Recently, there has been a strong interest in the concept of central bank digital currency (CBDC). China is actively piloting DCEP (the version of the digital renminbi), and some other famous central banks in the world (including the Federal Reserve and the European Central Bank) have also issued their opinions and comments on the implementation of CBDC. All this shows that central banks around the world are concerned about the pros and cons of providing universal central bank digital currencies.
According to a recent survey, about 80% of central banks are considering the implementation of CBDC, and more than half of central banks have already begun piloting CBDC.
Nowadays, cryptocurrencies (such as Ethereum and Bitcoin), as a new method of retail use case services, institutional hedging, and computing resources, have withstood the test of the market economy, and CBDC has emerged at this critical moment. During COVID-19, the economy is undergoing a fundamental reshaping, and the next major change is the digital retail currency supported by central banks.
With the rise of cryptocurrency, any new CBDC will naturally be compared with the standard. However, in many important ways, many CBDC implementation proposals are contrary to the principles of cryptocurrency. In fact, one of the most basic reasons for supporting the adoption of cryptocurrencies is that cryptocurrencies can act as a hedge for those who do not want to be forced to use digital alternatives to cash supported by the central bank.
The first and most important difference is that cryptocurrency is supported by a network of participating nodes distributed around the world , while the central bank has a centralized goal, which is to formulate public policies for a country or at most a group of countries. This is the key difference.
All of these central banks tend to focus on employment and ignore changes in wage inflation. To a large extent, this was the case during the COVID-19 period. While the European Central Bank and the Federal Reserve are racing to relax their restrictions on inflation, they are committed to “full employment” in their countries.
Second, the concept of privacy and self-protection of CBDC will not be inherently respected like cryptocurrencies . The central bank has close ties with tax authorities that enforce anti-money laundering regulations. The relationship between them is similar to that between police and prosecutors, or between different departments of universities. The key policy issue facing the CBDC that is being established in accordance with tax authorities is who can access the data, not whether the data should exist.
It is not difficult to find that the metadata that is forcibly attached to each CBDC transaction will be disclosed to certain institutions . In fact, only cryptocurrency allows you to conduct cross-border transactions without being restricted by the regulatory system of a certain country or another country, and enables you to have the right to control your own data.
The default assumption is that people who use privacy protection technologies may also commit criminal activities (the US Department of Justice recently pointed out). In addition, while many countries have recently advocated limiting end-to-end encryption activities, they are also constantly advancing the central bank’s digital currency process. These actions should make people stop and think about the government’s loyalty to privacy protection and people’s ability to conduct financial transactions in the way they choose.
Finally, another important point is that cryptocurrencies are relatively well-tested . Including attacks on the underlying system under a variety of attack surfaces, such as exchange vulnerabilities, self-custodial and identification problems of wallet addresses after reuse, and the possibility of chain-level attacks (such as 51% attacks). attack.
In addition, the impressive fact is that the cryptocurrency systems have reached their existing scale , because there is no other “arms” support behind cryptocurrencies. On the contrary, under the approval of the country, the central bank’s digital currency has a larger “attack surface.” Although the protection of banknotes has been repeated for centuries, attacks from competing national opponents and profit-driven hackers, focusing on network security, will be very violent.
Governments will face a series of attacks almost simultaneously, instead of evolving incentive mechanisms in a game-theoretic way. At the same time, however, the practice of giving legality and trust to digital currencies may still be undesirable . After all, as the large-scale hacking attacks have shown, states are facing tremendous difficulties in protecting key information about internal employees and key services such as election servers or politically sensitive email inboxes, plus funding and Financial flow will increase the possibility of government negligence.
With the rise of cryptocurrencies and central bank digital currencies, linking the two can be extremely attractive. However, it should be emphasized that there are some important and key essential differences between the two. Some people believe that the creation of central bank digital currency is related to the success of cryptocurrency, but in fact, the relationship between the two is more about competition than cooperation . On the contrary, the inevitable creation and issuance of central bank digital currency is a key reason for the existence of cryptocurrency, because it is not only a financial hedge, but also a technical hedge.
Original author: Roger Huang
Original link: https://www.forbes.com/sites/rogerhuang/2020/10/13/central-bank-digital-currencies-are-not-cryptocurrencies/#1c6c0aa327a3
