Central bank digital currencies (CBDC) have received quite a bit of attention in recent years, sparking a fierce debate about the benefits and possible drawbacks of the technology.
A digital form of a country’s fiat currency, CBDCs are centralized and backed by a nation’s central bank. In contrast, cryptocurrencies like Bitcoin (BTC) are decentralized and not controlled by any major authority.
Advocates of CBDCs say they could potentially improve payment efficiency and expand financial inclusion for populations with limited access to the financial system. At the same time, critics argue they have the potential to infringe on privacy and open up new avenues of government corruption, among other concerns.
Kadan Stadelmann, chief technology officer of blockchain platform Komodo, believes concerns around CBDCs are warranted. He says the tech opens up avenues for abuse and surveillance, providing governments with unprecedented access to individuals’ financial transactions.
Speaking to Cointelegraph, Stadelmann said if implemented as a country’s primary currency, CBDCs also carry a higher risk of hacking attempts and other malicious activities that could undermine financial systems globally.
According to Stadelmann, if the world wants a digital currency, there is already a viable alternative with none of the concerns plaguing CBDCs.
“CBDCs have no principles of decentralization; Bitcoin is the better alternative to CBDCs, as pioneered by El Salvador,” he said, adding:
“No one can shut you out of Bitcoin and other decentralized, blockchain-based cryptocurrencies. Bitcoin is the opposite of CBDCs. That’s what the world needs now, as El Salvador is showing.”
Nayib Bukele, the BTC-loving president of El Salvador, made the digital currency legal tender in September 2021, becoming the first country in the world to do so. As of 2024, the only other country in the world with BTC as legal tender is the Central African Republic, which followed El Salvador’s lead in 2022.
In contrast, according to the Human Rights Foundation, which unveiled a CBDC tracker in November 2023, out of 193 existing governments worldwide, 16 have deployed a working CBDC to the public. Just 39 have built a pilot, and 64 are still in the research phase.
Stadelmann believes that regardless of which camp you fall into, advocate or critic, it’s essential to “think critically and imagine the ways in which such systems have been abused and are possibly being abused.”
“Isn’t a CBDC really just a continuation of the old fiat system, which allows for endless war? They could usher in an era of government control and surveillance over financial transactions, jeopardizing user privacy and autonomy,” he said.
“Nevertheless, living our lives in fear will not bring about a more peaceful financial system. Rather dreaming wildly and innovating will,” Stadelmann added.
CBDCs are a seal of approval for crypto
Some proposed CBDCs could operate using blockchain technology, allowing for near-instant transfers. The associated ledger automatically tracks all payments made across the network.
Peter Alfred-Adekeye, the founder and CEO of social e-commerce platform Boom Market, believes that governments using the underlying crypto tech in CBDCs could be a positive.
“Governments adopting CBDCs is a seal of approval and a win for the underlying technology of crypto and for the environment because we won’t be needing to print cash anymore,” he told Cointelegraph.
Related: Is a US stablecoin bill just around the corner?
“However, the fear with CBDCs lies in the fact that they are non-transparent programmable money, centralized under government control, and prone to seizure unlike never before,” Alfred-Adekeye added.
Alfred-Adekeye further claimed there is potential for corrupt individuals in power to exploit the unlimited supply nature of CBDCs to mint and move around illegally obtained wealth.
A ruling party in government could also freeze the wallet of the opposition just before elections, limiting their chances of victory.
There is already a massive push from banks in the traditional finance sector to go entirely online and digital. According to online data gathering platform Statista, at least 216 million Americans will use digital banking by 2025.
Alfred-Adekeye says if CBDCs are going to be adopted en masse in the future as part of this digital push, safeguards must be in place to avoid all the worst-case scenarios.
In his view, because CBDCs run on non-transparent centralized private blockchains that are not open to public verification, much like centralized crypto exchanges that are also black boxes, it is not a good idea to have them as the sole medium of value exchange in societies.
“A two-state solution where government-controlled CBDCs co-exist with non-government controlled seizure-resistant, open and decentralized tokenized fiat and other real-world assets is a better solution,” he said.
“This way, everyone would be able to hedge their bets across both infrastructures. To allay the fears of the masses, CBDCs should be subjected to regulatory standards and independent third-party audits too.”
Underlying tech with CBDCs isn’t the issue
At the moment, public opinion on CBDCs appears to be mixed. A 2023 Cato Institute National Survey found only 16% of Americans support adopting a CBDC.
Around 34% were firmly opposed, and 49% had no opinion at all. Overall, the 2,000 Americans surveyed were more concerned about CBDC’s risks than enthusiastic about the possible benefits.
Speaking to Cointelegraph, Sebastien Davies, vice president of research at crypto financial service platform Aquanow, thinks some of the opposition to CBDCs is not so much about the technology itself but rather about its potential for misuse.
“The centralization of CBDCs is a significant departure from the foundational principles of most democracies, which were designed to limit central control of the government,” he said.
However, if CBDCs were designed with strong privacy protections and limits on government control, Davies thinks “some fears might be alleviated.”
In his opinion, any development of CBDCs should be accompanied by comprehensive regulatory frameworks that safeguard privacy and limit potential government overreach.
Related: Philippines to launch non-blockchain CBDC in two years
“A CBDC which exists as programmable money between a country’s large financial institutions has the potential to unlock the power of blockchain technology while limiting the risk of excessive surveillance,” Davies said.
“In theory, the mass adoption of CBDCs could bring about significant benefits, such as enhanced efficiency in financial transactions and greater financial inclusion.”
However, Davies thinks there’s too much of a risk to privacy infringement and civil freedom in practice. Instead, he thinks a hybrid model could be a better solution, where wholesale CBDCs coexist with private digital currencies and traditional cash could provide a balanced approach, combining efficiency with financial autonomy.
“While innovations like programmable money and smart contracts associated with CBDCs could offer significant benefits, they also require careful consideration to avoid negative consequences,” he said.
CBDC debate making everyone uneasy
There is an ongoing debate around CBDCs, with both those in the crypto space and traditional finance world uneasy about the digital currency. As the 2024 United States presidential election approaches, several candidates have even vowed to ban CBDCs if elected.
Lucas Kiely, chief investment officer at crypto trading platform Yield App, says the crypto-native crowd fears the erosion of privacy and personal freedoms that CBDCs represent.
On the other hand, Kiely thinks those firmly embedded in traditional finance fear that CBDCs could disrupt existing financial systems and even cause economic instability and exclude certain parts of the population, for example, by eliminating cash.
“In general, there always needs to be a privacy option with currency, whether it’s with cash or decentralized finance, and when this privacy option is taken away, it generates fears and mistrust,” he said, adding:
“We also currently don’t have much information on how CBDCs will function in practice, which adds fuel to the fire.”
Other questions Kiely thinks still need to be answered about CBDCs are how they will fit into traditional banking systems, whether depositors will choose CBDC accounts over conventional banking accounts and what the possible impact on liquidity and lending capabilities would be.
“Until all these questions are answered, we will continue to see fear and resistance from both camps,” he said.
In his opinion, a middle ground needs to be sought between the crypto crowd and the traditional finance industry. At this stage, he thinks if crypto wants to achieve mass adoption, governments and regulators will want some form of control over the space.
Related: India to look at offline solutions to aid CBDC adoption in rural areas
“We need to find a middle ground, and CBDCs may well provide this. They certainly represent a double-edged sword, but they could also be a gateway to the rest of the crypto market,” he said.
“If governments are afforded more control over digital currencies, we could see the emergence of regulatory policies that better reflect the requirements and risks of blockchain technology, for example.”
Overall, though, Kiely believes that until we have more clarity and details around the implementation of a CBDC, it’s tough to assess their potential positive or negative impact outside of speculation.