Government-issued digital currencies could bring about a dystopian future, security experts warn

Government-issued currency has taken on a whole gamut of forms — from pieces of salt to polymer bank notes with security holograms.

After centuries of reliance on physical currency, many of us can go days without touching a coin or bank note — and governments around the world want to take advantage of this digital shift. Several nations have already turned the contents of their citizens’ wallets into digits in an electronic ledger, an emerging concept called central bank digital currency (CBDC).

While China’s digital yuan has received the most attention, nearly 100 CBDCs are in the works around the world, according to the International Monetary Fund. These include economic giants like India, Brazil, and the Eurozone. In the United States, the Federal Reserve Bank of New York is now testing out the concept with major banks.

It may seem alluring to ditch physical currency, particularly considering the boom in cashless businesses and the pandemic-induced cash shortage. And it does promise very real benefits, especially in developing countries seeking to boost financial independence and cut the high costs associated with printing and transporting cash.

But experts have also highlighted a number of downsides: The citizens subject to CBDCs could face a number of risks, including ramped-up government surveillance, data theft, and even financial punishments for political dissidents.

“At the moment I’m hoping it will be used for the best, but we also have to prepare for the worst — at least in some contexts,” Carola Westermeier, a political economist at Goethe-University Frankfurt in Germany, tells Inverse.

What is a CBDC?

Economists don’t fully agree on what a “central bank digital currency” actually entails, and each country has plenty of leeway in designing its own. But all CBDCs do have a few things in common.

For one, it must be digital — existing as numbers in an electronic record known as a ledger, not as coins or bank notes that change literal hands in physical space.

Plenty of people already pay digitally, so the demand is there. This year, around 41 percent of Americans ditched cash for their weekly purchases (up from 24 percent in 2015), according to a 2022 Pew Research Center study. While estimates vary, up to 60 percent of China’s purchases are now cashless — driven not just by credit cards, but also by mobile payment apps like WeChat Pay and Alipay.

But unlike forms of other digital payment, a CBDC falls under the control of a country’s central bank, which the government itself regulates.

While paying with a CBDC could feel similar to pulling up a digital wallet like Bitcoin, the transaction would be backed by a government authority — essentially the opposite of crypto’s radical, anti-regulation origins.

“The front-end experience is going to be, I think, identical.”

Behind the scenes, a CBDC would enable a central bank to interact directly with the people. For instance, an American digital dollar would allow everyone to open an electronic account at the Federal Reserve as if it were an online bank.

This type of payment could speed up money processing and help people avoid the pesky fees issued by commercial banks, Christian Grothoff, a computer scientist at Bern University of Applied Sciences in Switzerland, tells Inverse.

Overall, though, it may not feel too different from opening up a checking account with, say, Bank of America or Wells Fargo.

“The average American is not going to be able to tell the difference between a checking account at the Fed and a checking account at the Bank of America,” David Andolfatto, an economist at the University of Miami in Florida who has worked at the U.S. Federal Reserve, tells Inverse. “The front-end experience is going to be, I think, identical.”

But on the back end, it isn’t quite clear how much power governments would hold over our funds — and the detailed digital trail our transactions leave behind.

Eyes on our wallets

Even if a CBDC isn’t a major change for customers in its look and feel, it would certainly mark a major shift for central banks. Historically, central banks have issued currency — not managed its day-to-day use. Cash is relatively anonymous, after all. But with a CBDC, that layer of anonymity would likely vanish.

Security advocates have pointed out how a government could theoretically track all of its citizens’ purchases and gain intimate knowledge of someone’s daily activities. And while CBDCs could afford users privacy by making some low-value transactions anonymous, legal restrictions in many countries make anonymous CBDCs practically impossible.

In attempts to crack down on illicit transactions like money laundering and terrorism financing, governments usually require financial institutions to tie their accounts to identity documents. That clearly ties a CBDC account to its user’s name.

It’s theoretically possible, then, for the authorities to monitor what people are doing with their money, coerce them into spending on certain things, or target individuals based on their spending.

“How do we make sure the data is really gone?”

For example, the Canadian government froze the bank accounts of people who protested Covid-19 vaccine mandates in 2022 — officials had to work with commercial banks to make that happen, but CBDCs could eliminate that hurdle. This means that politicians could more easily mess with the accounts of any individuals targeted by authorities, Grothoff notes.

And if officials don’t meddle with our data, someone else could. Some economists warn that if the data isn’t handled correctly, third parties could crunch it in dubious ways.

Already, insurance companies quote customers using highly personalized data that has resulted in price discrimination.

“To me, this is the most important issue with CBDC and I don't see any clear solution to it,” Cyril Monnet, an economist at the University of Bern in Switzerland, tells Inverse. “Erasing data after a year or so may be a solution, but how do we make sure the data is really gone?”

For now, major powers like the Central European Bank and the Federal Reserve are still figuring out how to deal with this highly sensitive information in a CBDC structure. And even if leaders do safeguard financial details, transitions in leadership — including a sudden coup — could suddenly endanger citizens’ data.

“How can [central banks] make sure that, first of all, they don’t abuse it, but also that they don’t lose it to somebody who might abuse it?” Grothoff says. “And what if the government changes and tomorrow you have a way worse government in power?”

Politicized payments

Despite the many unknowns, a few real-life examples hint at what a CBDC looks like in practice.

The highest-profile CBDC project can be found in China, whose digital yuan — the eCNY — made its international debut at the 2022 Winter Olympics in Beijing. China has been tinkering with the eCNY for the better part of a decade. Now, the government is pushing the system in a bid to become the world’s first cashless society.

But the digital yuan is hardly used at the moment, perhaps because it doesn’t offer a clear advantage over existing payment apps. And while the popular apps Alipay and WeChat Pay have both integrated the eCNY, it may not be entirely noticeable to users.

It’s a similar deal with Nigeria’s eNaira, a CBDC introduced by its central bank in October 2021. Less than 0.5 percent of Nigerians use it, according to Iwa Salami, a finance regulation expert at the University of East London in the U.K.

So if CBDCs aren’t particularly helpful for the average person, why are some governments looking into them?

It turns out that they could help nations challenge the dominance of the dollar in international trade. CBDCs can help nations avoid middlemen like American credit card companies or the U.S.-dominated SWIFT network that connects financial institutions around the globe. In fact, CBDCs and cryptocurrencies could even help countries avoid U.S. sanctions.

“There are ways [for] states to try and enforce CBDCs as the dominant form of payment.”

“Countries see themselves dependent on American technology, especially for payment systems,” Grothoff says. “By establishing CBDCs and making those interoperable without relying on the American system, they might be able to get around sanctions.”

When it comes down to it, the proposed benefits of CBDCs could just as well be accomplished by making existing options easier — and cheaper — to use, some experts say. After all, they’re likely not helpful in countries where significant amounts of people don’t have a mobile phone or internet access in the first place. They could even worsen the inequalities they’re meant to help solve by raising the price of physical payments.

You may be wondering: Could governments try to phase out cash entirely?

That may already be the case in Nigeria.

On December 7, the government drastically restricted the amount of cash ATMs in the country could disperse, from 2.5 million naira (around $5,620) per week to just 100,000 naira (around $225), with a 20,000-naira (around $45) daily limit. Ostensibly, the move is to combat counterfeiting — but it’s the stick pushing naira users to go digital.

“There are ways [for] states to try and enforce CBDCs as the dominant form of payment — and we will see how that plays out,” Westermeier says.