First, let’s be clear about what CBDCs are not: they are not just digital currencies, although they are often passed off as such and the name itself suggests it. After all, the dollar, the euro and all traditional currencies are already largely digital. Whenever new currency is issued only 5% is cash, the rest is digital, and this percentage is steadily decreasing and the use of cash is increasingly restricted and hindered.

CBDCs are also described as a digital currency issued by central banks that uses the technology of bitcoin but with the advantage of being guaranteed by a central bank and a state and therefore more secure.

In reality they are just an attempt by governments to place even more control over how and where citizens spend their money, have greater ease in tracking transactions and blocking accounts if necessary. They are thus the exact opposite of what bitcoin aims to do, which is to create a financial infrastructure and currency that are untethered from any intermediary, particularly central banks and governments.

Difference between CBDC and a cryptocurrency

This point was also recently addressed by Edward Snowden, a computer scientist and activist and former CIA technician famous for revealing the methods used for wiretapping by the United States and the United Kingdom. He has called CBDCs the “evil twin” of cryptocurrency and also “a perversion of cryptocurrency, or at least of its founding principles and protocols: a cryptofascist currency, expressly designed to deny the basic ownership of money and putting the state at the center of every transaction.“

CBDCs completely distort the very purpose for which Bitcoin was born, which is to create a decentralized form of money. They are not a new form of money. They are really just a technological upgrade to the same form of money that is used now, putting central banks in full control of citizens’ money. Control that they have been losing lately both because of the spread of payment systems, such as We Chat, run by private companies, and by the spread of bitcoin and other cryptocurrencies.

So why are central banks developing CBDCs?

Primarily to regain control of payment systems, since now, for example in China, the majority of people use Ant Pay or We Chat to make payments, platforms that are in the hands of private companies like Alibaba and Tencent. Hence most transactions do not go through banks. Whereas the e-yuan, or digital yuan, already being tested since April 2020, is highly integrated with commercial banks because it is used through a digital wallet held by commercial banks.

And then it is a rather clunky attempt to create a bitcoin alternative, a competitor. But they actually have very little in common since bitcoin’s main characteristic is decentralization, whereas CBDCs are by definition centralized. The only thing they have in common is that they use the blockchain as a ledger for transactions. Understanding the difference between bitcoin and CBDCs is also important to understand that using the blockchain per se does not mean decentralization.

What benefits should CBDCs bring?

Supporters of CBDCs say it will make everyday transactions:

• cheaper, compared to using payment systems such as Visa/Mastercard
• safer, eliminating counterparty risk (so even if the commercial bank fails you still own your money)
• will make it easier to tax transactions and assets
• will make it almost effectively impossible to hide money from the government.

Snowden again says that “states often criticize bitcoin with a patina of paternalistic concern, arguing that free trade, in the absence of their own intermediation, will inevitably turn the market into underground gambling dens and carnage sites rife with tax fraud, drug dealing, and arms trafficking.“

This is one of the great false myths about cryptocurrencies. According to a recent Chainanalysis study, which was also picked up by Forbes and Fortune, criminal activity attributable to cryptocurrencies in 2021 accounted for just 0.15 percent of traded volumes, so about 1/600. And then the U.S. Department of Treasury (Office of Terrorism Financing and Financial Crimes) itself stated that “although virtual currencies are used for illicit transactions, the volume is small compared to illicit activity through traditional financial services.“

So it is clear that this is not the real problem. The problem for the state is losing control of the money and especially the power that comes with it.

What are the risks of CBDCs?

CBDCs are cryptocurrencies issued by central banks, so like all cryptocurrencies they are a form of programmable money that records transactions on a particular type of ledger, which is called blockchain. The fact that it is programmable but controlled by an authority is very dangerous because it means, for example, that it can be programmed to be spent only on certain assets and not on others. In essence the issuer is given the power to control how and where the money is spent. For example, if a certain bonus is given out, it could be programmed so that it could be spent only on certain purchases and not on what you want. Or they could also be programmed so that they “expire”: you are given money and if you don’t use it by a certain date you can no longer use it.

The supposed “safety” and “convenience” of CBDCs is nothing more than a way for the state to police in an increasingly looming way. It is an attempt to put the State at the center of monetary interaction, thus at the center of the use and custody of each dollar or euro. In fact, decentralized cryptocurrencies are seen by central and commercial banks as dangerous because they allow disintermediation; precisely because they are designed to provide equal protection for all users, with no special privileges for the state. These cryptocurrencies are indifferent toward who owns them, who uses them and for what. They represent an epochal revolution because they give the ability to store and move value in a verifiable way, regardless of State approval. And this is unacceptable to traditional banks, and especially to States with sovereign currencies, so they do everything they can to hinder them or try to create fake alternatives like CBDCs.

Snowden, digressing into the history of money, concludes that “in an increasingly digital society, there is almost nothing a bank can do to provide access to and protect your assets that an algorithm cannot replicate and enhance.” The importance of banks historically comes from the fact that they had to hold something physical that had value, gold, securities, cash. In an increasingly digital world of finance, that with bitcoin is also becoming increasingly decentralized, the role of banks is losing its meaning and so they are trying with CBDCs to reclaim their central role.

CBDCs are therefore a very dangerous tool for everyone’s financial freedom. If they were to take hold there would be total control over our financial lives. Basically it would be the end to any kind of freedom to spend money where and how we want.

Image Credits: HACKZEROs