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| By Jurica Dujmovic |
As the world rapidly moves toward the adoption of central bank digital currencies, it is essential to understand the dangers of CBDCs, as well as alternatives.
Joining me this week is Andrew Saks, the senior executive at The People's SCE, along with Stefan Rust, the former CEO of bitcoin.com and CEO of independent inflation data aggregator Truflation.
Together, we discussed the potential consequences of this transition and some substitutes that can offer the same functionality while preserving the key advantages of cryptocurrencies — namely decentralization, privacy and financial freedom.
Andrew Saks started the conversation, explaining that central banks around the world have been preparing for years to launch a fully digital version of their own sovereign currency. For example, the digital pound, digital euro and even the digital yuan have been in the works for some time now.
Although CBDCs are still a work in progress, there are two common misconceptions about them. Specifically, CBDCs are often linked to crypto … but they could not be any more different.
To be clear:
1. CBDCs are not a form of cryptocurrency.
2. CBDCs do not provide more financial freedom to their users.
This is because CBDCs are still centralized and under the authority of central governments.
In fact, Andrew stated that “CBDCs will be the polar opposite of proper, decentralized cryptocurrencies.” While decentralization empowers people, CBDCs will do the opposite, because they are centralized.
He highlighted the potential threat of the Chinese social credit system as an example. This system is based on the establishment of a record that tracks and evaluates the trustworthiness of businesses, individuals and government institutions.
He explained that this system is currently mainly focused on businesses and is very fragmented, contrary to the popular misconception that it is focused on individuals.
“It is also the framework for ensuring complete compliance with consequences for those who do not do exactly as they are told,” he added.
This has led to the concern that the unveiling of a digital yuan may be used as a method of enforcement by the state.
Small to medium-sized businesses in Europe and North America have already faced tremendous challenges recently. If CDBCs are introduced, the public’s opinion on questionable directives and regulations may no longer be heard.
Now, the beauty of blockchain is that it is an open distributed ledger, where anybody can participate and provide validation or mining services to that specific chain and its token.
In this decentralized system, ordinary people can be stakeholders in the technology, allowing them to have a say in governance.
While decentralization grants this type of freedom, centralization can take it away.
That’s exactly why Stefan Rust warned that CBDCs can be utilized as a tool to control citizens. If a country were to only allow its citizens to be paid through a CBDC, it would be able to track, monitor and control exactly how, when and where it is spent.
If this seems far-fetched, it has already happened. This was seen in a recent trial in Shanghai where citizens were given a strict time limit within which to spend their hard-earned wages.
He further highlighted the fact that CBDCs do not solve the issue of inflation, as citizens of every country are at the whim of their governments’ monetary policies when it comes to trying to preserve the value of their earnings.
So, why would anyone consider buying or using a CBDC?
Because of its stability. By being regulated by a central bank, that asset would be more comparable to the dollar rather than Bitcoin and less susceptible to the often large peaks and valleys of crypto prices.
Stefan suggests that there is a type of true cryptos that has become an increasingly attractive alternative to centralized CBDCs while still offering more stability than most other cryptos.
And no, he’s not talking about stablecoins. While they are protective against volatile price swings, they aren’t protected against depreciation of its pegged asset.
A stablecoin pegged to the U.S. dollar will still depreciate alongside the value of the dollar itself, even if the peg holds.
This is where Stefan believes “flatcoins” could shine.
Flatcoins are a new category of stablecoins that are pegged to the cost of living instead of real-world assets such as fiat currencies.
A flatcoin has been frequently discussed by crypto founders like Brian Armstrong, Balaji S. Srinivasan and Vitalik Buterin, who have commented that crypto should prepare to depeg from overreliance on any one fiat asset to reduce concentration and regulatory risks.
Stefan pointed to Nuon, calling it the world’s first independent flatcoin. He also highlighted $SPOT and $FPI stablecoins as examples of this, explaining that these represent a stable crypto asset not linked to a depreciating fiat currency.
Andrew had a different alternative to CBDCs — eCredits (ECS, Unrated), which, in his words, offers a fairer system by rewarding consumers and merchants while also empowering local economies.
The decentralized eCredits blockchain was designed to establish a more democratic system of transactions. In this system, merchants take over the role of the middleman and enable faster, more efficient ways of doing business.
Furthermore, The People’s SCE — the decentralized organization that supports eCredits — provides all members with one vote per initiative, creating a democratic and inclusive ecosystem for everyone, erasing a main concern of CBDCs.
The days of physical currencies are slowly coming to an end. Digitization is the future. And it’s imperative that we have true cryptos that can offer more stability, combat inflation and allow holders to maintain financial independence.
Whether that ends up being a flatcoin, a project such as ECS or a yet unknown option, no one can say for sure.
But what we can say is that CBDCs won’t be the solution we recommend.
In your opinion, which cryptocurrency is the best alternative to CBDCs? Let us know by tweeting @WeissCrypto!
Best,
Jurica
