The majority of people who have heard of central bank digital currencies (CBDCs) dislike them. The only people who care about central bank digital currencies are the central banks that create them, and perhaps a few monetary policy geeks or clever bulge bracket banks that believe they can make a lot of money off of them. CBDCs are not yet available to the general public. They don’t really exist, except for a pilot project in a small region of China. But imagine their implementation and what, if anything, impact it would have on cryptocurrencies that compete with fiat today as a source of wealth generation.
According to John Wu, head of Ava Labs, the company that created the Avalanche blockchain, there is certainly enormous potential here. Currently, the Fed’s balance sheet is around $9 trillion. The $45 billion moving towards digital, even if only 50 basis points of it, is nothing to sneeze at.
This presupposes that the government hires private blockchain firms like Avalanche under contract. Another option is for the market to develop money market funds linked to these things. Nobody is yet aware. It’s all extremely science fiction and idealistic. CBDCs are programmable in their “better” forms. Thus, the central banks that manage them have it easier to regulate consumer spending, which equates to easier control of inflation without the need to raise interest rates and enrage bond lords.
What Exactly Are CBDCs? What’s the matter with them?
A CBDC will be a liability of the central bank and will be managed by the central bank. Right now, there are two types of central bank money: physical dollars issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve, which are “digital” in the same way that a debit card is.
This is how Americans have stored money for a long time, using bank-linked credit cards and internet payment services. Because a CBDC is managed by the Fed and not a commercial bank, it differs from other payment methods like credit and debit cards. The Federal Reserve’s responsibility is to supervise the money supply and control inflation. One method to achieve that is using programmable currencies. This is the cornerstone of CBDCs, however the definition of programmability has not yet been established. CBDC development is still in its early stages.
CBDCs are being developed in two different forms: retail and wholesale. Governments must choose whether their stablecoin will have permissionless, permissioned, or semi-permissioned access.
These routes will eventually decide geopolitical effectiveness and the impact on other cryptocurrency ecosystems.
For instance, application-specific blockchains like subnets on Avalanche will be able to meet the Central Bank’s compliance criteria if operating in a permissioned environment.
A blockchain network without permissions is present in Bitcoin. Access and maintenance are open to anybody with a functional internet connection and a compatible device. Blockchains that require authorization to utilize them are mostly employed by governments and companies.
Steve Forbes claimed that CBDCs posed a ominous danger to our liberty.
Governments would be able to track each and every transaction and sale made due to digital money. Officials could simply seize or freeze all of your money, making it a terrifying instrument of control. Beijing’s enthusiasm for CBDCs is understandable, he said.
How Governments Will Offer Citizens CBDCs
One prediction is that universal basic income will be provided through CBDCs. You must apply for a chip reader credit card to be connected to the CBDC blockchain matrix and receive universal basic income. Another approach is to make it widely available during a crisis, like hyperinflation. Although it is now starting to decline from its highs, if inflation in the West, where CBDCs are most frequently discussed, remained in the 8% and above range, one could imagine the government using this to persuade businesses and consumers that a digital dollar will be a good way to control inflation.
The media would then be summoned to vilify anyone who believes CBDCs are a bad form of programmability and control as a “conspiracy theorist” or other such nonsense from central bank technocrats.
According to Dr. Praveen Buddiga, Co-Founder of Terareum, a cryptocurrency exchange with offices in Dubai and Chennai, India, “A digital dollar, in his view, is going to be the equal of fiat money, although held virtually in your banking checking account or an account opened with permission through some fintech application overseen by an authorized subsidiary of the Federal Reserve. The digital dollar would continue to have its own unique line item for records. The Fed CBDC would be preferable over cash because it would guarantee financial transfers and provide other benefits like safety, convenience, speed of remittance, and instant debt settlement.
Regardless of the blockchain protocol the central bank chooses, the CBDC’s transactions and settlements would take place on that blockchain, which may also be backed by other assets like hard cash, fixed-income securities, or commodities like gold.
According to Buddiga, he sees a fiat-backed stablecoin built to keep the currency’s current degree of stability. Similar to USD currency and TetherUSDT, it will only be tied to the US dollar.
Life as a USD coin or Tether with a CBDC on the market is difficult to envisage, but who knows. CBDCs do not now exist, although those digital currencies do. The fact that central banks are joining the digital currency game late could be a factor in this first-mover status issue. As long as Tether has the funds to support its token, customers may remain satisfied with it forever. However, their presidents would have full taxing and legal authority from the government to do so if the central banks decided to destroy that market.
Will Bitcoin be Banned? – Bitcoin vs. CBDCs
According to the “Digital Dollar Project” study dated January 2022, the Federal Reserve wants to approach CBDCs cautiously while minimizing disruption of the status quo. That report supported the maintenance of the current commercial system, assuaging concerns that a CBDC would become the be-all and end-all of financial transactions. This means that the CBDC would operate similarly to actual cash or a credit card in terms of dissemination, distribution, and ultimately redemption.
In a free market society, it would be better to have both CBDCs and bitcoin instruments, according to Buddiga. The corresponding CBDCs perform the function of stablecoins pegged at a 1:1 ratio to the Digital Dollar, whereas bitcoin performs the function of an instrument subject to macroeconomic conditions in the global market.
This has been a project for central banks for at least the last three years. The first was China, whose most recent trial took place in October.
In 2020, the European Central Bank published its initial digital euro report.
On November 7, Christine Lagarde, president of the ECB, outlined her rationale for taking into account CBDCs. In 2021, she noted, 10% of Europeans and 16% of Americans owned bitcoin and other altcoins. They are too unstable to be used as a form of payment, she claimed. She remarked, possibly pointing to the Luna currency debacle, Stablecoins are designed to be less volatile, and so more acceptable for payments, but they are prone to runs – and often not supported at all.
Lagarde cautioned that the involvement of Big Tech in payments increased the danger of market hegemony and reliance on foreign payment systems. She added this has implications for Europe’s strategic autonomy. More than two-thirds of card payments in Europe are processed by foreign firms.
In April 2021, the Bank of England established its CBDC task team. They are currently beta testing a CBDC wallet as of this month.
The Federal Reserve has partnered with 12 financial firms, ranging from banks to credit card processors, to examine CBDCs since the demise of FTX.
Since 1930, the Bank for International Settlements (BIS), also known as the central bank of central banks and co-owned by 63 central banks headquartered in Switzerland, has proposed three fundamental concepts for the establishment of CBDCs:
Do no harm: When central banks issue new types of money, currencies should be converted as smoothly as possible, allowing the financial institution to maintain its stability while meeting policy objectives and other mandates.
Coexistence: To reinforce public policy goals, the various currencies issued by the Central Bank, such as paper currency, coins, and digital currency, should coexist. Alternative forms of central bank money must meet the public’s demand for cash withdrawals while also allowing for uninterrupted private and commercial banking procedures and transactions.
And Finally, innovation: National governments should allow and encourage both the public and private sectors to promote various payment instruments in order to meet the need for both parties to have safe and accessible payment services.
Sounds logical. Though is it?
It’s too early to say. Additionally, in order for CBDCs to be the worst of what the critics accuse it of being, it would have to require people to transact in digital dollars and outlaw the growing alternatives, in this case, cryptocurrencies.
At this moment, no central bank should forbid the existence of bitcoin, Buddiga respectfully disagrees. It is the force behind the cryptocurrency (and blockchain) industries.
The term “at this moment” is crucial here. Will it transpire later? Investors in cryptocurrencies must pay attention.
Earlier this month, a senior executive of the European Central Bank Fabio Panetta called for a ban on cryptocurrencies like bitcoin that had an “excessive ecological imprint” and compared investment in cryptocurrencies to gambling.
Investors should avoid purchasing bitcoin, Panetta advised, as the house of cards is falling. He preferred CBDCs, in general.
This necessitates a risk-free and dependable digital settlement asset, which only central bank money can provide, he said on December 7 in a speech in London. That is why the ECB is developing a digital euro…for the future of central bank money settlement.
