Central Bank Digital Currencies (CBDCs) sound like the next frontier in crypto—but are they really? In this article, we’ll be exploring the idea behind CBDCs and why they are ultimately the antithesis of cryptocurrencies.
A Pale Imitation
When Lehmann Brothers declared bankruptcy in 2008, they probably had no idea that they would inadvertently create Bitcoin. The chaos that ensued from the central banking crash inspired Satoshi Nakamoto to take decisive action to ensure it could never happen again.
Satoshi went on to create Bitcoin, which was the first attempt at a digital and decentralized currency. The questions that followed the creation of Bitcoin were plentiful. Would central banks accept it? Would people accept it? What would happen if the government deemed it illegal? Could it deliver on its promises of decentralization? Or would it just end up being a tidy tech with no real uses?
It’s almost 15 years later, and a lot of those questions have now been answered. One Bitcoin is now worth roughly $20,000, and the coin has birthed a whole ecosystem of cryptocurrency. The coin is widely accepted across society, and the idea of a decentralized digital currency is probably the most consequential concept of the last decade. The blockchain has simply revolutionized how we think of finance. And it’s only just beginning.
However, the success of Bitcoin didn’t just inspire ordinary people or those who sought a decentralized monetary system. It also inspired people who had no interest in such a system. To these people, the popularity of Bitcoin meant one thing only: people like digital currency.
That’s why, in response to Bitcoin and other decentralized currencies like it, they created CBDCs. For institutions like the European Central Bank, CBDCs were the perfect tool to replace Bitcoin and other cryptocurrencies.
At its core, CBDCs are badly made copies of cryptocurrencies. For one, they would have never been created if not for the rise of crypto. Their entire raison d’etre is to provide a state-backed alternative to crypto. They are essentially the government’s way of saying that fiat can also compete with crypto.
CBDCs and cryptos only have one similarity, they are both digital currencies. That’s where any resemblance between the two ends. Where CBDCs are centralized, cryptos are not. Where CBDCs are not anonymous, crypto is at least pseudonymous. And where CBDCs are not immutable, cryptos are. In many, fiat has even more similarities with CBDCs than they do with crypto.
CBDCs In Real Life
One can argue that we’ve always had some form of digital money. For example, Apple Pay and WeChat Pay have almost eliminated the use of actual currency. But those are examples of merely moving money around, whereas CBDCs are currency made into computer code.
The first major economy to bite the bullet and make a CBDC was China. The digital renminbi was issued by the People’s Bank of China, China’s central bank, and is a legal tender equivalent to the Chinese Yuan (RMB).
On paper, the currency is meant to solve the problems of speed and ease that the RMB has. But there’s a tiny problem with that idea. The difference in the speed of transfers for regular fiat and CBDCs is negligible.
Another reason why policymakers say the CBDC idea is a solid one is the fact that it allows individuals to have bank accounts with the central bank. In the actual sense, the only real reason why the Chinese government rolled out the renminbi was to guarantee economic control.
The Chinese Example
Cryptocurrencies are fundamentally steeped in the language of liberalism. They are decentralized and pseudonymous, which means they circumvent centralized giants—like the state. In China’s case, the renminbi is the precise opposite of that. The currency is issued by the central bank of China, and its status as a legal tender is completely guaranteed by the Chinese state.
But that’s not the only reason why the Chinese digital currency is precisely the opposite of crypto.
One of the saving graces of paper currencies is that they aren’t programmable, which means there are limits to how well you can trace them. If a person pays cash to a jeweler, for example, it’s near impossible to trace the source of the money. This puts a limit on just how well the state can control your finances.
This is a flaw in the system for repressive governments. For countries like China, CBDCs are the perfect places to fix this flaw. CBDCs are programmable, so it’s easier for the authority behind the currency to trace it completely. With the digital renminbi in China, the government in Beijing can trace all transactions at an individual level in real time. For Beijing, this feature will be useful as it will help law enforcement fight money laundering, corruption, and terrorism financing.
These all sound like laudable goals, but the powers that CBDCs give countries like China can be deployed in other means too. Dissident voices can be discovered easily and consequently locked out of the economy. Critics of the government can suddenly find their banks unusable. Merchants who have business dealings with opposition activists can suddenly lose their capacity to perform any business at all. The point is that these currencies could easily become another weapon in the armory of repressive regimes.
This is especially true in the context of Chinese social credit scores. In 2018, around 23 million people were prevented from buying plane and train tickets because they committed “behavioral crimes.” This could include anything from talking to the wrong person about the wrong subject to not giving up a reserved seat on the train. It’s almost guaranteed that China will use this currency to continue these acts.
However, outside of those concerns, CBDCs could be used in another sinister way. Sources say that China’s CBDC is also a means for the country to reassert control over the state’s booming fintech industry. The industry is currently dominated by Ant Group and Tencent, and the CBDCs could end up as a way to end their domination in the Chinese economy. Analysts argue that these CBDCs are just part of the sustained attempts of the Chinese government to reign in the influence and power of these payment firms.
As the Chinese example has shown us, CBDCs are almost completely tethered to the control mechanism of the state. If one were to build a totalitarian fantasy state, the state would make use of CBDCs.
Unfortunately, a lot of other countries are taking a cue from the Chinese example. In a world where control of financial systems is paramount, more and more governments are looking to arm themselves with CBDCs. The Bank of Korea recently enlisted the support of Ground X for its plans to build a CBDC. Malaysia and the United States have also announced plans to explore the idea behind CBDCs.
Thankfully, some other countries are backing away from CBDCs as a whole. Japan, for example, has scrapped plans for a CBDC after the public paid it absolutely no mind.
CBDCs and Cryptocurrencies
A lot of financial regulators are already worried about the risks that cryptocurrencies pose to the financial system. A world where even 20% of people exclusively use crypto is one where the financial system dies. If the state loses its grip on money, it will lose its grip on everything. It will not be able to print enough legal tender to cover its irresponsible debts, and even doing that would only lead more people to use anti-inflationary coins.
CBDCs are an emerging answer to this question. But unfortunately for these states, it’s a bad answer. CBDCs are merely an extra layer on fiat, and they do nothing remarkable for the citizens they are meant to serve. Instead, they open an ugly door to a surveillance state. Whatever CBDCs do is already done excellently by fiat, meaning that there’s no need for them. They cannot compete with crypto because they offer dissimilar benefits, and they cannot be sustained in free societies because they can be draconian.
In all of this, one thing is clear. CBDCs do nothing but increase the power of the state, and they do nothing to challenge cryptocurrencies. Since they are fundamentally dissimilar to cryptocurrencies, they are essentially another layer of fiat that aren’t worthy of serious attention.
On the Flipside
CBDCs may have some utility in tracking down digital criminals.
It’s not a given that the surveillance properties of these coins will be utilized by a free state.
CBDCs may have some utility in providing banking services directly to the unbanked.
Why You Should Care
American authorities recently announced that they are studying CBDCs. If they eventually build one, they may be able to create the ultimate surveillance state.