The Future of Finance: CBDCs, Cryptocurrencies and Decentralization

Central Bank Digital Currencies (CBDCs) continue to pique the interest of nations globally, most recently with remarks by Brad Jones, the assistant governor for the Reserve Bank of Australia, in a speech titled "A Tokenised Future for the Australian Financial System," according to recent reporting by Cointelegraph. CBDCs, heralded for their potential to promote financial inclusion, enhance payment efficiencies, and ensure safer money, remain a topic of fervent discussion.

However, the core ethos of cryptocurrencies—decentralization and peer-to-peer transactions—seems at odds with the centralized nature of CBDCs.

State of CBDCs Worldwide:

Globally, more nations are exploring or already implementing CBDCs. Australia has notably completed its pilot project on CBDCs, with the Reserve Bank of Australia arguing that a digital Australian Dollar could bolster efficiency and resilience in certain payment system sectors, albeit necessitating further research​.

Initiated in January 2023, the pilot saw over 80 financial entities proposing use cases in e-commerce, offline payments, and government transactions, generating over 140 use case proposals​. In fact, the Reserve Bank may even recommend that parliament legislate the introduction of a digital Australian Dollar for household payments within the next five years, according to some reporting. (For more about the results of the pilot, see here​).

In the broader crypto arena, notable advancements include Ethereum 2.0 nearing its full launch, which is expected to address scalability and security issues. Additionally, the rise of cross-chain platforms like Polkadot and Cosmos, and the unfolding narrative around decentralized finance (DeFi) and non-fungible tokens (NFTs) continue to redefine the contours of the digital asset landscape​.

Evaluating Potential Benefits:

CBDC proponents, drawing from whitepapers by the Bank for International Settlements (BIS), enumerate benefits like enhanced financial inclusion, streamlined cross-border payments, financial resilience and stability, efficient fiscal transfers, and privacy preservation. However, the crypto community argues that cryptocurrencies address these concerns more adeptly than government-backed digital currencies. Indeed, stablecoins already offer the capability of settling payments and companies like PayPal provide these options.

Recent Major Crypto Developments:

The burgeoning DeFi sector and the proliferation of NFTs are altering the financial landscape. My work with Gordon Y. Liao in the Frontiers of Blockchain Economics shows how the set of web3 participants are quite diverse and the emergence of distributed ledger technologies is empowering content creators and other stakeholders by eliminating intermediaries and ensuring direct revenue streams. Moreover, traditional financial institutions are lowering barriers to credit access, as evidenced by the substantial expansion of mobile banking since 2014, predominantly among younger, single, and minority demographics.

Nail in the Coffin for Privacy:

Contrary to central bankers' assertions about privacy preservation in CBDCs, no concrete mechanisms have been elucidated. This, critics argue, could potentially lead to a dystopian financial surveillance state, infringing on individuals' financial autonomy. We are already seeing what has taken play with China's digital Yuan and the proliferation of a social credit scoring system.

Future of Money and Emergence of DeFi:

While the shift towards blockchain-based methods of recording currency might be inevitable, how we go about it matters. They are merely tools requiring robust governance for effective stewardship. The expansion of CBDCs, especially as a substitute for retail banks, threatens to centralize financial systems further, with central banks gaining more authority to issue tokens, contrasting the current practice of bond buying and selling in somewhat “open” markets.