Adopting a central bank digital currency (CBDC) could have significant ramifications, and there is increasing debate and hostility among politicians, particularly in the US, regarding creating a CBDC. Republican politicians, who have shown relatively more support for cryptocurrencies, are becoming more opposed to a CBDC. For example, Florida's Republican governor, Ron DeSantis, recently banned the use of CBDCs in his state, and there have been similar moves in other states.
CBDCs differ from cryptocurrencies like Bitcoin and Ethereum in their philosophy and governance. While cryptocurrencies are decentralized and governed by the people, CBDCs would exist on a centralized LEDGER controlled by a small group of policymakers.
CBDCs can be categorized as maximalist or minimalist. Maximalist CBDCs are directly issued to the public through deposit accounts managed by the central bank. In contrast, minimalist CBDCs are issued to private sector intermediaries who distribute them to the public.
Maximalist CBDCs raise concerns about Orwellian consequences, as governments could quickly curtail economic freedoms and control transactions. The potential for political abuse is high, as demonstrated by recent regulatory actions in the private sector. Minimalist CBDCs, while potentially offering some safeguards through private sector ownership, would create a rent-seeking system where central banks and private banks could exert control over transactions and enforce policies without the need for court orders.
CBDCs lack many attributes that make cryptocurrencies exciting and revolutionary, such as immutability, privacy, transparency, decentralization, and scarcity.
Proponents of CBDCs argue that they could benefit unbanked individuals, improve the traceability of transactions to minimize criminal activity, and enhance cross-border payments. However, these arguments often focus on the potential benefits while disregarding the potential costs and risks associated with CBDCs.
Instead of launching a privacy-hostile digital dollar and igniting a political firestorm, it may be more effective to foster a widely accessible crypto ecosystem alongside existing modes of payment. The stablecoin market already addresses some of the issues faced by unbanked individuals and cross-border payments, and crypto companies have shown cooperation with law enforcement in combating criminal activity.
If a CBDC is to be created, it should be based on its own technical merits and allow alternative forms of payment, including cash and cryptocurrencies, to coexist. It should not be imposed on citizens, preserving their freedom of entry and exit from the system to protect against potential adverse outcomes.
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