Cryptocurrencies vs. CBDC – Central Bank Digital Currencies
Googling CBDCs, the digital currencies issued by Central Banks, you can find many titles but little content. And, beyond the slogans, there is a reason. In fact, digital currencies issued by Central Banks risk creating many more problems than they can solve. One of all: why should one keep one’s money in a traditional bank when one could keep it at a (much safer, by definition) Central Bank in the form of CBDC (digital Eur, Usd, GBP etc.)? Obviously, with all the consequences for the banking system?
But let’s see a feature of cryptocurrencies vs. the CBDCs, indeed little considered outside the initiatic circle. All the main cryptocurrencies, in various titles and with different methods, are deflationary (or very slightly inflationary), in the sense that the relative monetary base decreases over time, according to the rules codified in the algorithm. And as we know, the algorithm can only be changed with the consent of the majority of the blockchain. For example, to change the Bitcoin algorithm today, the consensus of at least 5000 nodes would be needed. And then, beyond the algorithm, what actually makes cryptocurrencies deflationary is the phenomenon of lost cryptocurrencies, i.e., those relating to lost private keys. Beware that crypto are different from normal currencies (fiat). When you destroy a physical banknote, the Central Bank prints another one. With crypto, it is different. When a Bitcoin, or other crypto, is lost, it is lost for good, with no possibility of recovery and is subtracted from the monetary base of that crypto. One question: how many holders bother to pass their private keys to the heirs? Beware that with the passing of the holder (especially if hodler), even the cryptocurrencies risk passing away, without any possibility of recovery.
But instead, the CBDCs? Obviously the blockchain is not distributed, at least as far as known from the few concepts available. What if they decide to do digital quantitative easing on the basis of some whatever it takes from the guru on duty? They would have every opportunity to put it into practice. The Central Bank (the ECB in the case of a hypothetical Digital Euro) would govern the algorithm and the blockchain. Just intervene on a line of code of the algorithm and the game is done.
Is there to be trusted?