In just under three months, Beijing will capture the world's attention as the city hosts the 2022 Winter Olympic Games. China is leaning upon the talented 17-year-old skiing sensation, Eileen Gu, to win Gold following her stunning success at last year's Winter X Games. The People's Republic of China will simultaneously capture the world's attention with the global debut of their Central Bank Digital Currency (CBDC), the e-yuan. The Central Bank of China plans to expand the technology to an international scale and will supply tourists with access to digital wallets.
While China did not begin public trials of the e-yuan until May 2020, digital payment is far from new to China. Private platforms, such as Alipay and WeChat Pay have been widely popular since the early 2010's. In 2020, 852 million Chinese citizens, or approximately 60% of the population, exchanged currency on a private digital platform. Adoption of the e-yuan has grown exponentially as the government incentivized public adoption through lotteries and 0% transaction fees, compared to the 0.6% service fees on platforms like Alipay. To date, 34.5 billion e-yuan has been spent and over 140 million Chinese citizens have opened digital wallets.
The success of the e-yuan has caught the attention of central banks across the world, including the Federal Reserve System. According to the Bank for International Settlements, the dollar accounts for 88% of all forex transactions. The digital yuan poses a threat to the dollar's leading role in global trade due to the lower transaction fees, the reduced dependency on cash, and the faster transaction times inherent in digital currency. A transition to the e-yuan, or to other forms of digital currency, would lead to an erosion in demand for U.S dollar-backed assets and thus a devaluation of the U.S dollar. In response, Fed Chair Jerome Powell said the US Federal Reserve is "working proactively to evaluate whether to issue a CBDC, and if so in what form."
The positive case for a US CBDC is straightforward: it would allow the government to more easily enact financial policy, it would streamline inefficiencies in our current payment system, and it would preserve the value of the U.S dollar. Rather than the traditional model of private banks, credit card companies, and payment processors, a digital dollar would rely on a single ledger that will record all transactions. In theory, American citizens would have Federal accounts in which currency is distributed all within a centralized system. A digital dollar could dramatically reduce the delays and fees that come with our current payment system and cut down on the barriers that leave 7.1 million Americans unbanked today. Furthermore, a digital dollar would allow the Fed to instantaneously enact financial policy, such as distributing stimulus directly to accounts.
It is precisely this centralized structure that makes CBDCs so dangerous both in exposure to cybersecurity threats and in their potential use to create a dystopian society. Unlike cryptocurrencies which rely on blockchains to develop the integrity of a decentralized protocol, CBDCs are hosted within a single database which exposes them to cyberthreats. The blockchain exists synchronously in multiple locations called nodes, which are individual computers that track, synchronize, and constantly update the network with new transactions. Additions and manipulations to the blockchain require that the majority of the nodes in the network reach a level of consensus and verify a change before it is valid. This implies that a malicious actor can only manipulate the ledger if they control the majority of the mining power, a mathematically and economically infeasible event. This is critical because it makes attacking the blockchain extremely difficult if not impossible.
The centralized structure of CBDCs would require the highest levels of cybersecurity to protect extremely sensitive data that connects citizens to their financials. The tremendous incentive to attack would likely result in an eventual data breach. To date, the government has struggled to secure sensitive data and according to CNN, "key agencies across the federal government continue to fail to meet basic cybersecurity standards" and an August 2021 Senate report, "found systematic failures to safeguard data."
Furthermore, centralized currencies provide governments with complete visibility into their citizens' financial activity and the ability to directly control the economy. Not only could central banks impose negative interest rates, but since digital tokens will be minted directly onto a centralized platform, central banks would be able to directly control the flow of money. A frightening hypothesis is that a centralized ledger will lead to "financial snooping" similar to the misuse of personal data witnessed within big tech firms, only worse. China could implement financial data into its social credit system. Currently, the People's Republic of China "monitors and assesses" the behavior of citizens to establish a system of rewarding/punishing certain behaviors. According to a 2019 report, China denied "26 million air tickets and 6 million high-speed rail tickets to people with 'unacceptable ratings." The digital yuan supplies the data for the inclusion of factors such as timing on tax payments and contributions to political/charitable institutions into its social ranking system. With the implementation of the digital yuan, Xi Jinping appears to have one clear goal: more control over the people. Moreover, the centralization of CBDCs implies that governments will have the ability to completely blacklist an account from receiving/sending payments. In contrast, blockchains are entirely open, public, and censorship resistant. This means that all transaction history is public information. Anyone on the network can visualize each other's transaction activity; however, through pseudonyms, blockchains are able to support individual anonymity.
The irony in all of this is that the exact problems that motivated developers to create Bitcoin, Ethereum, Cardano, and other forms of cryptocurrency are intensified with Central Bank Digital Currencies. Cryptocurrencies offer user autonomy, data security, and protection against inflation. The inherent flaws of CBDCs pose a major threat to the global power hierarchy, individual autonomy, and personal security. I believe that if central banks across the world continue to pursue CBDC implementation, we will see mass adoption and further legitimization of cryptocurrencies. As more people become aware of the pitfalls of both traditional and digital centralized currencies, the value proposition of decentralized currencies will become increasingly clear. Cryptocurrencies, such as Bitcoin, offer an effective alternative to the dollar in global trade. Analysts at Citibank suggest that "bitcoin may be optimally positioned to become the preferred currency for global trade," specifically citing that Bitcoin is "immune from both fiscal and monetary policy, avoids the need for cross-border foreign exchange (FX) transactions, enables near instantaneous payments, and eliminates concerns about defaults or cancellations." Lastly, the emergence of DeFi lending platforms is supplying increased competition to traditional banking systems. The industry grew 14x in 2020 alone and is valued at roughly $81.85B.