In the first years of their existence, cryptocurrencies received little attention. However, as their popularity grew over time and hundreds of millions of people now know about their existence, central banks started paying attention. That is how central bank digital currencies (CBDCs) were born.
CBDCs on the rise
Three new players entered the "CBDC game" – who are they? 🏦🌎
➡ Central Bank Digital Currencies are becoming increasingly popular and their integration into our financial system seems inevitable.#cbdc #crypto #trading #trader #market #investrohttps://t.co/AZqYMrqGTP
— Investro.com (@investrocom) November 1, 2022
The goal of central banks is clear and straightforward. They want to control the monetary policy while keeping the economy stable. Unfortunately, that sometimes gets out of hand, which causes high inflation or economic downturns like we have been witnessing this year. However, the functioning of the whole monetary could change with the arrival of CBDCs.
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The decentralized nature of cryptocurrencies and their hybrid-like functioning of acting like an asset and medium of exchange simultaneously draw the attention of many investors. For example, Bitcoin has risen in value over time, but it can also be used to pay for coffee or in restaurants as it’s getting widely accepted. Governments and central banks do not really like that, because it takes control away from them.
That is why an idea of a CBDC was born. There are already talks about a digital dollar, while the UK is working on Britcoin. Turkey wants to launch its own CBDC in 2023, and Kazakhstan plans to integrate its own digital currency on BNB Chain. Many countries are working on their version of a digital currency as they see the undeniable benefits CBDCs bring. However, are they beneficial for everyone or just for the central banks?
National Bank of Kazakhstan (NKB) will integrate their CBDC on @BNBchain. #BNB https://t.co/33WMKwAczm
— CZ 🔶 BNB (@cz_binance) October 27, 2022
But first, what is a CBDC?
One thing is clear. CBDCs are coming whether people like it or not. The 20th century was all about cash, but it seems that the 21st century is heading into a totally cashless society. Bitcoin commenced what central banks now want to do. CBDC stands for “Central Bank Digital Currency,” which is essentially a digital version of a fiat currency like the euro or US dollar.
CBDCs will be created and issued by central banks. This digital money will be distinctive from cryptocurrencies as it is backed by the government while being of the same value as a national currency. This distinguishes CBDCs from cryptocurrencies, which have no institutional or asset backing. People can buy goods, pay for services, and settle taxes with CBDCs since they have the status of legal tender, which, in some jurisdictions, you cannot do with cryptocurrencies.
Suddenly, #CBDCs are everywhere 😳 pic.twitter.com/bhuHvyWCQH
— Investro.com (@investrocom) November 2, 2022
CBDCs are very similar to stablecoins (e.g., BUSD, USDT, USDC), but there is one main difference. CBDCs are issued by central banks, while stablecoins are issued by institutions. CBDCs will use Distributed Ledger Technology (DLT) like cryptocurrencies. DLT will help central banks to facilitate money supply, monitor transactions and more.
While the traceability of cash was partial, it will be total with CBDCs. People can exchange cash without the government knowing, but every transaction with CBDCs will be recorded and traceable. Goodbye to anonymity. Countries see cryptocurrencies as a threat, because they can be created by an anonymous team or a company that could control a part of the financial system.
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The popularity of CBDCs is soaring, and countries see them as a way to save their control over the system. The Bahamas were one of the first to launch its Sand Dollar. Then China came along with its digital yuan this year, with many other countries planning to join the digital currency race next year.
Are CBDCs beneficial to society or the government?
CBDCs are the best tool for central banks in decades as they can better control the monetary system. If implementing these digital currencies goes well, it will be useful for governments or even large corporations like Amazon, Google, etc. Tokenized versions of fiat currencies could simplify and speed up payments for people or companies.
For example, a digital euro could benefit ordinary people as they wouldn’t have to carry cash in their wallets and potentially lose it. Having just an online wallet with money in it makes it easier to shop or spend. Payments should be fast and easy to perform as well. But there’s also a catch. While they claim users of CBDCs earn privacy, the opposite is true.
Governments will be able to track all the payments, so it will be impossible to hide a thing from them. Authorities will see every little transaction and act if they see only a little suspicious activity. This means, for instance, that they can stop people from being able to make any transaction.
Potential risks of CBDCs
Centralized control over digital currencies raises many issues. Decentralized cryptocurrencies are basically owned by the people with a predetermined supply, which allows them to rise in the long run. For example, there will only ever be 21 million bitcoins, which creates scarcity. Anything else could be a fork or other altcoin. CBDCs, thus pose a threat to its users from several angles.
1. CBDC as a weapon
As mentioned earlier, CBDCs strengthen the government’s control over money flows in a country. These digital currencies could be used as a weapon when they’re connected with social credit systems. This has already been applied in China, where people are “ranked” based on their employment history, political opinions, shopping habits, etc.
When citizens are used to living on CBDCs, governments can easily punish them by freezing their money or giving penalties as governments please. If someone is not living according to society’s rules, they could face these actions. It may sound a little dystopian, but it is as simple as that. We as people are dependent on money, so if the government controls the money, it controls us.
2. Goodbye to privacy
The UK’s new prime minister claims CBDCs will provide privacy, but critics of these digital currencies have an opposite view. Every transaction will be recorded in a government database, so if they view some activity as suspicious or illegal, they can stop that in a blink of an eye.
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On the other hand, cryptocurrencies allow transactions to be made without a third party involved, which was the goal of Bitcoin’s creator. Some could say that CBDC is similar to a cryptocurrency, but it is actually the opposite in its very core. CBDCs pose a threat, because they could increase government oversight of each monetary transaction.
3. Prone to inflation
A man with a stash of Zimbabwe dollars, source: link
While the last two years have seen massive price increases in foods or groceries, it could be worse with CBDCs. It is easy for a central bank to print more money, leading to higher inflation. However, imagine they don’t even need to print it anymore. All they need to do is click a button and mint new money digitally.
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