While both Central Bank Digital Currencies (CBDCs) and Cryptocurrencies are leveraged on a blockchain and represent a stored form of value like conventional money (fiat), their similarities stop there. Both of these financial instruments have a very different purpose and benefit. Cryptocurrencies represent freedom for individual users from conventional legacy finance, while CBDCs represent a gateway to an unprecedented, dystopian society where rampant abuse of the people is possible without the user’s knowledge or control.
For us to understand the comparison of CBDCs and cryptocurrency, we will need to understand a few vocabulary words. What is a blockchain? For the purposes of this discussion, a blockchain is simply an online, shared database to which information cannot be added without consensus from certain (many, sometimes thousands of) participants who are a part of the shared database. Think of your bank; when you make a deposit, the teller records the deposit which is stored in a database in the bank’s computer system. The manager of the bank then corroborates the teller’s transaction, believing it to be correct. The bank teller and manager agreeing is called consensus. The way blockchains differ from conventional banks is that the bank’s database history can (and often does) get modified, either fixing an error or creating an error. The history of a blockchain can never be changed, as each “block” or “heartbeat-type” mass-data entry, is part of the previous block and also becomes part of the next block, forming a “chain.” This inability to change the recorded history is called immutability. It is one of the greatest strengths and attractive qualities of cryptocurrency.
What are cryptocurrencies? Cryptocurrencies are basically digital money. They represent a store of value the same way that your online bank account balance represents the amount of dollars that “exist” there. Interesting side note: when you deposit money in a bank, the money is no longer yours. What you now own is “bank debt.” The bank may invest your money any way it sees fit. Also, this is why banks used to pay you interest, they were using your money and the interest was a payment for that privilege. Now banks have the audacity to charge you a monthly fee, while using your money to make money for themselves! When you deposit crypto into a self-custody wallet, that money is yours. No one can invest it into anything without your permission, and you receive all the interest benefit. What are CBDCs? CBDCs stand for Central Bank Digital Currencies. They are a digital form of conventional money, also called fiat. They, like cryptocurrencies, are written on a blockchain.
Why are CBDCs so bad? Since we now know that CBDCs are going to basically be centralized banks’ digital version of fiat money, let us first find out why US fiat dollars are flawed and then expound upon why their digital counterparts would be even worse. Ever since the United States dollar has been removed from the gold standard (one dollar = one dollar worth of gold), the dollar has suffered inflation each year. Inflation is when your dollar buys less than it did previously. The United States dollar is currently marked as having 8% inflation rate at the time of writing (though some experts state that it is more like 20% for luxury items). This means that you will be able to buy 8% less: food, clothes, gas etc. this year, than the previous year. Why is this happening? Besides other macro factors such as was in Ukraine and Covid, the main cause for this is money printing. In the United States, if you and I were to print our own dollars, we would be considered felons and be imprisoned. The government however, has been printing money at an increasing rate for decades, and it reflects directly in the value of our dollar. You see, inflation and money printing are at their core, stealing. Imagine for a moment that you were standing in a room with a large group of other people, and you each had $100 dollars in your pocket. Now let us say, I am the government. If I walked into the room and tried to take that money out of your pocket, it probably would not end up very well for me, right? But what if I had a special machine that could decrease the amount of money in your pocket without even being present in the room. Who would you blame then? Yourself? The person next to you? The person you try to buy something from? This is what is happening to us all. Furthermore, imagine I come into the room and declare that you, and everyone else is in the room is a terrorist and confiscate your money at gunpoint. That would suck, right? Now imagine this, with CBDCs, I would not even have to enter the room; I would simply put a hold on all of your assets on the blockchain because I’m in charge. I could use this power anytime you do not agree with me on, well, anything. I can adjust the value of the currency for any group or class of your group so that some people have more money and others less. Oh, and the bank’s CBDCs are very different from your CBDCs, so the banks, will be able to earn interest and have special benefits while you will not. Ah yes, I almost forgot, with CBDCs I can stop, reduce, or eliminate your ability to buy any type, class, or other distinction of item I choose. So, I can make sure you do not buy more than 10 gallons of gas, or 2 gallons of milk a week. I can do this simply because I can, or because “it’s for your own good, or the good of everyone else.” I can also tie any parameter (condition), to your money, so for example, if you are not fully vaccinated, you cannot buy groceries (for your own good, regardless of the dangers of the vaccine). John Adams cites,
Loss of economic freedom – beyond the privacy concerns raised above, retail-based CBDCs pose risks to the economic freedom of individual economic agents given that central bank officials will have the ability to impose conditions on account holders.
And our final whammy is that CBDCs, while they will be on a block chain, they will not be open sourced. This means two things. One, you will not be able to see the code for the rules of their game as with open-sourced cryptocurrencies. And two, the gatekeepers of these CBDCs will be able to change the history of the holders! So, for example, they could erase any record of all your transactions like they never existed. That means they could literally erase all your money and savings, forever. You may be asking yourself what the big deal is, as you have not heard anything about CBDCs coming your way. Well, according to Bison Trails CBDC report,
Over 80% of Central Banks around the world are in the process of developing CBDCs.
So, what makes cryptocurrency so good? Well, I am glad you asked. Cryptocurrencies are generally open sourced, with a few exceptions which are used for high security and secrecy (for the benefit of the user). Open-sourced means anyone at anytime can look at the code history and use fancy tools to see exactly what is happening on the blockchain, as well as the rules that govern that blockchain. This gives users confidence in the system without having to trust any one, or any group of people. We call this a trustless system. Crypto enables you to trade with someone based on something called a smart contract. This smart contract is simply a trustless agreement. If “this” happens, then “that” will result. Smart contracts ensure that everyone wins. And, because these smart contracts are open sourced, everyone can see what the rules are before entering into an agreement. You can also see if many other people have entered into similar agreements, and if it worked out well. IBM cites:
Because there’s no third party involved, and because encrypted records of transactions are shared across participants, there’s no need to question whether information has been altered for personal benefit.
Crypto can be used for anything where you need to remove trust from the equation. In Africa, they are using crypto to record immutably, people’s credentials such as doctors and lawyers, helping to reduce fraud.
As we have shown, CBDCs are inherently dangerous due to the extraordinary power that the few would hold over the many. CBDCs will be closed sourced and have different rules for different classes. Cryptocurrency in contrast is open sourced. It has rules which apply to all, regardless of your wealth or the color of your skin. Cryptocurrency gives us freedom to trade in a trustless manor, while CBDCs threaten to keep us from trading at all, for whatever reason strikes those who are in charge. When governments try to roll out their CBDCs trying to say they are “crypto”, we hope that you will be informed enough to give them a hard pass.
- Bison Trails | CBDC Report: https://bisontrails.co/cbdc-intro/
- John Adams | Professional Economist | The Potential Orwellian Horror of Central Bank Digital Currencies: https://www.adamseconomics.com/post/the-potential-orwellian-horror-of-central-bank-digital-currencies
- IBM | “Topics” | Smart Contracts: https://www.ibm.com/topics/smart-contracts