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The possibility of nations issuing digital versions of their domestic currencies seemed utopian only a few years ago. Today, we are witnessing central banks worldwide racing against time and each other to create and regulate digital currencies for national and international use.
The two largest economies in the world, the US and China, are going head to head in almost every competition imaginable. The issuing of central bank digital currencies (CBDCs) does not make an exception.
Lately, there have been plenty of tensions between the two world powers, including a trade cold war, accusations of starting a global pandemic, and bans on each other’s diplomats, companies, and even social media apps.
The latest battlefield on which the United States and China have chosen to clash is cryptocurrency. China is actively working on a digital currency electronic payment (DCEP), unofficially known as the digital Yuan. Meanwhile, the US Federal Reserve has revealed its research plans for a future digital Dollar.
The battle is on! But, why does it matter who will win the race to issue the first digital currency? Let’s find out!
Asset & Population Control
More than 90% of the world’s money supply is in the electronic form already. Almost every entity deals in electronic transactions, from the largest banks and corporations to small businesses and regular consumers. So, issuing a digital version of a national currency is merely an extension of a central bank’s control over the evolving nature of the country’s physical money.
When digital currencies become the standard form of payment, transactions should take place easier, faster, and at considerably lower costs. Governments and companies would make huge money transfers more efficiently, which would alleviate money laundering.
It sounds like a smooth transition process, yet it is not that simple. Issuing a digital currency brings to the surface plenty of complex issues. One of them is the control that the issuing authority will have over the people who use these digital currencies.
The absence of paper currency would lead to the government having a complete financial profile with every citizen or company’s in-depth transaction history. It may seem like a good mechanism against fraud, but it takes a great chunk of personal freedom from everyone.
Your transaction history says more about your life than you would like to share with the world. It consists of data about your diet, your hobbies, and your travel itineraries. However, it also reveals your shopping behavior, your creed, your relationships depending on the people you lend or borrow money from, and much more information that in time creates a surveillance record of your life. Whether they are political or not, some ill-intended entities may use this data to control and manipulate you.
Asset and population control is just one of the many reasons why the United States and China are racing to issue a digital currency. Both states, like many others in the past, have dismissed Bitcoin and other cryptocurrencies for years.
Now, they see that decentralized, digital assets give people freedom of transaction and, most of all, anonymity. In this day and age, the governments cannot afford to lose their grip on their citizens’ taxable income and expenses.
A False Sense of Protection
As the process of money digitization advances, people will have to decide whom they will trust to control their money, and subsequently, their data.
Currently, most people do not have a problem with keeping their money in traditional banks, which report back to the central bank, which, in turn, shares data with all the state’s financial control institutions.
Cash is the only option to remain outside the system and to cover a few traces of your personal life if needed. However, once all physical money becomes museum exhibits, you will have to choose: the country’s CBDC or cryptocurrency.
Whether the United States or China issues the first digital currency will market it the same way. They will disguise the loss of privacy as a means of protection. They could say that losing your anonymity will only mean gaining more security and that your assets will be in safer hands or anything along these lines.
However, even if you trust your government not to oversee each transaction you make, the gains of security and protection will remain feeble and out of your control. Even the most liberal democracy out there could go through changes throughout your lifetime.
The way the government will manage your digital assets for the next 50 years could easily change due to war, revolutions, or economic crises. Elections can bring extreme ideologies in the seat of power, and technological advances can threaten your financial well-being in the long run.
On the other hand, cryptocurrencies provide you with a ledger that you can access at home in full anonymity and away from a central authority’s control. Cryptos are not nation-pegged, which means that you can move and engage in transactions freely almost anywhere in the world without hitting the legal boundaries imposed by various central banks.
Numerous cryptocurrency exchanges allow you to register your metadata without tying it to your real-world identity. This privacy feature that ensures transaction anonymity is one that governments like those ruling China and the United States will most likely never provide.
No Room for Self-Custody
One of the main prizes of the race to issue the first CBDC is the self-custody aspect. A cryptocurrency owner can easily manage their portfolio without external help or supervision. The future owner of nation-issued digital currency will most probably not even mention it.
It may look like you are the master of your domain, but you’re not!
The clearest example of governmental custody over one’s assets is the control over alternative payment systems. You may lose access to your funds just as easy as PayPal froze donations for WikiLeaks in 2010.
Cryptocurrencies offer self-custody and relieve owners from the threat of an administrator who can act on command, be it political or not, to deny access to their assets. State powers cannot fully intervene even when exchanges or chain analysis companies must share user data.
Crypto assets are country-agnostic, and they provide a financially empowering alternative for the people that not even the most powerful governments in the world cannot control.
It is difficult to imagine that states like China and the US will overlook the control over financial flows and transaction histories that a central bank digital currency offers.
So, while the race is fun to watch from the sides, we should not forget that while the two states seem to explore the promising blockchain and crypto technologies, they are forging golden handcuffs for everyone to wear.