Opinion: Central Bank Digital Currencies Will Only Increase the Need for BitcoinBy Nick Chong
Today, Donald Trump tweeted about Bitcoin and cryptocurrency for the first time in his presidency, responding to Facebook's attempt to issue its own form of money.
This is part of a larger trend. Governments around the world are reacting to the rise of cryptocurrency, with some launching their own digital currencies in response. An official at the People's Bank of China (PBoC) confirmed on July 8 that Beijing is working on a digital version of the Yuan.
This comes right after Agustin Carstens, the chief of the Bank for International Settlements (BIS), a Swiss organization, gave central bank digital currency (CBDC) projects his stamp of approval. Speaking to the Financial Times, the banking tycoon explained that his organization is actively "supporting" central banks' engagement with digital money. Carstens went as far as to admit that it "might be sooner than we think" that there is a market for CBDCs, making it somewhat of a necessity to start work now. To aid such efforts, the BIS has launched a financial technology (fintech) hub.
The BIS also recently released an in-depth report on fintech, giving insights into how this budding sector can improve businesses, bolster financial inclusion, make the economy more efficient, and even how certain products can pose a threat to fiscal stability and privacy.
Other notable central bank-affiliated groups have demonstrated interest in cryptocurrencies. The International Monetary Fund's (IMF) managing director, Christine Lagarde, commented on cryptocurrencies at the World Economic Forum's Davos convention. The soon-to-be head of the European Central Bank told reporters that "cryptocurrencies are shaking the system."
Dr. Doom Believes CBDCs Will Render Crypto Useless
With CBDCs finally entering the fold of global finance, analysts and economists have started to comment on the matter. Most notable is Nouriel Roubini, a New York University professor and economist who is (in)famous for his hatred of Bitcoin. In his column for Project Syndicate published late last year, Roubini proudly quipped that the rise of CBDCs would "close the door on crypto-scammers."
"CBDCs [are] likely [going to] replace all private digital payment systems," Roubini wrote. He explained that unlike retail banks and platforms like PayPal, whose services are subject to friction (high transaction fees, failed transactions, and a high barrier to entry), central banks are "efficient and cost-effective" at intermediating and lending money.
"By allowing any individual to make transactions through the central bank," Roubini wrote, "CBDCs would upend this arrangement, alleviating the need for cash, traditional bank accounts, and even digital payment services."
The economist went as far as to say that CBDCs would eliminate any need for "not scalable, cheap, secure, or actually decentralised" cryptocurrencies, including Bitcoin, by the simple virtue of central banking technology.
The Death of Cash
While Roubini's argument is logically sound, he is missing one key point: the world needs a fully private form of money, like Bitcoin. The issuance of central bank digital currencies will only make that need stronger.
Today, digital transactions seem relatively seamless. Most PayPal transactions go through with ease; in Canada you can "e-transfer" money at low cost without fear of ever getting your money "stopped." But, there are some exceptions. Certain banks actively deny any transactions to cryptocurrency exchanges. Visa and Mastercard famously banned transactions to Wikileaks, which forced the anti-establishment publication to go crypto, making it an early Bitcoin user.
More likely than not, CBDC transactions will be subject to even more government scrutiny, leading some to fear that financial privacy will become more at risk. The rapidly declining use of cash in nations with established digital payment infrastructure already provides a glimpse of that future.
Just look to China as an example. There, WeChat, what some call a "super app" (messaging, payments, financial services, games, etc.), has effectively taken over the economy. Alibaba's Alipay is a big player as well, and services like these — which sport no transaction fees and instant payment times — are wildly popular among urban Chinese citizens with smartphones. People can use WeChat to pay for almost everything. That means that they are leaving a complete record of their financial transactions, just for the sake of convenience.
Now, the People's Bank of China has revealed that it is getting into the digital currency game. As reported by The South China Morning Post, Wang Xin, director of the institution's research division, claims that if Facebook's cryptocurrency, Libra, gains traction, the PBoC will move forward with launching its own digital asset. What's more, the central bank is reported to have already received approval from the Chinese State Council to move forward with such a project.
That's right, cash is falling out of use. As a Bank of Japan Deputy Governor Masayoshi Amamiya told Reuters, the adoption of CBDCs will force governments to get society to drop cash. In nations with negative interest rates (Japan, Sweden, Denmark, etc.), of which there are a rapidly growing number, consumers hoard cash. This hoarding prevents central banks from taking full control of the money supply, causing unintended risks. With CBDCs, there is no such issue. Central banks can withdraw funds from users’ accounts as they please, which is why there has been a push for the adoption of this kind of currency.
The Fundamental Need for Bitcoin
As mentioned, there's an issue in China and in nations also adopting digital payments while dropping cash: privacy. Take a look at China's "social credit" system. It's not hard to imagine a future in which urban citizens will be actively monitored, with their financial transactions making up a part of their social score. This score could then decide access to certain services, jobs and homes.
Andreas Antonopulos, a long-time Bitcoin educator, has likened this to a violation of free speech. He claims that money is a language, and that making certain transactions illegal or cutting people out of infrastructure is a growing issue in today's society. As Rob Paone, a cryptocurrency personality and founder of Proof of Talent, recently wrote on Twitter: "going cashless means a financial surveillance state."
Government surveillance, of course, can theoretically protect citizens from criminals. But, as crypto researcher Hasu and Three Arrows Capital's Su Zhu wrote in an extensive post on digital cash, "The specters of terrorism and organized crime are often cited [as justifications for survillence]. But this makes the naive assumption that governments itself [sic] can never become evil." The duo write that cashless societies are less, not more, susceptible to tyranny, overreach, and authoritarian policies.
A surveillance state is exactly where Bitcoin shines. Right now, most public blockchains can be mined for data. Analytics companies like Chainalysis, which is linked to financial regulators, can build a web of data about transactions, and even find points at which one "doxes" themselves.
However, with the proper techniques and tools, like CoinJoin, Bitcoin can still exist as a private form of money. In an extensive post published to crypto exchange BitMEX's blog earlier this year, its CEO, Arthur Hayes, tapped into this narrative.
Hayes wrote that the "censored, centralized, and top-down" digital monies of the future pale in comparison to Bitcoin in a number of respects. "Bitcoin runs via a network of voluntary, independent, and self-interested actors, who neither demand nor require any favors or permissions; a few basis points in transaction fees is literally all they want from anyone."
Hayes went on to note that when the abolishment of cash would lead to Bitcoin adoption, due to the "moral and even psychological" need to keep information to oneself.