Most people who have heard of Central Bank Digital Currencies (CBDCs) hate Central Bank Digital Currencies. The only people who like central bank digital currencies are the central banks that develop them and maybe some monetary policy smugglers or savvy rogue banks who think they can make a lot of money from them. At the moment, CBDC is not for the masses. In fact, they don't exist, apart from a pilot project in a small region of China. But let's try to imagine what they will look like and what impact they will have on cryptocurrencies, which today compete with fiat as a source of wealth creation.
"There's clearly a lot of potential here," said Jonathan Wu, president of Ava Labs, Avalanche's founder.
This is because the government is making deals with private blockchain companies like Avalanche. Or the market is able to create money market funds related to these things. Nobody knows yet. Everything is very fantastic and amazing. At their “best” form, CBDCs are programmable. That means the central banks they run find it easier to control consumer spending and inflation without raising interest rates or driving bondholders crazy.
CBDC. What are you? What's wrong with them?
The Federal Reserve describes CBDC as “a digital form of central bank money” available to the public.
The CBDC will be a central bank liability and will be controlled by the central bank. There are two types of central bank money. Physical dollars issued by the Federal Reserve and digital balances held by commercial banks with the Treasury Department are "digital" like a debit card.
Americans have long stored money this way, using credit cards and online payment apps that link to bank accounts. CBDC differs from existing money platforms like credit and debit cards because CBDC is operated by the Fed and not a commercial bank. The Federal Reserve's job is to control the money supply and keep inflation in check. Programmable currencies are one way to do this. This is the basis of CBDC, but the concept of programmability has not yet been defined. CBDCs are still in the early stages of development.
Two types of CBDC are processed: retail and wholesale. Governments need to decide on the level of access to their stablecoin, whether it's permissionless, permitted, or partially permitted.
These paths will determine geopolitical effectiveness and how it will ultimately affect other cryptocurrency ecosystems.
For example, if you work in an allowed environment, application-specific blockchains, such as B. Subnets in Avalanche that meet central bank compliance requirements.
Bitcoins:
Steve Forbes said in a Dec. 15 post that CBDCs are "an ominous threat to our freedoms."
Digital money “will give governments the ability to track every purchase or sale made. This would be a frightening control tool, as officials could confiscate or freeze all or part of your money. No wonder Beijing is so bullish on CBDC,” he said.
How will governments sell CBDC to citizens?
One proposal is to introduce CBDCs as a universal basic income. If you want Universal Basic Income, you need to apply for a card with a chip reader and this will take you to the CBDC blockchain matrix. Another option is to offer it en masse during a crisis, such as hyperinflation. While inflation is now off its highs, one can imagine that if inflation in the West, where CBDC is the most talked about, the government will use this to convince businesses and consumers that the digital dollar is good remains in the range of 8% and higher. way to fight inflation.
The media will then brand anyone who considers CBDC a bad form of programming and a “conspiracy theorist” or some other underhanded strategy to offend those who question such wisdom of central bank technocrats.
“The digital dollar will, in my view, be the equivalent of fiat currency even if actually held in your bank account or in an authorized account controlled by a fintech application run by an authorized branch of the Federal Reserve controlled. He said Dr. Pravin Buddiga, co-founder of Terareum, a cryptocurrency exchange based in Dubai and Chennai, India of transfers and immediate repayment of debts.
Regardless of which central bank uses for its blockchain protocol, that blockchain will be where transactions and settlements take place in the CBDC and may be backed by other assets such as hard currencies, fixed income securities, or commodities such as gold.
"I propose a fiat-backed stablecoin that is designed to maintain the same level of stability as the currency is now," says Baddiga. “Only that it will be pegged to the dollar, like the US dollar (USDC
It's hard to imagine life like a USD coin or Tether with a CBDC on the market, but who knows. CBDC doesn't exist yet, but these digital currencies do. It could be first mover status, where central banks fall behind in the digital currency game. Consumers can be happy with Tether as long as it has dollars backing its token. But if central banks wanted to kill this market, their governors would have all the government fiscal and legal powers to do so.
Bitcoin vs CBDC. Will Bitcoin be banned?
Based on the Digital Dollar Project's January 2022 report, the Federal Reserve's goal is to approach CBDCs cautiously without significantly disrupting the status quo. For those worried that CBDC will be the end of financial transactions, the report has helped keep the current trading system alive. This means that the circulation, distribution, and ultimately redemption of CBDC works just like cash or a credit card.
"It would be better to combine CBDC tools and Bitcoin in a free market society," says Baddiga. “Relevant CBDCs act as stablecoins pegged 1:1 to the digital dollar, while Bitcoin acts as an instrument dependent on global market macroeconomic conditions.”
The central banks have been working on this for at least three years. China first conducted its last test in October.
The European Central Bank published its first digital euro report in 2020.
On November 7, ECB President Christine Lagarde presented her reasoned approach to considering the CBDC. He found that 16% of Americans and 10% of Europeans owned Bitcoin and other altcoins in 2021. we saw earlier this year," he said, possibly referring to the Luna Coin debacle:
Lagarde also warned that Big Tech's entry into payments increases the risk of market dominance and dependence on foreign payment technologies. "This is important for Europe's strategic autonomy," he said. More than two thirds of European card payments are made by foreign companies.
The Bank of England established its CBDC Task Force in April 2021. This month they are conducting beta testing of the CBDC portfolio.
Since the fall of FTX, the Federal Reserve has teamed up with 12 financial institutions, ranging from banks to credit card processors, to re-examine CBDC.
The Bank for International Settlements (BIS), known as the central bank of central banks and co-owner of 63 central banks headquartered in Switzerland since 1930, proposes three basic concepts for setting up a CBDC:
When central banks issue new monetary instruments, currency conversion to this new format needs to happen as smoothly as possible so that the financial institution can maintain stability while still fulfilling political goals and other mandates.
Coexistence. The various currencies issued by the central bank, such as fiat money, coins, and digital currencies, must coexist to ensure public policy goals are met. Alternative monetary instruments from central banks around the world are designed to meet the population's cash withdrawal needs and ensure smooth personal and commercial banking processes and transactions.
And finally innovation. National governments should allow and encourage both public and private sectors to promote various payment service tools, while considering the need to provide secure and convenient payment services for both parties.
Seems reasonable. But is it?
It's still too early to tell. And for CBDCs to be the worst of what the naysayers think, people must be forced to trade digital dollars and ban growing alternatives, in this case cryptocurrencies.
“I respectfully disagree with any central bank that is banning bitcoin right now,” says Baddiga. "It's the engine that drives the cryptocurrency (and blockchain) space."
The key word here is "now". Will this happen in the future? Cryptocurrency investors should be aware of this.
Earlier this month, Fabio Panetta, Senior Executive Director of the European Central Bank, proposed a ban on cryptocurrencies with an “excessive ecological footprint” (translation: Bitcoin), comparing investing in cryptocurrencies to gambling.
Panetta warned investors not to buy Bitcoin, saying "the house of cards is crumbling." He favored CBDC.
“This requires a risk-free and reliable digital settlement asset that only central bank money can provide,” he said in a speech in London on December 7. "That's why the ECB is working on a digital euro... the future of central bank money settlement."