CBDCs vs. Cryptocurrencies: Privacy and Control at Stake

These days, there’s an acronym increasingly popular worldwide: CBDCs. Maybe your own country has announced plans to research it or to issue its own “CBDC” / Central Bank Digital Currency. To make it simple, it’s exactly what the name suggests: a digital currency issued by a central bank. But maybe that doesn’t say a lot, right? Perhaps, to some people, it may even sound like a cryptocurrency created by a central bank in some nations. And it’s not that at all.

If we were talking about mere technical aspects, certainly some CBDCs would fall into the “cryptocurrency” definition. Digital coins that are built with cryptography and maybe also Distributed Ledger Technology (DLT). Money that can be handled independently through an app designed to be sent and received worldwide. However, cryptocurrencies were never about the mere technical aspects.

From Bitcoin, the first-ever cryptocurrency, to the whole and big crypto industry today, they were created to be decentralized money. That means no control, surveillance, censorship, or restriction on your own money by government titans and private financial entities. That’s the raison d'etre of real cryptocurrencies.  Meanwhile, CBDCs have a completely different agenda by being, indeed, fully controlled by governments and financial entities. Let’s dive a bit into this polemical topic.

Countries and Features

As of November 2023, according to the Atlantic Council, “130 countries, representing 98 percent of global GDP, are exploring a CBDC.” Which means the investigation or creation of their own CBDC with different purposes and features. From all of them, only 11 jurisdictions across the globe have managed to issue a functional CBDC already. Surprisingly enough, none of them is China, now famous precisely for that initiative (yet in the pilot phase).

The Bahamas was the first one, issuing the__Sand Dollar__ in 2020. In technical terms, this is a customized token built on a private DLT created by the company NZIA Limited. It can be used nationwide like any other payment method (like the Bahamian Dollar itself) through a mobile app (Android or iOS) or with a physical card. That’s after the KYC (identification) process, of course. The Sand Dollar isn’t anonymous at all, and none of the CBDCs are meant to be.

Changchun Mu, the Director-General of the Digital Currency Institute at the People’s Bank of China (PBC), published a report talking about it in 2022. It focused on the e-CNY privacy features, which is China’s CBDC. They call their privacy features “managed anonymity,” claiming that they’d never peek into the users’ transactions unless necessary. Unless they find some “suspicious” transactions. The concept of “suspicious” is never cleared, though, and they continue by implying that the funds could be, ultimately, frozen and seized by authorities.

So, CBDCs seem like a handy payment method, still strictly national (because of laws around international transactions) and not anonymous. Controllable. Also, surrounded by some alarming conspiracy theories.

CBDCs Harsh Criticism

“Why do we need CBDCs in the first place?” the people may wonder. Cryptocurrencies offer, among other things, decentralization and international payments, while current CBDCs offer none of it. The European Central Bank (ECB), another institution preparing a CBDC (the digital euro), delivered this answer:

“A digital euro would make people’s lives easier by providing something that does not currently exist: a digital means of payment universally accepted throughout the euro area, for payments in shops, online or from person to person. Like cash, a digital euro would be risk-free, widely accessible, user-friendly, and free for basic use.”

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Exactly, like cash. Even in China, governments are insisting that CBDCs are not meant to replace the truly private and good old cash, but only to be an online complement. The problem is that, in the process, all transactions will be recorded and kept by the government. They, in theory, could do whatever they want with them. They could use that knowledge and that level of control to serve their own agenda. For the “greater good” —yes, like a supervillain.

What could governments do with a CBDC in action?

The Libertarian CATO Institute has proposed some ideas of what might happen with a CBDC used with dubious intentions, just hypothetically. CBDCs could usher in a new era of government control over citizens' financial activities, presenting various risks. The direct link between individuals and the government could facilitate swift asset freezing or seizure, impacting social participation.

Negative interest rates, a novel concept with CBDCs aiming to stimulate spending, might lead to financial losses for individuals. This would mean that central banks would be able to take money out of people’s accounts to serve their own purposes. Moreover, the configurable nature of CBDCs raises fears of restrictive policies, limiting what people can purchase and own. This could extend to curbing certain behaviors, such as restricting alcohol purchases or, in the extreme case of dictatorial governments, even food purchases if you’re against them.

Beyond individual concerns, CBDCs pose threats to the broader financial landscape, potentially reducing credit availability, challenging traditional banks, and countering the rise of more secure and decentralized cryptocurrencies. Indeed, regarding security, the central storage of financial information in CBDC systems increases the vulnerability to cyberattacks and serious data breaches. The whole landscape and potential risks just don’t look good.

A Comparison with Crypto

CBDCs and cryptocurrencies diverge fundamentally in their operational principles. A CBDC is a direct liability of the central bank, establishing a digital tether between citizens and the government. This model raises concerns about privacy and freedom with few benefits.

Among those benefits is the fact that CBDCs would be more “secure” than money in a private bank. Since it's a direct liability of the central bank, not of a commercial bank, there would be no risk of losing your savings if the commercial bank goes bankrupt. The latter scenario almost happened recently, indeed, with the Silicon Valley Bank (SVB) in the United States.

On the other hand, cryptocurrencies are decentralized digital currencies facilitated by private and distributed actors in the market. They operate without a central authority. Bitcoin and Obyte, for instance, allow users the freedom to transact without requiring permission from any government or entity (except miners in the case of Bitcoin). They’re also programmable money (with additional features), without affecting user control.

The core difference lies, indeed, in the concept of control. CBDCs grant the government unprecedented control over citizens' financial activities. Cryptocurrencies, being decentralized, lack a central authority that can filter or cancel transactions, providing users with autonomy over their funds and financial activities.

The supply and, therefore, the price are also quite different. CBDCs, meant to be limitless and pegged to the “original” currency, could lose value over time due to inflation. For their part, cryptocurrencies tend to be designed with a fixed supply to avoid inflation and, depending on the market demand, increase or stabilize their price over time. Of course, this also implies a lot of volatility issues in the middle but a major level of user control.

As we also mentioned earlier, security is also a concern. Cryptocurrencies run on numerous, equally-treated nodes worldwide, while CBDCs would be fully controlled by one entity, so they'd have a single point of failure. They’d be vulnerable to more cyberattacks this way.

In essence, CBDCs and cryptos represent opposing approaches to the concept of digital currency, one centralized and government-controlled, the other decentralized and market-driven. We can say that regulated coins like these could offer their advantages too (user-friendliness, centralized services, credit points, etc.), but not without the price of at least some of your liberties.

Is your money really yours?

We were talking about CBDCs and their potential risks, but if you want to preserve full control over your funds in a decentralized manner, you should always ask yourself if your money is really yours —no matter the storage or payment method.

Some questions could help you to define that: could your funds be frozen, seized, or restricted by an intermediary? If you wanted to move that money from one account to another, could you do it easily, without paperwork, even if it’s a large amount? Is someone, institutional or not, checking and reporting your transactions? Can you do whatever you want with your money without permission?

Cryptocurrencies, just by offering you a simple private key (some secret words), offer all the liberties that CBDCs and traditional money can’t. By using them correctly, you can avoid censorship, external control, and limits (of space, time, and amounts). The only thing you must do is secure your private keys, something not always offered by crypto exchanges and other centralized crypto services, by the way. Remember this motto: not your keys? Not your coins.

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