Given that CBDCs will not be anonymous, there will be a record of all the movements. The platform and accounting system for these currencies will be centralized.
A report from seven central banks and the Bank for International Settlements warns of the risk of cryptocurrencies and the disadvantages of using cash. They propose a way in which they should design their central bank digital currencies (CBDCs).
According to these entities, it is risky that the populations of their countries adopt cryptocurrencies (specifically stablecoins) in significant amounts. They say that this “could limit the impact of the monetary policy or the ability to support financial stability.” This is because “the use of national fiat currencies would decrease.”
On the other hand, central bank digital currencies will have the necessary characteristics “to contribute to the aims of public policy of each central bank.”
The entities that sign the report, along with the Bank for International Settlements, are the central banks of Europe, Japan, Switzerland, Sweden, England, and the US Federal Reserve.
Principles and Characteristics of CBDCs
The report defines a CBDC as “a digital form of central bank money that is different from balances in traditional reserve or settlement accounts.” They add that these “digital payment instruments are denominated in the national unit of account, which the central bank is directly responsible for.”
Some principles that these digital currencies must comply with are: not compromising monetary or financial stability, coexisting with and complementing existing forms of money, and promoting innovation and efficiency.
The report also notes that CBDCs should have ease of use, low cost of production, convertibility, and continuous availability, among other characteristics.
CBDC as a Kind of State “PayPal”
These bank digital currencies will have neither the privacy nor the censorship resistance of Bitcoin and other cryptocurrencies. The report indicates that “a key characteristic of cash is that there are no centralized records of holdings or transactions,” as if it were something negative.
On the other hand, they say that central bank digital currencies will not make it plausible to have “total anonymity.” “There will be payment data for a CBDC and its system. A key question of national policy will be to decide who can access which parts and under what circumstances.”
The report clarifies that the accounting system of these currencies will not be decentralized either. They state that “blockchain-based systems can offer resilience benefits by replicating data on many more computers.” They add that “a centralized ledger could also do it with a smaller number of data centers.”
“There is a wide variety of mature cryptographic techniques flexible enough to be used in centralized ledgers.” They explain that “the operation of CBDCs might be similar to that of current payment systems and occurs in a 24/7/365 service.”
According to central banks, the main reason to advance this idea is “to provide a secure means of payment in tune with increasingly digitized lives.” In the report, they note that the use of cash has declined as digital payments are growing exponentially.
By Alexander Salazar