is Better to Spend It on Preparation


The beginning of 2020 had a lot for central bank digital currencies. China is seemingly ready to test its own digital cash system, while Western countries are getting on with their research and considerations about CBDCs. 

ForkLog’s Max Bit talked with a monetary theorist and cryptocurrency researcher Dmitry Bondar, author of the “Stablecoins: From Electronic Money on Blockchain to a Cryptocurrency Basket” report, to get the expert’s perspective on China’s case, the difference between CBDC and crypto, Facebook’s Libra, and the consequences of CBDCs for world’s monetary systems and cryptocurrencies. The full interview is available in Russian on the ForkLog YouTube channel.

Max Bit: Why are central banks, nation-states, and international organizations so agitated by Facebook’s Libra?

Dmitry Bondar: Libra is a very interesting case. First of all, the irony is strong with this one. Libra did what Bitcoin didn’t manage to, that is to scare the central banks. In fact, Libra did it without even going live. 

Also, there were, should I say, different forms of agitation. Most banks went with the same approach and decided that Libra is bad and should be banned. But China’s central bank, while remaining unwelcoming to Libra, said that it would be a great idea to have its own digital currency.

When China stated that they have serious intentions of launching a digital currency, central banks around the world immediately came up with a “fresh” idea of building a digital currency. Prior to that, the banks were finding all sorts of risks and very little benefit in launching CBDC. 

So, the irony is that Bitcoin led to Libra, Libra led to China’s own CBDC, which leads to CBDCs around the globe.

Max Bit: Speaking about government cryptocurrencies, what are Chinese authorities thinking about it? What about other countries?

Dmitry Bondar: Surely, countries’ CBDC projects are at entirely different development stages. There are countries that are actively researching, working with relevant companies, and announcing their plans. There are ones that are aware of the trends and are kind of looking into the matter of CBDC, while also evaluating other options. And there are ones that don’t appear interested in CBDC whatsoever.

The idea of CBDC is to allow the general public to access digital cash. Technically speaking, we do have a central bank’s digital cash, which is represented by accounts in a central bank. Yet these are accessible only to commercial banks. This is the M0 type of money. So, the idea is to make this money accessible to the general public.

Today, you may want to keep your money in a bank in order to use the benefits quite similar to those of digital money. Although, in this case, you don’t have the money anymore, you have the bank’s promise to get you the money back. This is especially obvious when banks burst. With physical cash, you are limited by the paper that needs to be stored somewhere and transferred physically between people.

Imagine if Apple would reckon that banks aren’t good enough and decide to keep some few billion dollars in cash. They’d need quite a large storage space for all those banknotes.

From the monetary authorities’ perspective, digital money decreases the costs of producing, maintaining, and transporting paper money. This also increases financial inclusiveness, meaning that people in remote areas will be able to use the money, but nobody will have to physically get there to bring them a bit of cash in the first place. The payment processing duties will move from commercial companies to central banks, which can make the system more reliable. And there will be less need for deposit insurance, as there will be less need for commercial bank deposits.

Max Bit: Why do people trust such digital monetary systems?

Dmitry Bondar: Now, we have paper notes: dollars, euros, yen, etc. Somehow, we are made to believe that these notes have a certain value and work as money. Basically, the thing that changes with CBDC is that it will be not a piece of paper, but a digital record kept by the bank. This is more of a technical change. Although, there are nuances.

When Facebook’s Libra was revealed, central banks were the ones concerned about its impact on financial sovereignty, you know the story. But, in fact, Libra wouldn’t really hurt central banks, it’s the commercial banks that will suffer. I mean, Libra is designed to be backed by a basket of national currencies, not to replace national currencies entirely. It’s like a wrap for the existing money. But Libra would be taking away clients from commercial banks. Why have a bank account, when you can have a Facebook account with all the features and then some more?

Although, when central banks are researching the opportunity to build a digital currency, they try to look for solutions that won’t harm commercial banks. Everybody cares about commercial banks. Ever so slowly they start thinking about people as well.

Max Bit: Is there a risk of politics interfering with the decisions regarding loans to the banks that lost liquidity because of CBDCs?

Dmitry Bondar: Central bank is by default the lender of last resort. If a commercial bank has financial trouble, it can ask the central bank to print and lend it some money to solve the problems. So a central bank is there for commercial banks that need help. From this perspective, not much will change. Commercial banks will still be able to ask the lender of last resort for help. 

As for politics, it can interfere and make banks stay alive or go down whenever. You don’t need CBDCs for that.

Max Bit: Max Bit: Will the interest rates go up?

Dmitry Bondar: There isn’t much research in this regard. Some analysts suggest that in the short term the interest rates may grow somewhat, but the situation will get back to normal when the market discipline improves and more specialized players emerge. 

I think more interesting is the issue of negative interest rates, when a bank charges you for storing your money instead of paying interest. A central bank can’t incur a charge for storing paper money in a jar somewhere. And it might want to because a negative interest rate is a way to make people spend money, rather than sit on it. When the money is digital and is controlled by the bank, nobody gets away from the demurrage.

Another point is that CBDCs may lead to dollarization. What I mean is that people in countries with weak national currency want to exchange their money for a stronger currency like USD. This is bad for the local monetary authorities since it subtracts from their ability to influence the national economy through money supply.

Now, you can get a digital USD using blockchain-powered electronic money like Tether or TrueUSD. If CBDCs will be easier to get than Tether, they may contribute to excessive dollarization.

Max Bit: How long would it take to build the infrastructure for CBDCs?

Dmitry Bondar: Importantly, with a system like CBDC central banks would have to work with millions of end-users, therefore having to think about the front-end, UI, and a multitude of product development aspects. Instead, central banks may have intermediaries between them and the end-users. 

These service providers will work like wallets that connect to the central bank and give users access to the money. In this case, central banks free themselves from product development, while service providers get a new business model.

Max Bit: What about the technical side of government crypto?

Dmitry Bondar: Official documents mention the term “central bank digital currency” or CBDC. Sometimes people do call it “government crypto,” but it is misleading. Better call it “digital cash.” 

As for the technical side of it, we need to begin with defining what is cash. There are several main features of cash. The most important is probably its use in peer-to-peer transactions. I can give you money directly and we don’t need anybody else to make this transaction happen. It works in a similar fashion for gold or Bitcoin: we can exchange it directly without having somebody in between.

Another thing is that there are online and offline transactions. With physical cash, you can pay offline, with Bitcoin and such you can pay online and, to some extent, offline by exchanging keys with other people. When thinking about CBDC as a replacement for physical cash, it is important to have a way to pay offline. The easiest way, of course, is to leave physical cash to exist in parallel with CBDC. 

Max Bit: Why build something new, if there are suitable technologies ready to go? Imagine a hypothetical Ethereum-powered token as a national currency. Why not do something like that?

Dmitry Bondar: I’m not a technical expert, but I can see some potential problems there. What if the number of transactions made with such currency exceeds the number of transactions generated by CryptoKitties? You would need a couple of days to pay for groceries and also pay a hefty fee.

We, as a central bank, could’ve considered other public blockchain platforms like EOS or something else, depending on the features and whatnot. But why not just keep a boring old centralized database of transactions that we can control? 

Max Bit: Why not use Bitcoin? Also, are CBDCs a threat to Bitcoin?

Dmitry Bondar: We get back to cash and how we use it. Bitcoin was designed as a digital cash system for uncensored p2p transactions. Cash is similar in a sense that it gives you the freedom of transactions. Central bank digital currencies are not about freedom and lack of censorship, they are about monitoring and control. 

This is the reason why they do not threaten Bitcoin directly. People who were using Bitcoin because of the transaction costs will probably have no problem moving to CBDC, but people who appreciate the freedom aspect of crypto will continue using crypto. Moreover, CBDC and the related surveillance may prompt some people to go for Bitcoin instead.

Max Bit: So, we shouldn’t be afraid of CBDCs, since they will be here anyway?

Dmitry Bondar: If there is time to be afraid of CBDCs, it is better to spend it on preparation.

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