Active central bank digital currencies may be farther away than many think, as a number of factors — including their alleged threat to privacy — hinder growth.
As cryptocurrencies grew more popular, governments worldwide have brought their own vision of digital currency forward in the form of central bank digital currencies (CBDCs).
China was among the first countries to start research on CBDCs as early as 2014. As of May 2020, 42 countries had started CBDC projects. Since then, dozens of others have started some form of research and development on a CBDC.
Per the Atlantic Council, 19 of the Group of 20 (G20) countries are in an advanced stage of developing CBDCs.
Currently, 167 countries have begun research and development into a national digital currency, according to CBDCTracker.
Out of these 167 nations, only four countries have launched a final product: Jamaica, Zimbabwe, Nigeria and the Bahamas.
Seven nations, including the Philippines, Kenya, Denmark, Singapore, Ecuador, Curacao and Finland, have canceled their CBDC projects.
Privacy problems with CBDCs
There are a number of headwinds facing CBDCs, namely concerns regarding privacy.
Some have contended that a central bank could monitor consumer spending habits and even limit citizen’s spending for political or ideological reasons.
Harry Halpin, CEO of Nym, a privacy infrastructure firm, told Cointelegraph that there are large and rightful privacy concerns with CBDCs:
“It is not without reason that China is one of the first countries with a CBDC and that CBDCs are part of a larger trend of increasing financial surveillance.”
Last year, a Trezor research report in the United Kingdom demonstrated the scale of public unease with the potential for the government to abuse CBDCs.
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The report found that 73% of people are concerned about ruling authorities being able to control access to their funds.
Two-thirds (67%) are concerned about the ability to impose time conditions on money (e.g., spend it or lose it); 62% have misgivings about controls on which goods and services can be bought; and 59% about the ability to cut off specific individuals from the U.K.’s financial services.
Trezor analyst Lucien Bourdon told Cointelegraph that the sentiment in the U.K. survey is shared worldwide:
“I think the digital penny is finally dropping, and we’ll see governments worldwide scale back their ambitions for CBDCs dramatically. Not only are they fiendishly complex and costly to implement, but their purpose is being eroded with the increasing mainstream adoption of Bitcoin and crypto stablecoins.”
He added that most people are “uncomfortable with financial authorities having the kind of powers a CBDC could grant them. Although there is still extremely poor awareness and understanding of CBDCs among citizens, as understanding increases, public unease also increases.”
Former U.S. President Donald Trump and Florida’s Republican Governor Ron DeSantis promised never to allow the creation of a digital dollar. In May, the House of Representatives voted along bipartisan lines to advance legislation blocking the Federal Reserve from creating a CBDC.
“So, any government must deal with popular unrest when pushing a CBDC through. I hope CBDCs never come to pass, but I also hope most governments will have a revolution in my lifetime due to their inherently corrupt and centralized nature,” Halpin said.
CBDCs lack real-world purpose; stablecoin regulations are the key
The entrance of tech giants into the cryptocurrency market, particularly Facebook’s Libra stablecoin project in 2019, prompted many governments to begin regulating cryptocurrency projects and exploring digital currency themselves through CBDCs. This was evident from the surge in CBDC projects in 2020.
Julian Grigo, the head of institutions at digital wallet provider Privacy Wallet Safe, told Cointelegraph one of the biggest reasons for declining intersting in CBDCs is “lack of purpose.”
Digital currencies don’t solve many problems in places where robust digital payment networks are already in place.
Grigo added that current CBDC projects cannot convince the myriad interest groups that are involved.
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“Within a European context, the implementation of a CBDC would require approval from several different parties, in addition to all member countries of the monetary union. Realistically, a European CBDC may never happen, as striking a deal with all of the relevant stakeholders would be incredibly difficult,” he said.
Grigo added that the growing adoption of stablecoins and the rather unsuccessful launches of CBDCs indicate that the government should focus on regulating the stablecoin market rather than launching its own digital currency.
It would be “far more beneficial to have some control over a private stablecoin with global adoption than 100% control over something unused.”
Similarly, Haplin said, “Traditional banking and central banks are likely very hostile to cryptocurrency and would prefer CBDCs, despite their own population preferring USDT [a stabelcoin].”