Aug 31, 2021

Letter #38: Central Bank Digital Currencies - The Future of Fiat

What is the difference between a CBDC and regular Fiat?

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Dear Readers,

The advent of Bitcoin was revolutionary for two primary reasons. Firstly, Bitcoin represents a medium of exchange, unit of account, and store of value that is completely outside the control of any one entity and is, consequently, open and accessible to all. Secondly, Bitcoin is built on a technology, blockchain, that has completely changed the way that humanity goes about storing and transferring information. As a result of those unique properties, Bitcoin has spawned an army of copycat cryptocurrencies, and has launched a multi-trillion dollar industry around itself.

There are plenty of Bitcoin critics in the world these days, but they’re typically much less antagonistic towards blockchain technology, and society as a whole seems rather open to accepting it. In fact, to a large degree, blockchain technology has found favor with many of the companies and governments that it was built to replace. Companies around the world are studying blockchain in the context of supply chain management, protection of personal information, provision of social services, and much more. And governments are experimenting with blockchain technology in an attempt to improve the functionality of their national currencies, which is leading to a new form for their old money: Central Bank Digital Currencies (CBDCs).

What is a Central Bank Digital Currency?

The fiat currencies that we use today, like the U.S. dollar and the Indian rupee, are already digital to a large degree. We make purchases using credit and debit cards. We transfer money through banks or through payment companies like PayPal. We buy houses and cars with banks’ money by signing our names on a dotted line. However, today’s digital money relies on a disjointed group of transaction ledgers maintained by a disconnected network of financial providers and is overseen by a diverse group of government regulators.

CBDCs, at least those that operate on true blockchain technology, may provide a smoother way for governments to operate their national money. A blockchain in its purest form represents a single ledger of all transactions occurring in a network. The ledger itself is typically not maintained by any one entity, but is commonly shared with many or all participants using the network.

While it is unlikely that a CBDC running on top of a blockchain would be openly shared with all participants, it does seem feasible that the governments of the world might choose to share the ledger with regulated entities supporting the national financial infrastructure. Under such a model, everyday citizens like you and me wouldn’t have or control a copy of the ledger, but perhaps our banks, credit card processors, and other financial companies would.

Around the World with CBDCs

Although Bitcoin and blockchain have been around for over twelve years at this point, the vast majority of countries have only just begun to experiment with blockchain technology in the context of CBDCs. That said, there are several countries which have already made some progress on their homegrown CBDCs, including developments in countries that may be closer to home for many of us:


The Chinese government has been a fierce opponent of cryptocurrencies, going as far as outright banning its banks from servicing crypto companies or handling crypto transactions and banning Bitcoin miners from operating legally within the country. The country’s acceptance of blockchain technology by comparison, has been just as strong as its rejection of cryptocurrency.

China has experienced significant progress with its domestic CBDC and began testing it in certain parts of the country months ago. The People’s Bank of China (i.e., the country’s central bank) recently released a whitepaper describing the CBDC and it is estimated that millions of Chinese citizens are already using the digital currency in their daily lives.

United States

The United States’ central bank, the Federal Reserve, has taken tentative steps towards researching CBDCs, including the following listed on its official website:

The Federal Reserve System is focused on better understanding the underlying technologies and their potentials, as well as policy issues associated with a CBDC. In addition to projects underway at the Board and the Federal Reserve Bank of Boston, the Federal Reserve is collaborating internationally in groups such as the Bank for International Settlements' CBDC coalition.

While many experts believe that the U.S. dollar’s status as the world’s reserve currency may be severely at risk if the United States does not develop a CBDC, the Federal Reserve has stated that no final decision has been made as to whether a domestic CBDC will actually be released.


India’s central bank, the Reserve Bank of India, is also considering the launch of its own CBDC, although the project is still in the idea phase rather than actively ready to be rolled out. One of the central bank’s top officials has indicated that the goal of India’s eventual CBDC is to lower the reliance on physical cash, enable easier and less costly international transfers, and insulate people from the volatility that often is experienced by “private” cryptocurrencies like Bitcoin and Ethereum.

Cryptocurrencies vs. CBDCs

To a small degree, CBDCs may seem similar to everyday cryptocurrencies. After all, many CBDCs will run on top of a form of blockchain, just like most cryptocurrencies do. And the governments of the world certainly hope we’ll think of CBDCs as an improvement over cryptocurrency. Many of them are actively trying to convince their citizens that cryptocurrencies will no longer be useful once CBDCs exist. Comments of that nature are far from the truth and ignore several key differences between CBDCs and Bitcoin:


The Bitcoin blockchain is decentralized, meaning that anyone in the world can download the blockchain software and ledger at any time and join the network. Contrast that openness with the closed-off nature of CBDCs: CBDCs will be controlled by central banks with an iron fist and any non-government entity that may have some level of influence within a CBDC’s network is sure to be heavily regulated.


The Bitcoin blockchain has a very simple purpose, which is to execute the code on which they were written. The transfer of information across the blockchain happens no matter who you are as long as you initiate a transaction in accordance with the rules established by the software’s code.

By comparison, governments will have absolute ability to decide who can use the CBDC. Many people may believe that such control is good in the context of limiting criminals' ability to access the financial system. But it could, in essence, also extend at some point to anyone at all who doesn’t conform completely to the government’s will.


There’s a common misconception that Bitcoin is anonymous and that there’s no way to identify people using the blockchain. In reality, Bitcoin is pseudonymous, meaning that people’s identities are obscured through use of blockchain addresses rather than names or other identifiers. However, it is still possible to tie a real-world identity to a blockchain address, and the implementation of “Know Your Customer” procedures at exchanges and other companies within the cryptocurrency sphere has the express purpose of enabling governments to identify blockchain users.

CBDCs on the other hand get rid of anonymity from the onset. In the same vein as having to provide your personal information to the government on a tax return or to an institution in order to open a bank account, citizens will be required to share that information in order to open up a CBDC account or wallet. And since governments will have complete visibility into all transactions occurring on the CBDC’s blockchain, they will have a full record of everything you do with your money. In an attempt to assuage citizens’ privacy concerns, many governments have promised some level of selective transaction privacy. Citizens should not be lulled into a false sense of security by those false promises: CBDC transactions will only remain private until the government doesn’t want them to be private anymore.

Do Your Due Diligence

CBDCs, in one form or another, are certain to become a part of our everyday lives, and likely sooner than we think. While they may have some advantages over the physical and digital forms of cash we have today, they are not without their drawbacks. The responsibility to understand CBDCs and distinguish them from Bitcoin falls on all of us. In no small way, our financial future and self-sovereignty may depend on it.

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