Some would argue that CBDCs will negate the need for cryptocurrencies like bitcoin. After all, how many different digital currencies do we really need? But in fact, the opposite is true. The rise of CBDCs highlights the importance of decentralized cryptocurrencies that are relatively private and not controlled by any government.
While China’s digital currency is an impressive undertaking that could provide many benefits, such as ease and efficiency of payments, privacy is not one of them. On the contrary, the digital yuan will give the government greater visibility into the financial transactions of its citizens.
You might not have to provide ID to make small payments, Yaya Fanusie, deputy principal researcher at the Center for a New American Security, said in an interview. But “the government will be able to trace all transactions, in general, whether they are anonymized or not”.
China already has a very sophisticated mobile payment system, led by WeChat Pay and Alipay. Companies already collect a lot of private financial data, but the digital yuan will make that data even more accessible to the government. Fanusie said the Chinese government can already go to payment companies and get the data, but with the digital yuan they won’t need to take that extra step because they will already have direct access to that data. With the digital yuan, he said, “all they have to do is lift a finger. The data comes to them.”
CBDCs are not only traceable, they can also be programmable. After a natural disaster, for example, a government could send citizens digital money that could be spent on food and medicine, but not alcohol. This means that governments will have a greater ability to decide who has access to digital money. In China’s case, Fanusie said, “it will be easy for the central bank to deactivate any wallets they want to deactivate, due to political, crime control or other issues.”
Cryptocurrencies offer a fundamentally different approach. Bitcoin, the world’s leading cryptocurrency, was introduced after the 2008 financial crisis as a form of money that was meant to be independent of government or banking supervision. Bitcoin transactions are stored on a decentralized ledger known as the blockchain.
One of the main advantages of bitcoin is that no government can prevent you from sending or receiving it, and no government can shut down the network. Bitcoin is also a relatively private form of currency, in the sense that all you need to send and receive bitcoin is an address consisting of a string of numbers and letters. Some are attracted to cryptocurrencies simply because they believe that even perfectly legal transactions should have basic privacy protections.
Some crypto purists will argue that even bitcoin isn’t private enough because all bitcoin transactions are recorded on a publicly visible blockchain. Still, attaching a bitcoin address to a real person’s identity takes work: governments or spy agencies would have to spend a lot of time, skill, and effort on the task of analyzing blockchain data. . CBDCs like China’s, on the other hand, are designed to be traceable by the government.
China’s digital yuan could eventually become the country’s primary mode of payment. “Whether or not I adopt the digital renminbi is not for me to decide,” Victor Gao, a tenured professor at China’s Soochow University, said in an interview. “If I stay in China, if I stay a citizen of the world, I think this wave will hit me sooner or later. I can’t fight it, I can’t resist it without being buried by it.”
Other countries, including the United States, may not be able to resist the temptation to roll out their own CBDC. But government-backed digital currencies should not reign supreme. Other cryptocurrencies are needed to preserve an independent and relatively private form of digital currency in a world where transactions are becoming easier for governments to track and control.