CBDCs With Expiration Dates, Restrictions Could Target Social Policies, Economist Tells WEF

A sign of the WEF is seen at the Congress centre during the World Economic Forum (WEF) annual meeting in Davos on Jan. 18, 2023. Fabrice Coffrini/AFP via Getty Images

Expiry dates and restrictions on “less desirable” purchases are some of the key advantages behind central bank digital currencies (CBDCs), according to an economist at a World Economic Forum (WEF) event.

The WEF hosted the 14th annual Meeting of the New Champions in Tianjin, China, also known as Summer Davos. During one of the 30-minute panel discussions on June 28, Cornell University professor Eswar Prasad explained that the global economy is “at the cusp of physical currency essentially disappearing” and that programmable CBDCs and the technology behind these new forms of money could take the international economic landscape toward a dark path or a better place.

Prasad contended that one of the “huge potential gains” for the digitization of money is the programmability of CBDC units and attaching expiry dates. Governments can also utilize central bank money to socially engineer society.

“You could have ... a potentially better—or some people might say a darker world—where the government decides that units of central bank money can be used to purchase some things, but not other things that it deems less desirable like, say ammunition, or drugs, or pornography, or something of the sort,” he said. “And that is very powerful in terms of the use of a CBDC, and I think also extremely dangerous to central banks.”

The author of “Gaining Currency” and “The Dollar Trap” purported that CBDCs possess unique characteristics and could be employed “as a conduit for economic policies in a very targeted way, or more broadly for social policies.”

“That could really affect the integrity of central bank money and the integrity and independence of central banks,” Prasad stated. “So, there are wonderful notions of things that can be done with digital money, but again I fear the technology could take us to a better place, but equally has the potential to take us to a pretty dark place.”

CBDC Expiry Dates

Integrating expiry dates with CBDCs has already been discussed by various central banks worldwide.

The Bank of Canada (BoC) published a paper in 2021 entitled “Best Before? Expiring Central Bank Digital Currency and Loss Recovery.” The institution weighed the pros and cons of expiration dates, asserting that an expiry date would “automate personal loss recovery.”

“With this feature enabled, digital cash could not be spent after its expiry date. Consumers whose digital cash expired would automatically receive the funds back into their online account without having to file a claim,” the Canadian central bank wrote. “We show that offering the option of personal loss recovery could substantially increase consumer demand for digital cash. However, the length of time to expiry plays a key role. An expiry date that is too soon is inconvenient, but a date too far in the future slows down the reimbursement of lost digital cash.”

China has been exploring expiration dates for the digital yuan, suggesting that it would no longer be usable if not spent in a specific timeframe.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, Jan. 21, 2016. Jason Lee/Illustration/Reuters

The World Bank studied the effects of expiring money and argued that this could be a “potential monetary policy tool” to stimulate consumption during recessions or pandemics.

“Expiring money would increase both the velocity of money and overall economic activity, similar to applying a negative rate to digital cash,” the organization wrote. “In practice, a carrying fee on money would encourage people to spend it and thus prevent it from being hoarded.”

Indeed, CBDC advocates say digital money can be a flexible instrument to micro-target sectors, regions, interest rates, and socio-economic demographics with real-time feedback.

Skepticism

Despite more than 100 countries at least in the research phase of CBDCs, there is growing skepticism surrounding government-controlled digital money.

A May Cato Institute 2023 CBDC National Survey found that just 16 percent of Americans support the adoption of a CBDC. In addition, 68 percent of respondents say they would oppose a CBDC if the state could monitor consumers’ purchases. A majority of Democrats and Republicans reported fearing the government could control what the public spends its money on and potentially turn off the American people’s cash.

“While some groups (Democrats, black Americans, younger people) are more likely to be supportive of a CBDC than others, majorities still oppose adopting a CBDC,” the libertarian think tank said in its report. “In sum, it is clear the idea does not have the majority support that government officials should seek before adopting a CBDC.”

Even some Federal Reserve officials have expressed doubt about the necessity of CBDCs.

Fed Governor Michelle Bowman espoused the “significant risks” and highlighted the risks compared to the benefits.

“In thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested,” Bowman said in a speech at a Georgetown University event on April 18.

In February, House Republicans introduced the CBDC Anti-Surveillance State Act to ban “unelected bureaucrats” in Washington from issuing a CBDC that they say could install an “authoritarian-style” and “surveillance-style” digital dollar. Since its introduction, the legislation has yet to come out of the House Financial Services Committee.

Meanwhile, in places that have instituted CBDCs, there has been a minimal appetite for them, as many still prefer cash or mobile payment applications.

Last year, the Nigerian government released the eNaira, and fewer than 0.5 percent of citizens have used the CBDC. Officials tried incentivizing greater adoption rates, such as providing discounts if people used the CBDC to pay for taxicabs. This still did not work.

The trend even caught the attention of the IMF, calling the lack of public adoption “disappointingly low.”

Beijing has been trying to boost adoption rates for the digital yuan. One of the strategies has been encouraging local governments to incorporate CBDC into daily life, like public transportation, or paying civil servants in digital yuan. Other city governments are going as far as handing out free money in the form of consumption coupons and subsidies.

Several major economies, including Japan and Russia, will be rolling out their pilot projects this year. Officials will determine if there is demand for virtual yen or rubles or if consumers prefer the status quo.

At this week’s European Central Bank (ECB) forum in Portugal, ECB chief Christine Lagarde confirmed that the governors in the governing council would decide when a digital euro will happen at the end of October.