- >Do National Digital Currencies Go Against the True Spirit of Crypto?
Do National Digital Currencies Go Against the True Spirit of Crypto?
In the wake of cryptocurrencies’ massive success emerges a new phenomenon: national digital currencies. They are a sort of cryptocurrency rival that governments around the world are experimenting with. It’s the last thing the crypto world expected from the government and regulatory class. After all, the relationship between crypto and governments is for the large part a frosty one. But crypto has proven to become only stronger, and it seems national digital currencies are a case of “if you can’t beat them, join them.”
Hope Mutie | Jan 27, 2021
What is this national digital currencies stuff and why are governments scrambling to launch them? Though they’re created to counter cryptocurrencies, can they hold a candle to them at all? More importantly, do these currencies go against the true spirit of crypto?
Debunking National Digital Currencies
In recent years, the term ‘digital currency’ has taken the meaning of a currency that’s available in digital form only. Digital currencies differ from physical currencies in that they are purely electronic and cannot be handled or exchanged like banknotes and coins.
All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies. In this piece, when we speak of national digital currencies we refer to central bank digital currencies (CBDCs) that are issued by the central bank of a country. CBDCs borrow from the blockchain concept of Bitcoin and other cryptocurrencies and they also represent both the features of crypto and a government-issued currency.
Several countries across the world have either gone or are considering going the CBDC way. Venezuela was one of the first to do so – launching the controversial Petro in Feb 2018 (though at the time of writing the currency is good as dead).
Turkey is considering a CBDC launch in 2021 as reported by the country’s local crypto outlet Koin Bulteni. The Marshall Island’s government passed legislation in 2018 that would pave the way for the creation of the Marshallese Sovereign – the country’s national cryptocurrency. Saudi Arabia and the UAE’s central banks have partnered to launch a joint digital currency.
Sweden is running a feasibility program in the hope of launching an e-krona. Canada’s exploration of CBDCs is past the proof-of-concept stage. And some countries, such as the US, are wary of wading into the CBDC waters too soon.
The Rationale Behind CBDCs
This unprecedented race towards national digital currencies by countries is both a response to the digital winds of change flowing through the finance world and the quick ascent of cryptocurrencies. It’s hardly a secret that governments and regulators view cryptocurrencies as a threat.
The cryptoverse watched keenly when Facebook’s announcement of a global cryptocurrency was met with a particularly hostile reaction by regulators around the world, forcing it to go back to the drawing board. While Facebook’s checkered history contributed to this pushback, it’s obvious the finance establishment is deeply unsettled by the prospect of a decentralized currency taking over.
Most countries that are flirting with the idea reckon that a national digital currency would have more cred and power than its decentralized, freewheeling counterpart.
But in there also lies nobler motivations. There’s the notion that national digital currencies would usher in cashless societies. Cashless societies have their appeal: crimes like money laundering are reduced, it’s easier to exchange between currencies while abroad, people can manage their spending habits better, and so on. Also, government-issued accounts could herald the phasing out of retail banks.
How Do CBDCs Differ From Cryptocurrencies?
CBDCs borrow from cryptocurrencies but the two couldn’t be more apart when it comes to their technological makeup and philosophy.
First thing, and probably the biggest, CBDCs are central bank-issued and hence centralized. This is diametrically opposite to most cryptocurrencies whose core tenet is decentralization.
Second, since CBDCs are issued by the country’s central bank, it also regulates them, just like it does Fiat.
Again, since they’re centralized, CBDCs are controlled from the top, while crypto, such as Bitcoin, is open-sourced; anyone from any corner of the planet can propose changes and contribute to the system.
National Cryptocurrencies Go Against The True Spirit of Cryptocurrencies
Let’s dispense with this already: national digital currencies are completely antithetical to what cryptocurrencies stand for: whether it’s decentralization, privacy, autonomy, or security.
Here’s a closer look at each one of those factors and how actual cryptocurrencies compare to CBDCs:
Democratization of Money
Decentralization, for one, is at the core of crypto’s ethos. Crypto advocates for a democratic system where anyone, no matter their origin, gender, or social status can contribute.
For that reason, Bitcoin and cryptocurrencies’ networks are maintained by thousands of computers across the globe such that even if one of them were to go down, it wouldn’t affect the network in the slightest. This not just makes for a democratic system, but an effective and resilient one as well.
Meanwhile, national digital currencies are centralized and hence tightly reined in by the central bank and other state apparatus. Due to this, you have systems that have a single point of failure. A breach of security or a malfunction at the top threatens the security and integrity of the whole system.
Regulated Money Supplies
Something else: most cryptocurrencies have a supply limit. For instance, Bitcoin has a coded supply limit of 21 million, making it considerably hard for its supply to be manipulated by anyone (in what’s truly the epitome of a free market). Do you think most central banks and governments are going to relinquish the ability to add or reduce the money supply just because national digital currencies will have the blockchain tag?
Then we have the not-so-tiny matter of inflation. The limited and unmanipulatable nature of cryptocurrency means it’s immune to the causes of inflation such as the pumping of new money into the economy. With crypto, people are cushioned from the asset devaluation caused by inflation – a far cry from centralized currencies.
Money Without Borders
Finally, we have cryptocurrency transcending borders. It doesn’t matter which part of the world you are in – you can use crypto, unlike government-issued currency.
Crypto’s borderlessness means people can transfer wealth across countries without friction and sky-high expenses. It also means that even people in the remotest and poorest places of the world can participate in the global financial system, something that flashy CBDCs, with their territorial nature, aren’t going to fix.
Governments can launch digital currencies all they want, but the truth is that such currencies are a complete travesty that contradicts the true spirit of cryptocurrencies. From decentralization to privacy to transcending borders, crypto has set high standards that CBDCs – in their effort to play catch-up, betray.