For months, I have had serious suspicions about the future of CBDCs becoming a very expensive failure similar to Libra/Diem, so I asked ChatGPT a series of questions about CBDCs and why they may fail.

I got a few logical but very generic statements back. They all looked like a neutral politically correct speech of an IMF or ECB official, nothing new or interesting. But I kept digging and googling, and finally was able to find and put together this summary.

Here is what ChatGPT created (my own analysis is below):

Central Bank Digital Currencies (CBDCs) are a growing area of interest among many central banks globally as a potential new form of money. CBDCs have several potential use cases, including: 

• Financial inclusion: CBDCs can help improve access to financial services for those who are unbanked or underserved by traditional banking systems.
• Cross-border payments: CBDCs can facilitate faster and cheaper cross-border payments, as they would be based on digital technology and be less subject to the limitations of traditional cross-border payment systems.
• Digital payments: CBDCs can offer a more secure and efficient digital payment option, as they would be issued and backed by a central authority.
• Digital cash replacement: CBDCs can serve as a replacement for physical cash, which is becoming less used in many countries.
• Improved monetary policy: CBDCs can provide central banks with new tools for implementing monetary policy, such as implementing negative interest rates or distributing direct payments to citizens.
• Anti-money laundering and countering the financing of terrorism (AML/CFT): CBDCs can help improve the traceability of financial transactions and increase the transparency of the financial system, making it harder for criminals to launder money or finance terrorism.

CBDCs face several potential challenges, including:

• Privacy concerns: CBDCs could potentially undermine privacy, as transactions would be recorded on digital ledger systems that could be subject to government surveillance or hacking.
• Technical challenges: Implementing a CBDC system that is secure, efficient, and scalable is a technically complex challenge, and there are concerns about the potential for system failures, hacking, or other security breaches.
• Financial stability: There is a risk that CBDCs could disrupt financial stability, particularly if they were to be widely adopted and displace traditional deposit-taking institutions.
• Regulatory challenges: CBDCs raise complex regulatory and legal questions, particularly with regard to how they would be governed and who would be responsible for regulating them.
• Competition with commercial banks: CBDCs could potentially compete with commercial banks and disrupt their business models, which could have far-reaching consequences for the financial sector.
• Monetary policy implications: CBDCs could have unintended consequences for monetary policy, particularly if they were to be adopted on a large scale and displace other forms of money.
• Reduced lending: CBDCs could reduce demand for commercial bank deposits, which could, in turn, reduce the availability of funds for commercial banks to lend.
• Reduced intermediation: CBDCs could potentially reduce the role of commercial banks as intermediaries in the financial system, which could have implications for financial stability. CBDCs could encourage households and businesses to bypass commercial banks and hold digital currency directly with the central bank, which could further reduce the role of commercial banks in the financial system.

It is currently unclear whether CBDCs (Central Bank Digital Currencies) will fail or be widely adopted.

• One potential challenge that could contribute to the failure of CBDCs is privacy concerns. CBDCs could potentially undermine privacy, as transactions would be recorded on digital ledger systems that could be subject to government surveillance or hacking. This could discourage widespread adoption and make it difficult for CBDCs to gain widespread acceptance.
• Another challenge that could lead to the failure of CBDCs is technical difficulties. Implementing a CBDC system that is secure, efficient, and scalable is a technically complex challenge, and there are concerns about the potential for system failures, hacking, or other security breaches. If these technical difficulties cannot be overcome, CBDCs may not be adopted on a widespread basis.
• There is also a risk that CBDCs could disrupt financial stability, particularly if they were to be widely adopted and displace traditional deposit-taking institutions. This could make CBDCs less appealing to regulators and financial institutions and could contribute to their failure.
• CBDCs raise complex regulatory and legal questions, particularly with regard to how they would be governed and who would be responsible for regulating them. 
• Increased Traceability: The digital ledger system used for China’s CBDC has increased the traceability of financial transactions, providing greater transparency and making it easier for regulators to monitor financial activity. The centralization of digital currency under the control of the central bank could potentially increase the government’s control over the financial system, although this remains a matter of debate.
• The digital Naira project is a proposed project to launch a digital currency in Nigeria. While the project has not officially failed, it has faced several challenges that have prevented its launch. Launching a digital currency in Nigeria would require significant regulatory and legal frameworks to be put in place, and these frameworks are not yet in place. Implementing a secure and efficient digital currency system is a technically complex challenge, and there are concerns about the potential for system failures, hacking, or other security breaches. Nigeria’s infrastructure, particularly in terms of access to digital technology, may not be adequate to support the widespread adoption of a digital currency. Nigeria has a vibrant mobile payment industry, and there is competition from existing payment systems that may make it difficult for Digital Naira to gain widespread adoption.

Here is my own analysis:

Governmental bodies like the conceptual idea of CBDCs very much: they hope it would create an infrastructure for easier fiscal payments (taxes, social security allowances) and surveillance opportunities (Big Brother stuff, CO2 footprint, China social credits, etc) and may reduce the cost of transactions and the overall cost of managing monetary flows. These projects make their owners feel good about their innovative roles and the legacy they may leave behind.

There are 3 main operational obstacles that, in my opinion, are going to make CBDCs dead on arrival:

• Most people don’t want CBDCs. They are happy with their cards and bank accounts, cash-back premiums, loyalty points, fraud protection associated with card payments, and other convenient routines. People have serious reservations about the lack of privacy associated with CBDCs. It has been argued by many legal scholars that CBDC accounts will not be able to accrue interest, unlike bank deposits. There are no compelling reasons for normal people to use CBDCs. Those who like cash and bitcoins will like their cash and bitcoins even more.
• CBDCs won’t solve the financial inclusion problem. Central Banks are not equipped for opening direct user accounts for people, conducting KYC checks, and administering account monitoring. It means that the account management and administration will be outsourced to the existing banks and other financial institutions (this is what happened in Nigeria and China). As a result, only people who have access to these banks and have been vetted and accepted by these banks can get access to the CBDC, which makes the whole exercise totally redundant.
• Commercial banks, Visa, Mastercard, and the likes of PayPal won’t like the idea and will lobby against it or slow it down. Banks won’t want to administer CBDC accounts for free. If customers suddenly start saving in CBDCs instead of bank deposits or saving accounts, banks will have fewer assets to lend. If e-commerce or consumer purchases shift into CBDCs, it will reduce the addressable market for digital and card payments.

What is your opinion (both about CBDCs and ChatGTP)?

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