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Will CBDCs bring balance to crypto?

Crypto’s independence is the answer to several of humanity’s challenges, but its freedom also attracts scams that earning criminals billions each year. Is there a way for society to enjoy the benefits the emerging digital currencies while reducing the risk of fraudulent behaviour? Some say that central bank digital currencies hold the answer, but there is a risk that they don’t solve the issues, simply change the nature of the problem.

There is a myriad of benefits that come from digital currencies. Without a central authority managing them, their evolution can be influenced by the community. They are far simpler to administer, enabling transactions to be completed quickly and money moved around the world virtually instantly. Without having to rely on legacy systems or extensive administrative organisations, they are far cheaper to operate and administer than a traditional banking system. The need for third parties is also often drastically reduced.

Like most things in life though, for every benefit there are potential downsides. The environmental aspects have been widely discussed and although there are ways being found to go around this, there is a challenge for the crypto world from both the perspective of practical reality and the wider public perception.

There is also little doubt that crypto’s mostly unregulated nature means that it attracts scams and gives criminals a safe financial haven from which to operate. Equally, roads, hospitals and schools need to be paid for, so a system that bypasses central banking authorities and their tax collection activities represents a significant downside from the perspective of social cohesion.

Centralised decentralised money
Central bank digital currencies (CBDCs) are currently being touted as the next stage in the evolution of money, bringing the majority of benefits of digital currencies and simultaneously solving several of the challenges that they represent.

Domesticated CBDCs retain the simplicity of transaction of their wild-crypto cousins, remove the constraints created by legacy systems and as a result are far cheaper to administer than fiat currencies. They also reduce the opportunity for criminal behaviour because they are managed far more closely by a central authority. This means that they are likely to be less simple for criminals to use for money laundering and also also reduces the space for scammers to operate in.

They also create an environment where individuals can operate while ensuring that societies can get what they are due. The way that CBDCs are being developed will ensure that taxation is collected simply and potentially equitably, so that roads, hospitals and schools can continue to run. Some proponents argue that in some cases they may even enhance the way that society operates, with taxation more closely linked to usage or rebates administered according to people’s needs.

Government leading innovation
CBDCs are clearly not a panacea though.
One of the biggest attractions of crypto currencies has bene that they are completely decentralised, free from a central influence and as such completely independent of central bank monetary policies. This meant that no single institution was in control. CBDCs put central control right back at the heart of the entire concept.

They also give governments a rich seam of data to operate with. While the vast majority of global governments are of course completely benign in their intentions, the rise of CBCDs has the potential to create several scenarios that fans of civil liberties should be concerned about.

Bringing banks to the bank-less
That said though, there is also the point that CBDCs can bring significant benefits to the underbanked. People are often priced out of the traditional banking system or simply live too remotely to have access to a traditional bank. With many global banks reducing their bank branch networks in even developed countries, this has the potential to become an increasing problem. China is one of the most prominent CBDCs currently in development and has included a way of making its offering, the Digital Chinese Yuan (DCNY), work offline in a way that even those without smart phones can benefit.

In many ways though, expecting central banks, regulators and governments to innovate is potentially missing the point of what central banks and governments do. Their purpose tends to be to take the world as they find it and make sure the framework of taxes and protections serve society. In some countries they are supposed to do this in a way that does not stifle individual freedoms, although of course this is not always the case. The point is that these institutions are not developed to innovate, they are there to regulate and protect.

As such the majority of CBDCs will err on the side of caution and control rather than innovation.

Three possible futures
Ultimately, it feels like at this point there are three possible scenarios for the future of crypto.

In the first, cryptocurrencies continue as they have over the last five years and only those with cast iron constitutions and either plenty to play with or little to lose will participate. Some will do very well, some will fall for scams and some will endure both possibilities on the same day. As a result, crypt will continue to be a niche play enjoyed by a specialist community.

In the second, governments and regulators will become consumed by the belief that the risk of crypto massively outweighs the benefits and find a way to legislate it out of existence. There is a decent potential that this will turn into an eternal game of cat and mouse with new versions of crypto springing up as quickly as governments can supress them and a large amount of resources will be expended in the process. While the crypto sector will become adept at operating under the government’s radar, the wider community will miss out on a lot of benefits.

The final potential option is that CBDCs will come to be an accepted part of government activity, delivering several of crypto’s benefits more widely but at the cost of a certain amount of freedom. This balanced approach is probably the most likely outcome. There will be a loss of innovation and justified concerns about the potential loss of individual liberty, but in the longer run, it’s an approach that will deliver more of the potential benefits to a wider cross-section of society.

When discussing digital currencies recently, a Chinese spokesperson asked whether you would rather trust the government or a tech firm. For many, this seems like a very binary response to an exceptionally nuanced debate.

Collingham House 6-12 Gladstone Road
SW19 1QT London

Marco Quacken has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.

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