Central bank digital currencies, or CBDCs,represent the ultimate ratification of digital finance: Its adoption by the most venerated guardians of the international monetary architecture.
Why it matters: Crypto-evangelists often talk about CBDCs in awed terms. But it's far from clear that the bitcoin-and-ethereum crowd would ultimately benefit from money going digital.
How it works: The country with by far the most advanced digital currency is China — but eCNY, as the Chinese digital currency is known, is pretty much the exact opposite of bitcoin and everything it stands for.
- It doesn't use blockchain technology. Instead, the ledger of who owns what is closely held at the Chinese central bank — and nowhere else.
- While bitcoin is based on zero trust, eCNY requires full trust of the Chinese monetary authorities. If it goes global, then China will at all times know exactly how much of its currency you possess — and could zero you out for any or no reason.
- While bitcoin is a deflationary currency designed to increase in value over time, eCNY is an inflationary currency designed to decrease in value over time. In fact, in its current incarnation, it expires worthless if it isn't spent within a few weeks.
The big picture: eCNY is an attempt by China to move toward a monetary and payments system wherein the Communist Party can have full visibility into, and control over, citizens' financial lives.
- Other CBDCs won't necessarily go that far. But the ability to keep track of all transactions is part of why they're attractive to central banks that are losing the global war on money laundering.
- CBDCs are also attractive to central banks precisely because if they're set up so that they can expire or lose their value over time, that would act as an incentive to spend, in countries that are struggling to reach their target inflation rates.
The bottom line: The power of central banks, both as issuers of currency and as financial regulators, is easily great enough to ensure that CBDC architecture replaces whatever nascent technologies are currently being built in the crypto space.
- If that happens, then cryptocurrencies would become little more than digital collectibles — a store of value, perhaps, but one with no real transformative potential.