Central bank digital currencies (CBDCs) offer governments the ability to exercise absolute control over the currency. All impartial blockchain leaders should reject them, but unfortunately that is not the case.
In June 2023, the International Monetary Fund (IMF) noted that most cryptocurrency innovations come from the private sector. But he praised central banks for “catching up” by experimenting with CBDCs and creating state-controlled instant payment systems, such as Brazil's Pix.
CBDCs are an experimental form of digital money created by a country's central bank. They are generally controlled through a private network and are centralized and programmable. This means that central banks can track, monitor and edit transactions. These capabilities give authorities extensive control over money flows, including the power to impose spending restrictions, set “expiration” dates on consumer savings, and even freeze or confiscate money remotely. And by 2030, CitiGroup predicts there will be $5 trillion in CBDC circulating in the global economy.
Related: Jerome Powell Pivot Heralds Dull Summer for Bitcoin
While some crypto leaders have been quietly concerned about the rise of CBDCs and what they could mean for privacy, democracy, and growing authoritarianism, others have openly supported them, even as they paradoxically promote the advantages of decentralized technologies.
Consensys, owner of MetaMask and Infura, is an example. It is widely recognized as a fundamental force in blockchain technology. She also has an incredibly flirty relationship with CBDCS. In partnership with Visa, Consensys is designing a new infrastructure designed to unite central banks with traditional financial institutions. Other cryptocurrency projects, including Ripple (XRP) and Stellar (XLM), have also been active in allowing their blockchains to be used in CBDC development.
Ripple's native cryptocurrency, XRP, operates on a decentralized public ledger similar to Bitcoin (BTC) or Ethereum (ETH). However, in 2021, Ripple introduced a CBDC platform on a separate private ledger designed specifically for governments, central banks, and financial institutions. This setup allows these entities to exercise full control over their new digital currencies.
In contrast, Stellar advocates the creation of CBDCs on its public blockchain, albeit with custom tweaks that allow centralized entities to improve governance. In its CBDC Guide, Stellar suggests managing monetary policy and programmability centrally, but maintaining a decentralized approach to technological infrastructure and service delivery.
In a perfect world, one would hope that major blockchain players like Ripple and Stellar, with their significant banking connections, could use their influence to resist CBDCs on moral grounds, despite the tantalizing commercial prospects they present. However, even in an imperfect world, it would be shocking for them to openly discuss the real long-term threats of CBDCs, particularly the risks of granting governments overwhelming financial omnipotence.
Of course, blockchain pioneers might be happy to see their previously marginalized technology now being discussed in high-level forums like the IMF and Davos. However, while this recognition may be gratifying, it does not translate into a victory for the ideals of blockchain technology. Quite the opposite: CBDCs compromise the basic principles and benefits of blockchain, such as immutability and decentralization.
Can governments be trusted with such power? Historically, the answer is “No,” even in the West. Canada served as an example in 2022, when Prime Minister Justin Trudeau activated the Emergency Act to unconstitutionally freeze bank accounts linked to anti-lockdown protesters. United States President Franklin Delano Roosevelt provided another example when, in 1933, he signed an executive order directing citizens to surrender their gold to the federal government, or face fines of up to $10,000 and 10 years in prison.
Whatever consumer safeguards may be implemented within various future CBDCs, governments will certainly retain extensive control to modify, adjust and redefine the rules governing this future form of money over time.
Related: Solana Illustrates the Dark Side of Monolithic Blockchains
When it suits them, Western governments will impose financial sanctions against their own citizens through political means. It is not rocket science to understand that adopting CBDC risks encouraging and normalizing the use of these measures.
Cryptocurrencies have been mocked, ridiculed, and certainly have a PR problem following the collapse of FTX and other industry scammers. But despite all the challenges of cryptocurrencies, their technology, applications and values make the need for CBDC redundant. We don't need CBDC for fast, accessible, low-fee transactions for everyone. Cryptocurrencies can already do it.
With KYC (know your customer) measures, governments can now monitor, tax income and crack down on cryptocurrency money laundering where it arises, without the need for excessive centralized control.
CBDCs could be the start of a very slippery slope towards a new authoritarian norm. It is up to our brightest minds and leaders, both in blockchain and beyond, to wake up and stop flirting with CBDCs. Opinion leaders can actively fight back by supporting decentralized alternatives. However, being more vocal in both opposing and challenging CBDCs will allow others to do the same.
The current bull run will attract millions of new investors and enthusiasts, perhaps up to a billion by the end of 2025. Let's take advantage of this publicity to spread the message that CBDCs are not the only way forward.
Callum Kennard is the founder of Guava Studio, a UK-based Web3 marketing and e-commerce agency. He has a degree in politics and social policy from the University of Brighton.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
