What is a CBDC & why are they a challenge to crypto?

Danger of CBDCs
Learn Crypto Blog Learn Crypto Blog
Learn Crypto Sep 08 · 6 min read
  • Permissioned vs Permissionless money
  • CBDCs - Surveillance Money
  • Bail Ins vs Bail Outs
  • China's race to the digital Yuan

One of the strongest arguments for crypto is that money evolves. If not, we’d still be using shells or beads as a medium of exchange. But the evolution narrative doesn’t mean that money will make a clean jump from fiat - the type controlled by government - to the decentralised variety, giving crypto hodlers a happy ending. Governments have started to play catch-up and are now emerging with CBDCs - Central Bank Digital Currencies. Which is where things get really interesting.

It should surprise no one that governments would do anything they can to retain their power to control and create money. They may have been slow to recognise the threat of cryptocurrency or underestimated the speed of innovation.

Whatever the truth, governments around the world have recognised that there are elements of crypto’s general design - especially Stablecoins - that can actually be beneficial to their own agendas. Central Bank Digital Currencies are the result.

Like crypto, there will be no one standard CBDC approach, rather interpretations of a broad framework which seeks to utilise the benefits of managing national currencies in an entirely digital form but through permissioned, rather than permissionless ledgers. Each government will adopt CBDC design to fit their own agendas.

Permissioned vs Permissionless

Bitcoin is permissionless. That means anyone can participate, fulfilling one of the many functions that enable it to function as a decentralised money. And anyone can view the ledger of transactions - the Bitcoin Blockchain - at no cost. Bitcoin is also governed by fixed rules which create digital scarcity, so no one can arbitrarily change the supply and devalue it through inflationary spending.

By contrast, a CBDC will be run on a permissioned basis - invitation only. It will enable a 360 degree view of where money is being spent and by who, but only for those with the given authority. The closed committee approach to policy will remain, and so will the ability to generate more digital units at will - money printer goes brrr to use the popular meme.

Given government’s decide what is legal tender, they can essentially force citizens to use this new digital national currency.

CBDCs - Surveillance Money

It is this aspect that government’s recognise as beneficial. It might help them with tax avoidance, because you cannot hide digital currency under the mattress, or offshore. There is nowhere to hide within a digital ledger.

It will enable them to tackle organised crime, which contrary to popular misconception, relies on cash to thrive far more than crypto, because crypto is the most transparent form of money in existence.

It may also help with the hugely inefficient ways in which social benefits are currently distributed to citizens, cutting down on delays and fraud.

But it is the more insidious elements of permissioned ledgers that have those within the crypto community concerned. They describe CBDCs as surveillance money because it potentially gives governments the ability to see every transaction you ever make. 

While knowing your habits is bad enough, it gives government the ability to control those habits too, should they wish, by potentially prohibiting certain transactions.

With a CBDC, the government decides who is a validator, so essentially has God-mode with respect to balances across the ledger of government digital money.

Bail-Ins not Bail Outs

Worse than this, with digital money created on private, permissioned ledgers, there is nothing stopping governments from confiscating money. Bitcoin is designed such that this kind of manipulation - described as a 51% attack - is hugely expensive and self-defeating. 

A majority of Miners - those validating new transactions - would have to collude to add false entries into the Bitcoin ledger, what is described as double spends. With a CBDC, the government decides who is a validator, so essentially has God-mode with respect to balances across the ledger of government digital money. It can add to your balance, or take it away, all at the stroke of a keyboard.

If you think this is far-fetched, history has shown us otherwise. In 1933, in the wake of the great Depression Franklin D Roosevelt issued executive order 6102, seizing all privately held gold, deciding the rate at which holders were compensated then revaluing gold in relation to the dollar.

More recently, the idea of bail-ins as opposed to bail-outs has been muted, in response to systematic failures, like the 2008 financial crisis. In a bail-out the government steps in to back-stop businesses considered too big to fail; the idea of a bail-in is that ordinary systems are required to cover the losses. A CBDC would enable this to happen without your approval. 

With a CBDC approach, this would be easy to achieve, and given Cyprus has already done this, should be considered as fanciful.

How China is leading the CBDC charge

This may all sound pretty alarmist, and as yet is purely conjecture, but all eyes are on the PBOC - People’s Bank of China - who have already been running large scale experiments with the Digital Yuan. 

China set up a task force to investigate digital fiat currencies as far back as 2014, and started testing in 2017, while in a recent survey by the BIS (Bank for International Settlements) in 65 countries, almost 90% had conducted research into CBDCs.


Number of countries surveyed by the Bank for International Settlements who had conducted research into CBDCs

China has been using localised trials to test the digital Yuan (aka eCNY) such as the one this summer in Beijing. The equivalent of $6.2million was dispersed in a lottery system with ‘red parcels’ of 200 eCNY allocated at random from those downloading an eCNY wallet. 

At some point soon the digital Yuan is expected to go national, and other currencies are expected to follow suit. The PBOC whitepaper states that the eCNY will initially coexist with cash, so as yet there is no clear timeline to a digital only Chinese economy, and that is because there are so many other hurdles to pass.

Based on China’s approach, the intention is to create a two-tier system in partnership with commercial banks, which is a real grey area for CBDC application in the wild. 

In theory, CBDCs could erase a lot of the functions of the private banking system, but that is very unlikely to be the intention. One of the reasons that China has been ahead of the game with CBDCs is that it wants to break the dominance of the US Dollar as the world’s reserve currency. 

By getting out of the gate early in the race to create national digital currencies China has an early advantage in the use of CBDCs for cross-border payments and the setting of any standards. In short, the digital Yuan is part of their long game to become the dominant world economic power. If you want to trade with China, you may find that you need to use eCNY.

While China’s command and control system enables controversial measures such as CBDCs to happen quickly, there is likely to be greater debate and resistance within Western democracies. 

The worst-case scenario for digital currencies might, for example, pose a threat to some of the basic rights enshrined in constitutions or human rights.

In a way, CBDCs are a back-handed compliment to Satoshi. They are acknowledgement of both the potential benefits of digital money, and the threat that decentralisation poses to government controlled money. 


You’ll likely hear a lot more about CBDCs in the coming years, but if you’ve done research on what inspired them truly decentralised and permissionless money, you’ll be able to make a much more informed decision as to whether you think they are part of the next evolution of money, or a desperate attempt for government to retain their control on a system of money that is destined to die out like the dinosaurs.