Central Bank Digital Currencies (CBDC) are the meeting point between blockchain technology and central banks. It consists of a blockchain-based digital currency that allows central banks to have direct control over the monetary supply. This means “programmatic money” as if it were computer software. Imagine the central bank carrying out a QE policy via “airdrop” of 100€ to each bank account, and where that money could only be spent during a 30-day period, and then the remaining is burnt. This could be done using CBDCs.
The crypto-community has demonized CBDCs because of the level of control and privacy deprivation they deliver. However, even when they have their completely rational reasons to have that vision, every coin has two sides, and we are going to see them here.
Advantages
- More efficient monetary policies: With CBDCs, monetary policies could be applied with greater efficiency given the direct end-to-end control they have over the monetary supply. Instead of relying on financial intermediaries to spread the monetary policies over the real economy, central banks could have a direct impact on the final target.
- Targeted policies: It also opens the door for customized programmatic policies aimed to achieve more specific goals. Imagine for example the policy to reduce meat consumption, the government could set a monthly meat expenditure consumption limit to prevent anyone to consume more that the amount specified by the government.
- International transfers: Blockchain technology has delivered a cheaper, faster, and more secure way to perform international transactions. CBDCs could allow almost free and instant settlement of international transactions by reducing (or even eliminating) intermediary bureaucracy thanks to blockchain technology.
- Better credit scores: Blockchain technology delivers transparency and traceability to transactions, which could help credit-risk scoring algorithms to better estimate the default-riskiness of loans.
- Risk-free stablecoin: Right now centralized stablecoins pose some risks for holders primarily concerning bad acting from custodians or issuers. With a US CBDC, Defi investors and traders could have a risk-free stable asset based on the dollar.
- New use cases: CBDCs, as programmatic currencies, will allow new business models and use cases yet to discover. Micropayments or programmatic and streamed payments are examples of what could be built using CBDCs.
- Fight against illicit activities: Transparency and traceability coming from CBDCs could be also a good weapon to fight terrorism financing and other forms of illicit monetary transactions. This is where public and decentralized networks would gain popularity thanks to their anonymity, playing the role that cash is playing nowadays in this kind of transactions.
Drawbacks
- Restructuration of the financial system: CBDCs use would suppose a huge paradigm change in international financial infrastructure, with the necessity of restructuring most accounts and payments systems. Traditional financial infrastructure would become obsolete and the shift towards a new model would take time and consume a lot of resources.
- Defi protocols´ integration: CBDCs would be built to work over permissioned networks and under a set of rules that most of the current decentralized networks lack today. That would lead to some frictions in the implementation of CBDCs on DeFi protocols that wouldn´t comply with the regulatory requirements central banks can impose on CBDC-related transactions.
- Privacy: The main risk CBDCs pose on a user level is the degree of control, supervision, and privacy deprivation to which society would be subjected. With this new technology, governments will have total control over the most important aspect of everybody´s life: the way each one of us earns, save, and spend our money.
Conclusion
CBDCs take the best and the worst of blockchain technology and put it in hands of central banks. In this new world where every transaction is subject to monitorization and every euro is subject to censorship or manipulation by governments, truly decentralized cryptocurrencies play a key role.
Cryptocurrencies would be the alternative way to store or spend our wealth without being constantly supervised by our elites. It will take time and will have many downturns along the road, but there is no doubt crypto has a clear use case and reason to exist and, therefore, is here to stay.
