We all know the whole reason cryptocurrency was created was to decentralize the monetary system and improve security in the digital economy. So, when I say central bank digital currency (CBDC), I probably need to wait a minute for you to get up from where you were rolling all over the floor wheezing. Here, have a tissue to wipe your tears of laughter.

Now that you’ve gotten that out of your system, try not to X out of this ridiculous topic and hear me out. Why should you care about CBDCs? Well, it’s simple: ready or not, here they come. In May of 2020, only 30 countries in the world were considering a central bank digital currency. And now, almost 4 years later, 134 countries are researching or developing one. CBDCs are something to know about and consider, even if they’re not something to savor.

What is a central bank digital currency?

While the idea that the central banks gods could create digital fiat and call it “good” may be hilarious to dyed-in-the-wool decentralization nuts, perhaps you don’t feel completely up to speed yourself.

walkway of flags leading to central bankA central bank digital currency is essentially digital fiat. The idea is to use blockchain technology to improve and simplify transactions in an increasingly digital economy and reduce friction between banks, governments, and the people. While there are currently lots of third-party digital payment methods like Apple Pay, Google Pay, and PayPal, if a government-issued a currency that was inherently digital, some of those intermediaries would not be necessary. A CBDC would also, theoretically, increase wealth access to more people who are currently unbanked.

Of course, there’s a catch-22: digital fiat may remove barriers to financial services for those of lower economic status, but in order to use digital currency, those same people would need fast and reliable internet access. That problem is getting solved, however, as more than 50% of the world population was online by the beginning of 2021.

The appeal of CBDCs

If the philosophy underlying cryptocurrencies was to undermine centralization and democratize money in a way that hasn’t been done in modern history, why would governments be interested in implementing their own digital currency?

Let’s take a look at some of the reasons why advocates find central bank digital currency appealing.

Today, if you want to make a digital transaction, you either have to go through a third party like a digital payment provider who is trusted to record fiat transactions or use a decentralized cryptocurrency, of which there are thousands. While regulations do exist that attempt to protect consumers and the third-party services providing fiat currency transfers, in all but a few countries, there is no standardized currency that is issued digitally.

One of the main complaints people have about existing cryptocurrencies like Bitcoin is that they are so volatile. Because the value is set by supply and demand and cannot be meddled with the way the Fed meddles with the value of the dollar, crypto often has wild swings in value. Stablecoins have attempted to reduce volatility by pegging their value to a more stable asset—often fiat—and they have a similar functionality to CBDCs, but they’re not government controlled. A central bank digital currency would operate just like fiat in that the central bank would have control over supply and interest rates.

Another benefit (or downfall) of fiat currency is that it’s backed by the state. Instead of having some inherent physical value like gold, or abstract value like crypto, fiat has value by…well, fiat. Centralization allows the government to have a monopolistic control on what is considered legal tender, but that also incentivizes the government to make sure that a currency it’s backing continues to hold some kind of value. There’s no one guaranteeing crypto’s value. If it goes to zero, you’re fresh out of luck. A CBDC would have the conveniences of digital form but with the security of the state.

The appeal of CBDCs, so far, heavily leans in favor of government and centralization interests. But there may be a benefit that crypto enthusiasts can get behind: adoption. Even though crypto adoption is swimming along quite well on its own, a CBDC could almost certainly drive adoption higher, faster. If the government tells people to start using digital currency, they start using it. And even if all the fears of CBDC critics come to fruition, it’s possible that would only drive more people into crypto adoption.

Criticisms of CDBCs

Some people may say that criticisms of CBDCs consist of: literally everything. And, real talk, I don’t disagree. But maybe we should at least list some.

Yes, a CBDC is just fiat currency in digital form, but don’t worry, it gets even worse than that! You also get the added bonus of losing all privacy and security. At least with cash, you can buy things without leaving a trail. There’s some semblance of anonymity if you’re using physical cash. Not so with digital fiat. The beauty of centralization is that a single controlling power would be able to see all of your transactions and even control your ability to make them. How exciting.

It goes without saying that a CBDC would be highly regulated—even more than cash—because centralized, digital information can be tracked and controlled from anywhere. But beyond government big-brother-ing your every fiat transaction, regulation would likely increase for decentralized cryptocurrencies as well. If the government wants people to exclusively use a CBDC, it will have to do its best to curb other crypto uses. See China’s digital yuan and what may be next for China’s digital currency.  

Speaking of China, a totalitarian government, they are one of the pioneers in the CBDC game, with the rollout their digital yuan. They’re in good company with the likes of Russia, who have since rolled out their cryptoruble. There are other, much smaller countries like the Bahamas, Nigeria, and some of the Caribbean islands that already have CBDCs in place, but the fact that giant, authoritarian states like China and Russia are hoping to be at the front of the CBDC race should tell you something. After all, what proponents of centralization would not want complete access to and control over everyone’s transactions?

The future of centralization and crypto adoption

As a result of the pandemic and an unexpected acceleration into the digital world, the importance of digital currencies has been driven home to governments around the world.

person at the bitcoin ATM for central bank digital currencyMost of them are now scrambling to not be left behind in a new and inevitable digital era. Governments have big incentives to get CBDCs off the ground, knowing that their centralization monopoly is threatened by public cryptocurrency and people’s newfound eagerness to participate in digital opportunities like retail investing, crypto adoption, working remotely, or even quitting work altogether.

There are certainly reasons for the average person to be skeptical of a CBDC. And, while many governments are considering rolling one out, it’s not an inevitability yet. Most governments, the US included, are aware that there could be public pushback to digital fiat. The consolation, right now, is that a central bank digital currency wouldn’t replace physical currency; it would only be an addition to it. However, people were once confident that the US wouldn’t actually go off the gold standard too.

If the citizens of countries like the US remain adamant in their rejection of digital fiat, it may not come to fruition. Or, it may be held in check from complete monopoly and centralization—especially if crypto adoption is so far ahead that governments cannot catch up.

If you share any of the concerns that the fathers of crypto had regarding centralization and security, you might want to keep your eyes on what governments are doing with CBDCs and have your decentralized backup plans in place.