Central bank digital currencies (CBDCs) have garnered significant attention in recent years, sparking a heated debate about their advantages and potential drawbacks. CBDCs are digital versions of a country’s fiat currency, centralized and supported by the nation’s central bank. In contrast, cryptocurrencies like Bitcoin (BTC) are decentralized and not controlled by any central authority.
Proponents of CBDCs argue that they could enhance payment efficiency and promote financial inclusion for populations with limited access to the financial system. However, critics contend that CBDCs could infringe on privacy rights and create opportunities for government corruption.
Kadan Stadelmann, the chief technology officer of blockchain platform Komodo, believes that concerns surrounding CBDCs are justified. He asserts that the technology could be abused for surveillance purposes, granting governments unprecedented access to individuals’ financial transactions. Stadelmann also warns that CBDCs, if adopted as a country’s primary currency, pose a higher risk of hacking attempts and other malicious activities that could undermine global financial systems.
According to Stadelmann, if the world desires a digital currency, there is already a viable alternative without the concerns associated with CBDCs. He suggests that Bitcoin, as pioneered by El Salvador, is a superior alternative. El Salvador became the first country to make Bitcoin legal tender in September 2021, followed by the Central African Republic in 2022.
In contrast, as per the Human Rights Foundation’s CBDC tracker unveiled in November 2023, out of 193 existing governments worldwide, only 16 have implemented a working CBDC for public use. Furthermore, 39 have developed a pilot, and 64 are still in the research phase.
Stadelmann emphasizes the importance of critical thinking and considering potential abuses and ongoing abuses of such systems, regardless of whether one supports or criticizes CBDCs. He argues that a CBDC is essentially an extension of the old fiat system, which enables endless war, and it could lead to government control and surveillance over financial transactions, jeopardizing user privacy and autonomy. Stadelmann advocates for dreaming wildly and innovating to create a more peaceful financial system.
Some proposed CBDCs could operate using blockchain technology, facilitating near-instant transfers and automatic tracking of payments across the network. Peter Alfred-Adekeye, the founder and CEO of social e-commerce platform Boom Market, believes that governments utilizing the underlying crypto technology in CBDCs could be a positive development. He sees it as a seal of approval for the crypto technology and a win for the environment, as it eliminates the need for printing physical cash.
However, Alfred-Adekeye acknowledges the concerns associated with CBDCs, particularly their non-transparent programmable nature, centralization under government control, and susceptibility to seizure. He warns of potential misuse by corrupt individuals in power, who could exploit the unlimited supply of CBDCs to move around illegally obtained wealth or freeze the wallets of opposition parties before elections.
With a growing push from traditional banks to transition to online and digital platforms, Alfred-Adekeye believes that if CBDCs are widely adopted in the future, safeguards must be implemented to prevent worst-case scenarios. He suggests a two-state solution where government-controlled CBDCs coexist with non-government-controlled, seizure-resistant, open, and decentralized tokenized fiat and other real-world assets.
Sebastien Davies, vice president of research at crypto financial service platform Aquanow, states that some opposition to CBDCs stems from concerns about potential misuse rather than the technology itself. He highlights that the centralization of CBDCs deviates from the principles of most democracies, which aim to limit government control. However, Davies suggests that strong privacy protections and limits on government control could alleviate some fears.
Davies emphasizes the need for comprehensive regulatory frameworks to accompany the development of CBDCs, safeguarding privacy and preventing excessive government surveillance. He believes that a CBDC operating between a country’s financial institutions could unlock the power of blockchain technology while mitigating the risk of surveillance.
However, Davies acknowledges the risk of privacy infringement and civil freedom in practice. He proposes a hybrid model where wholesale CBDCs coexist with private digital currencies and traditional cash, striking a balance between efficiency and financial autonomy.
Public opinion on CBDCs appears mixed, with a 2023 Cato Institute National Survey indicating that only 16% of Americans support adopting a CBDC. The majority of respondents expressed concerns about the risks associated with CBDCs rather than enthusiasm for their potential benefits.
Lucas Kiely, chief investment officer at crypto trading platform Yield App, notes that the crypto-native community fears the erosion of privacy and personal freedoms that CBDCs represent. Meanwhile, those deeply entrenched in traditional finance worry that CBDCs could disrupt existing financial systems, cause economic instability, and exclude certain population segments by eliminating cash.
Kiely asserts that a privacy option is crucial for any currency, whether it’s through cash or decentralized finance. He believes that finding a middle ground between the crypto community and the traditional finance industry is essential. He suggests that if crypto wants to achieve mass adoption, governments and regulators will seek some form of control over the space.
Overall, Kiely emphasizes the need for more clarity and details regarding the implementation of CBDCs before assessing their potential impact. He believes that a middle ground must be sought to address the concerns of both camps. CBDCs may represent a double-edged sword, but they could also serve as a gateway to the broader crypto market.
In conclusion, the ongoing CBDC debate has left both crypto enthusiasts and traditional finance experts uneasy. The potential risks to privacy and personal freedoms, as well as the disruption of existing financial systems, have led to skepticism and resistance. However, if designed with strong privacy protections and limits on government control, CBDCs could unlock the benefits of blockchain technology while mitigating potential drawbacks. Comprehensive regulatory frameworks and a balanced approach that combines CBDCs with decentralized digital currencies and traditional cash may be the way forward. Until more clarity is provided, the debate surrounding CBDCs is likely to persist.