User privacy problem or currency of the future?
Central Bank Digital Currencies (CBCCs) have received little attention in recent years, sparking intense debate about the pros and cons of the technology.
A digital version of a country's fiat currency, CBCCs are centralized and backed by a national central bank. In contrast, cryptocurrencies such as Bitcoin (BTC) are decentralized and not controlled by any central authority.
Proponents of CBCCs say they can improve payment efficiency and expand financial inclusion for populations with limited access to the financial system. Along with this, critics argue that they have the potential to violate privacy and open avenues for government corruption, among other risks.
Kadan Stadelman, chief technology officer of blockchain platform Comodo, believes the concerns surrounding CBDCs are warranted. He said the technology opens avenues for attack and surveillance, giving governments unprecedented access to individuals' financial transactions.
Speaking to Cointelegraph, Stadelman said that CBCCs, if implemented as a country's primary currency, are more vulnerable to hacking attempts and other malicious activities that could disrupt financial systems globally.
According to Stadelman, if the world wants a digital currency, there is an important alternative to any of the CDCs' concerns.
“CBDCs have no decentralized principles; the best alternative to CBCCs, as pioneered in El Salvador, is Bitcoin,” he said.
“Nobody can shut you out of Bitcoin and other decentralized, blockchain-based cryptocurrencies. Bitcoin is the opposite of CBDCs. That is what the world needs right now, as El Salvador is showing.”
Naib Bukele, the BTC-loving president of El Salvador, has become the first country in the world to adopt a digital currency legal tender in September 2021. In the year As of 2024, the only country in the world to have BTC in legal tender is the Central African Republic, following El Salvador's lead in 2022.
In contrast, according to the Human Rights Foundation, which released its CBDC tracker in November 2023, out of 193 governments in the world, 16 have deployed a working CBDC to the public. Only 39 have piloted, and 64 are in the research phase.
Regardless of which camp you fall into, advocate or critic, Stadelman believes, “it's important to think critically and think about the ways in which such systems have been abused and may continue to be abused.”
“Isn't the CBCC just a continuation of the old fiat system that allows for endless war? They could usher in an era of government control and surveillance of financial transactions, threatening users' privacy and autonomy.
“But living our lives in fear will not lead to a more peaceful financial system. Instead, dream wildly and create passion,” Stadelman added.
CBDCs are the seal of approval for crypto.
Some proposed CBDCs may operate using blockchain technology, allowing near-term transfers. The attached ledger automatically tracks all payments made on the network.
Peter Alfred-Adekeye, founder and CEO of social e-commerce platform Boom Market, believes that governments using the underlying crypto tech at CBCC can be positive.
“Since we no longer want to print cash, CBDCs are a seal of approval from governments and a win for crypto as a foundational technology and environment,” Cointelegraph said.
Related: Is US stablecoin payment just around the corner?
“But the fear with CBCCs is that they are opaque program funds, centralized under government control and vulnerable to shocks like never before,” added Alfred-Adekei.
Alfred-Adekeyi said corrupt people in power have the ability to exploit the unlimited supply nature of CDCCs for mint and siphon off ill-gotten wealth.
A ruling party in government limits the chances of winning by tightening the purse strings of the opposition just before the election.
There is a strong push from banks in the traditional financial sector to go fully online and digital. According to online data collection platform Statista, at least 216 million Americans will use digital banking by 2025.
Alfred-Adekei said that if CBDCs are to be adopted en masse as part of this digital push in the future, safeguards must be put in place to avoid all worst-case scenarios.
In his view, since CBCCs operate on opaque centralized private blockchains that are not open to public verification, like centralized cryptocurrency exchanges and black boxes, it is not a good idea to make them the sole medium of exchange of value. communities.
“A two-state solution where government-controlled CBCCs coexist with non-government-controlled anti-seizure, open and decentralized tokenized fiat and other real-world assets is a better solution,” he said.
“This way, everyone can hedge their bets on both platforms. CBDCs must have regulatory standards and independent third-party audits to dispel public fears.”
Basic technology is not the issue with CBCCs.
Currently, public opinion on CBCCs seems to be mixed. A 2023 Cato Institute national survey found that 16% of Americans support adopting CBDC.
About 34% were strongly opposed, and 49% had no opinion. Overall, the 2,000 Americans surveyed were more concerned about the risks of CBCC than excited about the potential benefits.
Speaking to Cointelegraph, Sebastian Davis, vice president of research at crypto financial services platform Aquanov, thinks some of the objections from CBCCs are not about the technology itself, but about misuse.
“The centralization of CBCCs is a significant departure from the basic principles of most democratic systems designed to limit central government control,” he said.
However, if CBCCs are designed with stronger privacy protections and government oversight, Davis thinks “some of the fears may be alleviated.”
In his opinion, any development of CBDCs should include comprehensive regulatory frameworks that protect privacy and limit government malfeasance.
Related: Philippines to launch non-blockchain CBDC in two years
“A CBCC with programmable money among a nation's largest financial institutions has the potential to unlock the power of blockchain technology and limit the risk of excessive surveillance,” Davis said.
“In theory, the widespread adoption of CBDCs could bring significant benefits such as the efficiency of financial transactions and greater financial inclusion.
However, Davis thinks there is too much risk to privacy and civil liberties in practice. Instead, he thinks a hybrid model could be a better solution, where mass CBCCs coexist with private digital currencies and traditional cash can provide a balanced approach.
“Innovations such as programmable money and smart contracts associated with CBDCs can provide significant benefits, but they require careful attention to avoid negative consequences,” he said.
The CBCC debate will disappoint everyone.
There is an ongoing debate surrounding CBCCs, both in the crypto space and in the world of traditional finance, due to their discomfort with digital currency. As the 2024 United States presidential election approaches, several candidates have pledged to ban CBDCs if elected.
Lucas Kiely, chief investment officer at crypto trading platform App, says the crypto-native population fears the erosion of privacy and personal freedoms that CBDCs represent.
On the other hand, Kiely fears that CBCCs, which are firmly embedded in traditional finance, may disrupt existing financial systems and even cause economic instability and, for example, serve certain sections of society by eliminating money.
“In general, whether it's cash or decentralized finance, there should always be a privacy option with a currency, and when that privacy option is taken, it creates fear and distrust,” he said.
“Also, we currently don't have much information on how CBDCs work in practice, which adds fuel to the fire.”
Other questions Keeley thinks still need to be answered about CBCCs are how they fit into traditional banking systems, whether depositors will prefer CBDC accounts to traditional bank accounts, and what impact it might have on liquidity and creditworthiness.
“Until all these questions are answered, we will continue to see fear and resistance from both camps,” he said.
In his opinion, a middle ground must be found between the crypto people and the traditional financial industry. At this stage, if crypto wants to gain mass adoption, governments and regulators think they need some kind of control in place.
Related: India to look at offline solutions to help CBDC adoption in rural areas
“We need to find a middle ground, and CBCCs can provide that. They certainly represent a double-edged sword, but they can be a gateway to the rest of the crypto market,” he said.
“If governments put more control over digital currencies, for example, we could see the emergence of regulatory policies that reflect the requirements and risks of blockchain technology.
Overall, however, Kiely believes that until we get more clarity and detail around the implementation of CBCCs, it will be difficult to assess their positive or negative impact without consideration.
