CBDCs: Dispelling myths to change the way we see money
On the surface, central bank digital currencies (CBDCs) are merely traditional finance’s response to the perceived threat of cryptocurrencies and the fast-emerging world of digital assets.
The first question is, why do we need them?
CBDCs are being explored as virtual forms for a country’s fiat currency. Issued and regulated by a central authority, they provide an alternative to the decentralized and currently ambiguous regulatory landscape for digital currencies like Bitcoin.
There is a school of thought that China, Russia, the UK, and the majority of the world’s central banks are aggressively pushing CBDCs while enacting crypto regulations, to swing the balance of control back their way.
But this scenario would be oversimplistic and overlooks the greater possibilities that an effective, well-governed and secure blockchain-based digital currency can offer to people and businesses.
Today, 80 central banks are exploring CBDCs, according to research by the Bank for International Settlements. We may even see fully operating CBDCs in China and Russia by 2023. While Bitcoin, Ethereum, and other tokens today are limited in their real-world application as a day-to-day currency, a central bank-issued digital currency would fulfil all the traditional functions of money.
Consumers could confidently use CBDCs as legal tender, to pay debts, taxes as well as for their everyday transactions. The future of a cashless society can potentially be accelerated by this form of “trusted” digital money, while backed to the hilt by central banks to provide security and final recourse for settlement. Today, the simple exchange of crypto for cold-hard cash can still be challenging in some markets.
CBDCs have the potential to change the rules of the global financial system, and this has unearthed many questions about how we use and think about money. That said, before we reach this new financial future, a few questions and myths need to be explored and addressed.
Myth 1: CBDCs mean the death of crypto
The introduction of CBDCs is far from a zero-sum game when it concerns the future of cryptocurrencies. In fact, CBDCs present a significant opportunity for cryptocurrencies. With blockchain as the underlying basis for both assets, the roll out of CBDCs will help solve major issues that are bottlenecks for true global and seamless business.
For example, CBDCs would help global trade run smoothly by providing an efficient payment system, reshape the operating model for cross-border payments, reduce dependency on cash, and make banking and financial services more affordable and accessible to everyone — all of which are typical selling points of cryptocurrencies. Hence, the CBDC model will help drive mass market adoption of cryptocurrencies.
Myth 2: CBDCs pose a trade-off between privacy and transparency
Privacy is a perennial concern for investors and consumers everywhere. The appeal of cryptocurrency lies in its decentralized nature and the ability to transact without disclosing personal data. As an April 2021 survey by the European Commission found, the top things that respondents wanted most from a digital currency are privacy (43%) and security (18%).
The prevailing perception is that CBDC-enabled digital payments will always involve disclosing personal data to a payment services provider and/or a merchant. This is false — as a CBDC would allow complete anonymity up to a certain threshold — as is the case with cash. In fact, CBDCs allow for different degrees of privacy and disclosure. These can be established for various tiers of transactions or account sizes, or by transaction type.
For a CBDC to be trusted and acceptable to the public and lawmakers, it must comply with both the privacy expectations of the public and privacy regulations. Achieving this optimal balance is contingent on governments’ abilities to ensure that adequate legal and technical controls are in place.
There are many considerations that undermine this myth of a binary choice. Many technical controls, such as zero-knowledge proofs and digital identity frameworks, could actually increase security and privacy while enhancing transparency. With a good design and effective regulation, a robust framework for privacy protection can be built into CBDCs. As such, the question is really one of how privacy is assured — and whether or not it meets public expectations.
Huobi Global is excited to see CBDCs take their place in the global financial system. We are not only interested in the opportunity for financial gain that CBDCs represent for crypto trading and investment, but have also invested in blockchain technology because of its potential to improve the lives of billions in very tangible ways.
