Central Bank Digital Currencies (CBDCs) have emerged as a subject of both intense scrutiny and substantive economic promise.
CBDC: Economic justification
While concerns regarding privacy infringement, governmental overreach and financial autonomy persist, the potential economic gains that CBDCs could facilitate render them a compelling policy instrument.
Designed with appropriate safeguards, these digital currencies can fortify financial stability, lower transaction costs and enhance national monetary sovereignty.
Criticism of CBDCs has largely centred on their capacity to enable intrusive financial surveillance, with China’s digital renminbi often cited as a cautionary precedent.
The ability of state authorities to track and monitor financial transactions in real time has raised legitimate concerns about the potential misuse of CBDCs as tools for political control.
Even in liberal democracies, fears surrounding programmability – which could allow restrictions on spending behaviours – have generated public resistance.
In the UK, a petition against programmable CBDCs amassed 30,000 signatures, despite assurances that no such constraints would be imposed.
In the US, the discourse has become highly politicised.
Donald Trump, in his renewed tenure as president, formally prohibited the establishment of a US CBDC, aligning with a broader conservative apprehension regarding state-controlled financial instruments.
Robert Kennedy Jr., now serving as US Secretary of Health, has reinforced these fears, claiming that digital currencies could lead to “financial slavery and political tyranny.”
However, unlike the Chinese model, Western CBDC frameworks prioritise privacy protections to prevent state overreach.
More significantly, the economic rationale for CBDCs presents a persuasive counterpoint to fears of authoritarian control.
The Economic Rationale for CBDCs
Recent economic analyses have underscored the transformative potential of CBDCs.
John Barrdear and Michael Kumhof, senior economists at the Bank of England (BoE), modelled a scenario in which a CBDC issuance equivalent to 30% of GDP, backed by an equivalent amount of government debt, would result in a 3% increase in long-term GDP.
This growth would be driven by:
- A reduction in government borrowing costs
- Lowering distortionary taxation mechanisms
- Decreasing transactional inefficiencies across the financial system
To contextualise this, the projected GDP uplift from CBDCs is comparable to half the long-term economic costs of Brexit and the COVID-19 pandemic, as estimated by the UK Office for Budget Responsibility.
Given these benefits, a well-executed CBDC strategy could serve as an economic stabiliser amid rising transaction costs and declining cash usage.
CBDCs as a Counterbalance to Private Monopolies
One of the strongest justifications for CBDCs is their role in preserving public monetary infrastructure.
The prevalence of physical cash has markedly declined – from over 60% of UK transactions in 2007 to a mere 12% in 2023.
In the US, cash transactions have similarly plummeted, now comprising just 16% of payments, down from 32% in 2016.
As reliance on private digital payment systems grows, market concentration has led to increasing costs.
In the UK, Visa and Mastercard collectively control 95% of transactions involving UK-issued cards, and their fees have risen by 30% in real terms over the past five years.
In the US, meaningful fee reductions were achieved not through competition, but via a high-profile antitrust lawsuit settlement against these dominant players.
In this context, a CBDC would function as a public alternative, establishing a benchmark for digital transactions and mitigating the unchecked expansion of private-sector payment costs.
CBDCs as a National Security and Geopolitical Necessity
Beyond economic efficiency, CBDCs carry geopolitical significance.
In an era of intensifying economic fragmentation and geopolitical realignment, national governments increasingly regard digital payment infrastructure as a strategic asset.
As Jens Larsen, Head of Geoeconomics at Eurasia Group, observes, countries are becoming increasingly reluctant to entrust critical financial infrastructure to foreign-dominated payment networks.
For the EU and the UK, this underscores the urgency of establishing sovereign digital payment ecosystems.
While the US, backed by the dominance of the dollar, may not perceive an immediate need, other economies risk over-reliance on privately controlled or foreign-influenced financial intermediaries.
Developing independent CBDC frameworks ensures that national economies retain control over their monetary systems in a rapidly evolving financial landscape.
The Inevitable Role of CBDCs in the Future of Money?
While opposition to CBDCs remains pronounced, much of it stems from misconceptions rather than substantive economic arguments.
The erosion of cash-based transactions, the escalating costs imposed by private payment networks, and the geostrategic imperative of financial autonomy collectively make a strong case for the inevitability of CBDC adoption.
For these systems to be effective, robust privacy frameworks must be embedded and their usage must remain voluntary rather than coercive.
However, outright rejection of CBDCs would mean forgoing substantial economic and strategic advantages.
Rather than a threat, I surmise that CBDCs represent an evolution in the monetary system, providing a public financial instrument that enhances financial stability, national sovereignty and competitive market dynamics in the digital economy.
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