CBDC as the final reason against Cryptocurrencies

The world, shuddering from new economic shocks, is increasingly losing faith in the traditional financial system and anti-inflationary tools of regulators. People are increasingly resorting to Bitcoin and cryptocurrencies to hedge their finances and savings. Trying to reverse this trend, central banks are trying to counter their decision to cryptocurrencies, digital programmable currencies – CBDC.

According to central banks, the first available CBDC promises significant benefits for the issuing central bank and, consequently, for the associated country. This creates a conflict: implementation decisions must be well thought out, and at the same time there is a race to become the first central bank to launch its digital currency.

Central Bank Digital Currency: Definition

According to the data of Coinmarketrate.com unlike cryptocurrencies, digital currency (CBDC) is the digital money of the central bank, which has the same exchange properties as the usual fiat money. In this context, CBDC forms the third form of central bank money, along with cash (banknotes and coins) and fiat money (reserve).

The crucial difference between CBDC and cryptocurrencies, which are mainly issued by private organizations (not banks), lies in their interchangeability. While CBDC acts interchangeably with other monetary obligations of the central bank, private cryptocurrencies mostly have a flexible or fixed exchange rate relative to FIAT currency. In addition, CBDC is regulated by the state and is significantly less volatile than cryptocurrencies based on distributed ledger technology (DLT).

CBDC reduces the cost of raising money, and payment transactions between machines initiated using smart contracts become legally secure and divisible into the smallest units of value (micropayment). Money laundering becomes almost impossible.

Centralized IT solutions already allow for transfers. However, a standardized ecosystem based on DLT offers many advantages. In particular, it allows for step-by-step transactions in which execution and consideration or payment are made at the same time. It was difficult to do this on a digital card, and it often required the involvement of trusted third parties as trustees or guarantors.

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The gradual digitalization of living space and economy is not limited to digital means of payment. In 2009, Bitcoin, the first publicly traded cryptocurrency based on distributed ledger technology, entered the financial world. The purpose of creating Bitcoin is to make the digital currency freely available to everyone. Unlike fiat currency, Bitcoin does not require intermediaries or central authorities such as banks, and at the same time prevents the central problem of each cryptocurrency — double spending.

DLT ensures that transactions are debited offline on the Network, and that transactions between the parties cannot be made twice. It doesn’t matter if the parties know each other. Each transaction is evaluated in a decentralized manner and by a majority of votes in the network for correctness, and then stored in such a way that it can be tracked for all parties involved. Thus, distributed ledger technology also automates the integrity of the network and the payment information contained therein. This principle allows everyone to participate, without registration or complex identity verification.

Thus, DLT is in some sense a competitor to traditional financial institutions and a well-known account-based payment system. Currently, there are thousands of cryptocurrencies that use the properties of distributed ledger technology. However, most of them are not officially recognized as a currency by the state or the monetary union (and, accordingly, by the central bank).

The first exception is El Salvador, which in September 2021 officially recognized Bitcoin as the second state currency along with the US dollar. This means that in some cases, traders accept Bitcoin as a means of payment, and taxes can be paid in cryptocurrency.

In general, however, cryptocurrencies are not considered a universal means of payment, since there is often no regulation and clear structures and transparency. The biggest disadvantage for widespread distribution is also the high volatility of cryptocurrencies, which affects the stability of their value.

Central Bank Digital Currency in (Test) Use

With a publicly available CBDC, central banks will no longer issue purely physical money to the public and store electronic reserves for commercial banks, but will establish a purely digital means of payment as an additional standard. Digital means of payment depend on technology, so central banks should strategically position themselves as independently as possible in this regard in order to be able to guarantee a high degree of security. A decentralized architecture, such as DLT, currently seems promising for providing security and control in digital payment transactions.

Today, money goes through a long supply chain until everyone gets their hands on it. Safe transportation is difficult and expensive. DLT provides advantages in the interaction between central banks, banks and individuals. The technical base for the distribution of digital money can be organized and managed centrally. Central banks, for example, can protect their applications in a decentralized way using DLT without expensive additional technologies.

Private users can safely participate in the Central Bank of digital currency without special knowledge and equipment. Why would they want that? Well, firstly, the Central Bank claims that because central bank money in any form is the most reliable means of payment, and so far only financial institutions have had access to central bank digital money. And secondly, people simply will not be left with a choice.

In recent years, central banks have begun testing the use of central bank digital money. The Central Bank of China, the People’s Bank of China, is a leader in testing and implementing CBDC. In the country, the first practical tests began in 2021, while the salaries of civil servants were partially paid in the CBDC.

In January 2022, just in time for the 2022 Winter Olympics, the Chinese central bank issued a yuan wallet (a digital wallet in the form of a smartphone application) in several major cities of China. Thus, users can purchase digital yuan as a CBDC, and they can already pay with various trading partners both online and offline.

According to the latest official data (as of June 2022), more than 200 million users have already registered on the e-yuan, which together, since the start of the pilot launch, have reached a transaction volume equivalent to about $ 12 billion.

In the European Union, the Swedish Riksbank is the most advanced. The Swedes have been studying the possibility of introducing CBDC since 2016. There, e-krona is a further acceleration of the digitized form of payment, which is already widespread in society. The stage of technical testing of the current implementation is scheduled for 2022 has already begun, and at the same time the impact on the economy and legal requirements are being studied.

In the Eurozone, CBDC testing also continues to gain momentum: first, the ECB has reviewed and evaluated various scenarios for the use of CBDC. In conclusion, the ECB announced that it had attracted several companies to develop the tool, including Amazon, and then with the implementation of the first CBDC pilot project. The goal is public implementation by 2026, and an extensive testing phase will begin in 2023.

As always, the mission of introducing a digital currency is focused on ensuring its stability. The German Banking Association even considers the European CBDC solution “irreplaceable”.

The first test tests have already been conducted in parallel by the French central bank. In the summer of 2021, together with the Swiss cryptocurrency bank SEBA, calculations and delivery of quoted securities through TARGET2-Securities were simulated. At the same time, CBDC was tested as a government bond on the debt market. About 500 institutions in France participated in this ten-month testing phase.

The picture is just perfect. But the question arises: for whom?

If everything is so idealistic, then why is the United States Senate trying to declare such a development illegal. A bill with the original name “No Digital Dollar Bill” has been submitted to the Senate. This legislative act is aimed more at prohibiting the transition to CBDC, which brazenly interferes with the rights of American citizens to own fiat funds.

“No CBDC digital currency will be considered to have legal value in accordance with Section 16 5103 of Section 13 of the U.S. Code of Laws,” the document says.

It also says that Americans should not worry about the fact that technology will interfere with their private lives and affect financial freedoms.

Security is security, but are programmable digital currencies so harmless if they are capable of depriving financial freedoms?