Among the many races the pandemic has accelerated, none is so pointless as the issuance of central-bank digital currencies (CBDC). The Canadian government, which should know better, has jumped into the fray against its own earlier opinion.
Reversing comments made in February, the Bank of Canada’s Deputy Governor Timothy Lane now believes state involvement in cryptocurrencies is a pressing matter. Along with its G7 partners, Canada has been exploring CBDCs since 2017, but the race suddenly sped up in mid-October.
The G7 countries claim to be getting ready in case another government or company issues a similar product. On the one hand, they believe private cryptocurrencies such as bitcoin and Facebook’s Libra pose a threat to their monetary-policy control. On the other, they view China’s push to issue a CBDC as a threat to national security.
However, creating a new money monopoly for the digital world is a little too late. The cryptocurrency genie is out of the bottle, with altcoins flourishing by the thousands, and there is no going back. The way to tackle rogue actors is not to impose a top-down solution but to set clear rules for the legitimate initiatives to flourish.
Central Banks: Staying Alive
Just as in other parts of the world, droves of Canadians have turned to online payments and e-commerce during the pandemic. Many have dipped their toes into the vast sea of cryptocurrencies. Trying to bank on the opportunity and prevent more money from exiting the taxable financial system, authorities are rushing the development of CBDCs without pause for reflection.
Cryptocurrencies are such an attractive and disruptive technology precisely because they offer peer-to-peer alternatives to state-backed currencies. Central banks are increasingly impotent against that driving force. The more they fight, the more they reveal their obsolescence.
G7 central banks have only compulsion to offer crypto-enthusiasts. Governments are not after monetary innovation but rather their own continuity. To ensure it, they are trying to get in front of and truncate existing cryptocurrencies.
CBDCs are at complete odds with the nature of decentralized digital currencies. The technology that makes cryptocurrencies distinct, secure, and trustable is the distributed ledger called blockchain, behind which there is no central bank tweaking monetary policy.
Digital currencies controlled by the state would need a different architecture. They portend nothing akin to a network of transaction validators, like the miners that today power bitcoin through profit incentives.
CBDCs are the dream of starry-eyed politicians who think printing currency can solve a country’s problems. One need look no further than CBDCs issued in Ecuador and Venezuela.
Amid a humanitarian crisis, partly as a result of mismanaging its paper fiat currency, the Venezuelan socialist regime created two state-backed digital currencies: the petro and petro gold. The latter is allegedly pegged to the value of oil, gold, and other precious metals, but it never took off due to the lack of trust in the government.
Officials have tried forcing Venezuelans to use petro, but they prefer bitcoin and US dollars. No reputable cryptocurrency exchange lists petro.