What to know about CBDCs—and what to be wary about

With elections both planned and less so taking place throughout 2024, billions around the globe are being asked to consider both national and international issues. While discussions about domestic reforms and involvement in various armed conflicts aren't surprising, more and more governments around the globe are also addressing a topic very close to the heart of the crypto space: central bank digital currencies, or CBDCs. Many politicians are using CBDCs as talking points that signal their broad support for crypto projects, but the reality is that CBDCs and Bitcoin couldn't be more different. We're here to share what CBDCs are, what their future might be, and why you should step into the voting booth (or just log in to your crypto wallet) with a healthy amount of skepticism about them.

What are CBDCs?

As we said, CBDC stands for central bank digital currency. The US Federal Reserve, the central bank of the United States has a whole paper about CBDCs (warning: PDF!) that defines these as a "digital liability of a central bank that is widely available to the general public. In this respect, it is analogous to a digital form of paper money." So at its simplest, a CBDC would just be fiat currency—dollars or euros or Czech crowns or Swiss francs—that exists and spends exactly as it already does, except without the added step of printing them out on fancy paper or stamping them on coins. Put another way, CBDCs are just stablecoins, but with the added stability of being fully backed and endorsed by the power of the government.

What's the point of CBDCs?

So this all sounds pretty legit. It even seems like the logical next step in the evolution of money: most of us bank exclusively online, many of us use debit cards or payment apps for most transactions, and a long list of countries are trying to go cashless, so why waste the time,  resources, and added steps to produce banknotes? This is certainly the line of thinking that government-backed banks would like you to agree with. Again from the Federal Reserve's white paper: 

CBDC would enable the general public to make digital payments. As a liability of the Federal Reserve, however, a CBDC would not require mechanisms like deposit insurance to maintain public confidence, nor would a CBDC depend on backing by an underlying asset pool to maintain its value. A CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk.

To put a finer point on things, the argument in favor of CBDCs is that they will streamline the process of creating and transferring money. On a retail basis (for everyday consumers) and on a wholesale basis (for transactions between countries, between banks, and for control over monetary policy), it will simply solidify the way that users are already using money nowadays, including better digital bookkeeping and lower or nonexistent transaction fees and wait times.

The US isn't the only one taking steps in this direction either, even though it controls the world's most important fiat currency, the US dollar. Over 90% of the world's central banks are looking into CBDCs. Large players like the Eurozone and China are conducting surveys and pilot programs, and smaller countries—especially those in the Caribbean like the Bahamas and Jamaica—are actually issuing digital fiat.

But all is not as it seems.

The difference between CBDCs and Bitcoin

Political and financial institutions are trying to sell the idea that CBDCs would be a simpler, more trustworthy form of digital money, and therefore there's no need for solutions like Bitcoin. The simple fact, however, is that CBDCs and Bitcoin are as similar as a housecat and a lion—both are felines, but the similarities end there. For CBDCs and Bitcoin, the similarity is that both are digital, but past that they are by no means interchangeable. It wouldn't be too far to say that they're barely in the same family. The reason? Control.

Why Bitcoin is different

Let's review what makes Bitcoin, well, Bitcoin. From the very start Satoshi Nakamoto identified and set out to solve some of the biggest problems with fiat money. This was a direct result of the Global Financial Crisis of 2008, when, among other things, a long history of risk-taking by core financial institutions led to a series of government bailouts negotiated behind closed doors. Even then, a massive recession was not avoidable. Similarly but more recently, governments like the US responded to the COVID crisis by wildly printing money, leading to the harmful inflation we are all living through now. And while politicos can tinker with macroeconomics, banks also can and do choose to freeze accounts, confiscate funds, and block transactions of individuals, whether they're Julian Assange-type political enemies or everyday people trying to support causes that go against government wishes. The issues were—and are—that fiat money can easily be mismanaged and the people that control it are almost entirely unaccountable to the people.

Bitcoin set out to fix this by implementing a decentralized, peer-to-peer, open-ledger blockchain system. You can find the finer details of what all of these terms mean throughout Invity's blog, but the simple version is that Bitcoin is not controlled by any one person or organization, it's worldwide, transactions can't be altered, and every transaction can be verified by the people who use it. And the people who use Bitcoin can be anyone, rich or poor, whether you can access a traditional bank or not, whether you want to share your personal information or not.

Why CBDCs are more of the same

CBDCs share none of these characteristics. By their very definition, central bank digital currencies are issued by central banks, making them highly centralized and in no way peer-to-peer. They would require a high degree of both identity verification—sharing your name, address, account balances, and more simply to have a usable account—and privacy—defense against hackers and other bad actors to keep the system trustworthy—making them both invasive and completely unauditable. They would also still be based on national borders and national interests, reinforcing the arbitrary boundaries of where money can go and what you can do with your money. Essentially, the same problematic monetary system would remain in place, just digitally.

But it gets worse. In the same white paper cited above, the Federal Reserve states directly that CBDCs "would represent a significant expansion of the Federal Reserve’s role in the financial system and the economy." Commentator Nicholas Anthony, a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives, draws parallels between CBDCs global spy networks uncovered by Edward Snowden.

Anthony mentions repeated statements by major central bankers that "anonymity and complete privacy would not be an option with a CBDC." Basically, there's nothing "crypto" about so-called government-issued cryptocurrencies: with accounts managed directly by governments and a ledger open to only those in government, anyone's finances could be subject to examination, approval, or shutdown by unelected functionaries at any time. Even if you have nothing to hide, your financial stability or even your ability to simply buy groceries could change in the blink of an eye thanks to changes in policy, mistakes, or malice. Anthony sums it up: "there should be little doubt that governments most likely want CBDCs to solidify their control over money." With CBDCs, your money wouldn't actually be yours.

This is why CBDCs are not something to be welcomed. On the contrary, they're wolves in sheep's clothing, or a financial Trojan horse: CBDCs claim to offer all of the benefits of cryptocurrencies but in actual fact are significantly worse in nearly every way, from privacy to accountability.

The future of CBDCs

Currently, it seems like we are at an inflection point. CBDCs are under intense consideration around the globe, even in major economies. In the US, some financial conservatives recognize the downsides of CBDCs and are taking possibly symbolic steps to prevent their coming into being, while the EU is issuing updates to calm fears about privacy and implementation. With such widespread interest and so many benefits for controlling powers, it seems inevitable that some form of digital fiat will appear eventually. At the same time, Bitcoin is not weakening. Quite the opposite: developments like the approval of Bitcoin ETFs indicate that truly decentralized money is here to stay whether central banks like it or not.

So what should you do? The fact that you're reading this means you're in a pretty good place: you're already doing the right thing. If CBDCs become inevitable or necessary, you can accept it for the things you absolutely need—if you already have a bank account to receive your paychecks or to pay your mortgage, then CBDCs shouldn't change the status quo in that respect. But for securing your future, for making yourself a citizen of the world, and for insulating yourself against censorship and authoritarian government, you already know how to use Bitcoin. If you build up a parallel crypto fund of crypto with the Invity app, you'll be able to be your own bank: you'll be safeguarding your finances no matter what happens with central bank digital currencies.