Today, the only way for the general public to hold central bank money is to hold it in paper form. If someone decided to digitize this holding, they would be forced to convert central bank liabilities into commercial bank liabilities by depositing cash in a bank. However, in an era where the entire global financial system has been digitized, bank bills seem like an anachronism.
In response to this compelling realization, many central banks have begun to roll out central bank digital currency (CBDC) prototypes and other proofs of concept. Economically, this concept has the potential to usher in a new era of efficiency and accelerated growth for the economies that adopt it. This currency, free of credit and liquidity risk, would improve cross-border payments, financial inclusion and, most importantly, empower a country to implement more effective monetary policies. In the right hands, this would translate into more stability, growth and controlled inflation.
However, as the contours of a CBDC implementation become clearer, the debate surrounding them intensifies. First, from a security perspective, the stakes are far too high to leave room for the possibility of hacking, which is not an easy task given the potential resources deployed by enemies to destabilize them. Then, from a more philosophical point of view, there is the potential for abuse of power induced by this technology, as well as the increasing influence that central banks would obtain from it. Indeed, we have already seen the consequences of central banks' ideological and monetary experiments following the Covid pandemic, which, combined with a period of recession, affect the stability of the current financial system, and this with a magnitude that would certainly be even greater if these policies had been implemented with CBDCs. Finally, the privacy offered by paper money would disappear completely, and only the health of a society and its political system would serve as a bulwark against abuse. But considering how Western societies have been inspired by the Chinese model to manage the last pandemic, one can reasonably fear that the temptation to do so when using CBDCs would be too great. At the same time, China has made no secret of its ambitions to incorporate CBDCs into its total surveillance system.
In response, since 2017 several academics and members of the cryptosphere have proposed a Central Bank CryptoCurrency (CBCC), with the goal of centralizing control of the currency's supply while maintaining the decentralized transactional aspect.
If this currency followed the privacy principles of Monero or Zcash, or simply the anonymity of bitcoin, it would immediately solve the privacy problem, as even currencies like Monero and Zcash can be verified by a certain type of key that, when shared with the authorities, allows them to decrypt a user's history. Moreover, before it became the norm of the libertarian culture and movement, decentralization was a principle of security. Strength in numbers, securing the transactional aspect of the currency while increasing trust in it. And as the crypto-currency model already exists, building on what has already been developed in this area would allow institutions with limited resources or time to not fall behind and enter this new era along with others. Finally, this concept could be the final step towards widespread adoption of crypto-currencies, which are currently unable to support a modern, competitive economy, with the financial tools provided by a central bank offering a decisive advantage over them. Especially since no experiments with algorithmic central banks or DAO central bank currencies have been tested yet.
In conclusion, the CBDC race is accelerating, and there will likely be a wide range of models developed. A model based on today's crypto-currencies could be one of those solutions, and exist as a compromise between the economic and regulatory incentives of central banks and the security and privacy concerns of citizens.