Every day, dozens of new cryptocurrencies are released on the open markets. Investors have more than 12000 alternatives to invest in and trade them for profit. Some of the strongest cryptocurrencies have advanced financial instruments attached to them, such as options trading on Bitlevex.
However, governments around the world are feeling left behind in this narrative. Cryptocurrencies (or at least, most of them) are decentralized by nature and cannot be controlled. Their issuance and permission to use the network are governed by the users, instead of a central authority.
Governments feel like they are losing their grip on the economy and they answer by issuing their own central bank digital currencies, or CBDCs. In this article, we explore the basics behind these digital currencies and will analyze their pros and cons.
We will equally look at which countries are already developing their own CBDCs and see what this means for the future of crypto.
What are CBDCs?
Central Bank Digital Currencies are cryptocurrencies that are issued by the governmental financial institution of a country, i.e. the central bank. Unlike cryptocurrencies, which are decentralized in nature, the central bank possesses the issuance and permission rights of the CBDC.
This means that:
- The network is governed by a single, centralized body.
- The central bank can grant or revoke access to different users.
- The network can be shut down by the government.
- The amount of digital assets issued depends on the government, instead of a mathematical process.
CBDCs are issued by the government following a country’s policy to release more money in the system. Think of it as fiat money, but in digital form. CBDCs are also different from stablecoins, as they aren’t backed by physical assets, but by a government’s promise of the value of the currency.
For instance, 1 USDT (Tether) =1 USD because the company that issues USDT keeps an equal amount of USD in reserves to back these assets. A CBDC isn’t directly backed by fiat, but instead, replaces, or adds to the amount of the fiat money already in circulation.
Pros and cons of CBDCs
CBDCs are a controversial topic in the crypto community, as they go against one of the pillars of the crypto concept which is decentralization. Bitcoin and similar cryptocurrencies cannot be controlled by a single entity and need 51% of the nodes to give consensus for a major update or network change to take place.
For example, the block size of BTC is 1MB and this cannot be changed without more than half of the participants agreeing on said change. With a centralized CBDC, these changes are left to the discretion of a single entity, the central bank of the country. This opens some controversies on the subject, as well as some advantages and drawbacks.
Pros of CBDCs
The advantages of these CBDCs are:
Stable value – the value of a CBDC will always be the same as its local fiat currency.
Government-backed – governments can control inflation through different policies and provide long-term stability of the currency.
Simplified implementation of monetary policies – because they are digital, they can be easily distributed without an intermediary.
Cheaper to produce – no need for expensive printing.
Impossible to duplicate – CBDCs have a unique digital representation and cannot be copied or falsified.
Bank the unbanked – people in regions with weak banking infrastructure can access advanced financial products just by having access to the internet.
Cons of CBDCs
That said, CBDCs have their set of drawbacks:
Programmable money – the government can program CBDCs to be able to serve a single purpose.
For instance, stimulus money could be used only to buy food, but not for clothes or to be used for savings.
Permissioned access – the central bank can revoke access to your wallet or confiscate your money at any time.
CBDCs eliminate privacy – the government will know exactly how and when you spend your money.
What countries are working towards releasing a CBDC?
CBDCs are a hot topic among world governments and many are already working towards their implementation.
China – China seems to have advanced the most with its digital yuan compared to other countries.
Their CBDC is already in a mass-scale testing phase all across the country. The digital yuan clearly seems to be China’s answer to cryptocurrencies, as the country is actively banning any other cryptocurrency-related activity on its soil.
The European Union – the ECB has already drawn a framework for the digital Euro. However, the Euro CBDC is still just in the concept phase.
The US – the federal reserve has been hinting at launching a digital dollar in the past few years, mainly to answer to the rising popularity of stablecoins.
The Race For Digital Technology And Global Financial Impact
According to the statements of central banks and international financial organizations, the implementation of the Central Bank of Securities will allow, in a strategic perspective, to create a comfortable and secure infrastructure of payment and settlement services for citizens and organizations, as well as to minimize fees for money transfers.
In parallel with this, digital currencies will provide an opportunity to whitewash the shadow sectors of the economy and automate tax collection, as well as the provision of public services. For example, if a model of an unconditional basic income is introduced, the Central Bank of Central Banks will allow, through appropriate prohibitive metadata, to restrict the purchase of alcohol and tobacco products at the expense of the subsidies received.
However, there is at least one more important reason why central banks are pushing for digital currencies. It is directly related to geopolitical confrontation and foreign economic competition.
While CBDCs seem very useful on the surface, they come with a wide array of issues, such as privacy and centralization. It’s difficult to see how CBDCs could replace the new financial alternative brought by Bitcoin and other cryptocurrencies.
They can be viewed as an improvement on the existing fiat system, making money more portable, easier to store, distribute and use.