The Central Bank Digital currencies are frequently heralded as the money of the future. They both frighten and excite people. What really is the truth?
According to the Atlantic Council CBDC tracker, 114 countries are investigating CBDCs, accounting for more than 95 percent of global GDP. Eleven nations, including Nigeria and the Bahamas, have already begun. China is now testing a system that will be rolled out across the country later this year.
In 1993, the Bank of Finland introduced the Avant smart card, which was designed to function as an electronic form of cash. Despite the fact that the Finnish government abandoned the project in the early 2000s, it is widely regarded as the world’s first CBDC.
Their appeal to central governments is obvious: they provide central banks — currency issuers — with an electronic version that they can monitor and control. They provide a method for vendors to send and receive payments that are nearly instantaneous and do not require an intermediary such as a commercial bank.
We currently rely on intermediaries to handle the transaction when we pay for a good or service. They are required for card payments, mobile money, and electronic transfers. A CBDC is a peer-to-peer exchange, much like exchanging banknotes or sending BTC or ETH.
Simply said, CBDCs will be the digital equivalent of a banknote or coin.
Project Icebreaker is a collaboration between the central banks of Israel, Sweden, and Norway, as well as the BIS Innovation Center, on an interoperable CBDC system that will allow different CBDCs to interact across borders. Experts feel that broad adoption of this technology is simply a matter of time.
It’s easy to see why the crypto community has other ideas.
The cryptocurrency community was formed on a set of simple ideals and values. One in which concentrated financial institutions, such as the banks that precipitated the Great Recession, wielded excessive authority. (And the power they did have was frequently abused.) Two, other centralised institutions (such as governments) wielded excessive power. And three, that people have the freedom to act in society without the monitoring of both of them. It may be summarised in three words: decentralisation, liberty, and privacy.
That is where the problem lies. CBDCs, in their current form, do not provide the same level of privacy as cash or certain cryptocurrencies. Central banks would theoretically have access to all transaction data. While most blockchains track all transactions, they are not linked to your real-world identity.
Hugo Volz Oliveira, Secretary and founding member of the New Economy Institute, believes that we will never have a truly private CBDC. “The present kinds of digital money are not designed to be private, and CBDC will not be either. Only cash and a few privacy-focused cryptocurrencies are really anonymous – and even then, one must exercise caution if they expect their financial transactions to remain hidden. Worryingly, CBDCs can be used to punish individuals without the assistance of the legal system.”
Last year, legendary cryptographer David Chaum (dubbed the “Godfather of Privacy”) announced that he is working with the Swiss National Bank on a privacy-protecting CBDC (SNB.) BeInCrypto is aware that he has been working on this project for a number of years. Chaum and Thomas Moser of the SNB detailed the notion in a collaborative research article.
The device will also be quantum-resistant, according to the statement. So, nothing to be concerned about?
There is a perfectly fine alternative lying in the wings for many CBDC detractors. Despite the fact that they are designed for different purposes, a successful stablecoin has the same value as the fiat currency it imitates. Both serve as a store of value and promote cross-border trading, but only one is governed by a centralised authority.
“As long as the regulatory environment remains favourable for private stablecoins like Circle (USDC), there is no reason we necessarily need CBDCs. “I also believe it is more “American” (and thus more likely) for the US government to strongly regulate a private industry rather than directly compete with it, and the same holds true for stablecoins,” says Adam Miller, CEO of MIDAO.
While the path appears to be obvious, not everyone is persuaded we will end up in a world where CBDC is widely used. “I believe governments will make their currency systems more digital (but still centralized/federated), as the US has done for years and continues to do, but will not go as far as launching CBDCs that are truly censorship resistant or have other qualities of true blockchains,” Miller continues.
According to IMF research, another advantage of CBDC is its capacity to cut carbon emissions. However, the most significant advantage of CBDC is almost certainly its efficiency and ability to reduce payment friction.
The technology may come into its own in applications where individual privacy is less of a concern. Especially when banks and other financial institutions must transact with one another.
“However, if we’re talking about wholesale CBDC—which is used for settlement between financial institutions—then there are some intriguing benefits,” Oliveira continues. “Specifically, the efficiency and savings that result from the digital transformation of processes that are still largely bureaucratic and manual. These would not fundamentally alter the current system, nor would they render retail banks obsolete.”
At the time of writing, eight nations were developing a completely wholesale CBDC. CBDCs will be used for retail and wholesale purposes in 21 countries, including the United States, China, India, and Australia.