CBDCs (Central Bank Digital Currencies) have become a hot topic among crypto enthusiasts as the primary weapon of governments against privacy and freedom.

By controlling their population’s finances, governments can use CBDCs to control and manipulate the people to an extent that has not been possible until now.

Despite these issues, there may still be room for well-developed and wisely implemented CBDCs.

Let’s dive deeper into this intriguing topic and discuss ongoing and future trends.

The emergence of CBDCs

CBDCs result from the advancements in blockchain technology and the financial landscape.

Central banks across the globe are exploring the idea of introducing fiat currencies as an alternative to digital transactions.

Unlike traditional forms of money, CBDCs represent the country’s official currency issued by central banks.

This evolution is propelled by the need for more efficient financial transactions, modernization, and the desire to adapt to the evolving nature of currency in the digital age.

Despite these arguments from central banks worldwide, many people see CBDCs as the dystopian future, as central banks and governments will have complete control over individuals’ money.

CBDCs, in this matter, can become super dangerous weapons in the hands of autocracies worldwide. Hence, development could be faster, and governments are trying to take time.

Are CBDCs truly future fiat currencies, or are they a threat to democracy and freedom?

The dilemma cannot be underestimated – at first glance, CBDCs are the future for fiat currencies and the inevitable result of technological discernment.

On the other hand, they can become a real threat to freedom, as corrupt governments can use them to freeze assets for the opposition and take complete control over everything.

Freezing money for the opposition will be an effective weapon to silence opposition, and the world population must not take this threat lightly.

With this said, there is an argument for CBDCs for genuinely democratic countries, and using them together with other money alternatives could be advantageous for government spending monitoring.

Although corrupt governments can leverage CBDCs to exert control over their population, the ability of individuals to monitor government spending may be a significant factor in the global reluctance to expedite the development of CBDCs.

Understanding blockchain technology

Blockchain is a decentralized and distributed ledger system designed to record and store all transactions and information on the blockchain.

It is a network of interconnected blocks containing a list of transactions.

Its decentralized nature sets it apart from other forms of financial ledgers, where multiple participants maintain and validate the network, making it transparent and secure.

Blockchain is also immutable, meaning it cannot be altered or changed in any way. Anything written on the blockchain stays there forever as long as the network exists.

Blockchain is also transparent, as all participants can access the same data and various block explorers enable crypto enthusiasts to see all the transactions on public blockchains.

The security of the blockchain is maintained using cryptographic techniques, making it almost unhackable.

Now, the account information can be hacked by personal devices such as desktop and mobile, but the blockchain itself is unbreakable by hackers.

In essence, blockchain fosters trust in digital interactions by offering a secure and transparent platform for recording and verifying financial and innovative contract transactions.

Blockchain and CBDCs

CBDCs use blockchain technology to facilitate financial transactions and save data in the network. The blockchain plays a pivotal role in developing the CBDCs.

The blockchain will be the underlying technology for providing decentralized and secure transactions for recording and verifying transactions.

CBDCs will also be able to automate processes using smart contracts. Without the blockchain, there will be no CBDCs.

Challenges and considerations

As I mentioned earlier, CBDCs come with a range of issues that need close attention.

They can become a foundation for a genuinely dystopian society where corrupt governments have complete financial control over their population, making it extremely difficult to transform into a truly democratic world.

Despite threats, CBDCs can be an effective way to battle money laundering and other criminal issues. However, fighting against criminals must not be achieved by ignoring freedom and democracy.

Technological challenges CBDCs face include scalability issues and interoperability to ensure the effective and efficient functioning of blockchain-based CBDCs.

Scalability is the number-one challenge for all blockchain-based systems because it requires time to validate transactions while maintaining proper security.

It remains a critical issue for the majority of blockchains and cryptocurrencies.

This is also why replacing Visa and MasterCard with digital currency transactions is difficult, as traditional methods can process millions of transactions daily – which is super tricky for cryptocurrencies without delays.

One prominent example is Bitcoin, which sometimes requires several hours to process transactions, especially when many transactions are in the queue.

Visa and MasterCard can process 24,000 and 5,000 TPS (transactions per second), while Bitcoin and Ethereum can handle only seven and 30 TPS.

This difference is so drastic that it’s impossible to use these cryptos for large numbers of transactions.

Future outlook

Even the IMF (International Monetary Fund) admits privacy challenges regarding CBDCs.

The central banks around the world will have to come up with ways to make CBDCs align with the main principles of democracy, which will pose a considerable challenge to all democracies around the world.

However, privacy and democratic principles are not the only issues facing the development of fully functioning CBDCs.

Technical challenges and scalability issues are present challenges as well.

Facing all these challenges, central banks will have to find a balance between financial stability and the privacy of their countries’ citizens before launching CBDCs.

One promising solution that the central banks that use CBDCs have come up with is limits on holdings of CBDCs.

Holding some part of your wealth in other currencies and some interest in CBDCs can help citizens keep their privacy while complying with the authorities simultaneously.

CBDCs are double-edged swords, as governments will control their entire population’s finances while keeping their spending transparent and visible.

This nature may be the primary reason governments will slow the development of CBDCs and make less restrictive policies to ensure they can maintain a healthy balance between democracy and control over their citizens.

Conclusion

CBDCs are digital alternatives for fiat currencies issued by central banks. There are both ethical and technological challenges when considering these digital fiat alternatives.

The scalability challenge is the leading technological challenge for CBDCs, as blockchain networks are usually known for their slow transaction speeds and low throughput.

Ethical challenges mainly consist of threats of CBDCs if used by corrupt governments and autocracies to control and suppress the free will of their population by managing the entire financial sector.

In other words, autocracies might use CBDCs to freeze all the financial assets of the opposition and limit free speech.

However, the opposition and population can use CBDCs to monitor all their governments’ spending, making it difficult for corrupt governments to hide their financial activities.

This is why governments are not in a hurry and are working slowly to develop this new emerging technology.

The IMF also considers CBDCs a novel approach that needs a balance of privacy and efficiency.