Cryptocurrency’s potential to undermine state-backed fiats is one of the most debated subjects among blockchain advocates. Although it is too early to have a clear answer to this issue, governments are deeply concerned. A proposed solution to the growing threat of cryptocurrency is for states to issue official alternatives. Supporters assert that these central bank digital currencies (CBDCs) could offer the benefits of crypto, yet not sacrifice the stability and security offered by central banks. However, CBDCs have shortcomings, and states are deeply divided over their issuance.
Earlier this week Saudi Arabia and the United Arab Emirates announced a joint project to create a CBDC. The currency, to be called the Aber, will initially be used for remittances between the two nations. The governments will slowly introduce it during its initial stage, and only make it available to select banks. The plan is for its use to gradually expand, giving the central banks time to explore and learn from the technology.
Conversely, South Korea’s central bank has just announced that it will not issue a CBDC in the near future. The Bank of Korea (BoK) has stated that there is presently no urgent need for such a currency, yet it will continue to research the subject. This move is notable because cryptocurrency is extremely popular among South Koreans, and more progressive moves into the crypto space by the government has been expected.
In December, the Swiss-based Bank for International Settlements reported that seventy percent of nations have researched CBDCs, yet only a handful have taken steps to issue them. This number is likely to increase, which will no doubt impact the crypto space. Importantly, if they are to become common a number of issues will need to be resolved, such as whether or not their technical structure should be standardized, and what their relationship will be to their fiat counterparts.
States may promote CBDCs as cryptocurrencies, but they are clearly intended to be different than traditional blockchain-based platforms such as Bitcoin. Notably, they will likely not be open source, nor will their nodes be permissionless. Also, they will almost certainly not be designed with fixed, immutable supplies nor will transactions be private. Simply put, they may be digital, but they will still carry all the characteristics of a centrally controlled fiat.
A key challenge for CBDCs is the fact that traditional currency is designed to be used within the borders of a nation. In fact, since the abandonment of the gold standard in the early 1970s, fiat currencies are valued entirely on the strength of their state economies. Cryptocurrency, on the other hand, is borderless and decentralized. It is this supranational design that gives blockchain assets such revolutionary potential. Thus, as merely digital versions of a centralized fiat, CBDCs cannot operate as viable alternatives to crypto. In fact, even if they were internationally used, they would still not contain features such as smart contracts and decentralized applications.
Nations that have shunned the issuance of CBDCs are no doubt influenced by these shortcomings. Also, even if these digital currencies succeed they are highly unlikely to replace decentralized crypto, which is clearly their intent. In a larger sense, the inability of nations to reach consensus over these digital currencies reflects how difficult it will be to regulate the blockchain revolution.
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