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For the second year in a row, Algorand, a permissionless “3rd generation” blockchain, is issuing a report detailing how central banks can utilize its technology to create CBDCs (Central Bank Digital Currencies).
The new 2022 report argues that Central Banks need CBDCs in order to participate in the opportunities provided by the digital economy, to maintain their monetary sovereignty, and modernize the payment system of their countries.
The new 2022 report notes four key trends that are coming to define the digital age. They include:
- A growing digital economy
- Asset tokenization as a new business model
- A growing demand for alternative forms of money; and
- The emergence of decentralized finance as a new financial system
These trends challenge one of the primary objectives of a Central Bank, and one very much in chaos at the moment: ensuring price stability.
Six Necessary Aspects of a CBDC
The white paper also identifies a number of features that creation of a CBDC must take into account.
CBDCs have to have to be trusted to prevent manipulation. Decentralized blockchains excel in this regard. As the paper notes, “By contrast, entries on centralized ledgers can be manipulated if the ledger’s database is hacked or otherwise compromised.”
Bitcoin, the original blockchain crypto, has never had its ledger compromised.
Scalability, including the ability to process thousands of transactions per second, is another must.
Algo’s vision of governments partnering with “private company” blockchains to CBDCs, may be a path that some governments choose.
At a recent G20 meeting in Indonesia, some Central Bank representatives actually acknowledged that privately issued digital currencies could have advantages compared with Central Banks trying to create and maintain CBDCs.
As reported by Reuters, Phillip Lowe of Australia’s Central Bank said:
“I tend to think that the private solution is going to be better—if we can get the regulatory arrangements right—because the private sector is better than the central bank at innovating and designing features for these tokens.”
He added a regulatory caution:
“If these tokens are going to be used widely by the community, they are going to need to be backed by the state, or regulated just as we regulate bank deposits.”
Will Any CBDC Offer Citizens True Ownership and Privacy?
One area mentioned by the report is a sticking point that many privacy advocates say make CBDCs a poison pill that will inevitably allow governments to wield digital money as a tool of surveillance and political control.
The Algorand white paper answers the issue of privacy this way:
“As such, it is paramount, particularly in the context of retail CBDCs, to balance this right carefully with the regulatory need to ensure transactions are KYC/AML (Know Your Customer) compliant. This requires a layered approach to privacy with adjustable limits for fully private, partially private, and fully transparent transactions. Importantly, central banks must have full control over the thresholds between the different layers of privacy and be able to change these as necessary.”
The report clearly indicates that Central Banks will have more or less complete control, via an ability to “change” layers of privacy “as necessary.”
It goes so far as to say that the privacy features of cryptos like Bitcoin represent a “flaw”:
“Algorand provides a flexible framework that allows governments and central banks to specify their own tiers of privacy and delegate, as needed, identity to authorized Identity Providers in their system using a combination of built-in features and powerful Layer-1 smart contracts. This layered approach to privacy is both practical and in stark contrast to the approach most private crypto assets have chosen, where there is no native notion of privacy. These blockchains instead rely on pseudonymous addresses as a means of protecting user privacy, but this approach to privacy is in direct conflict with existing know your customer and anti-money laundering requirements.”
The commandeering of digital payments infrastructure to crush political dissent is also in conflict with long established democratic rights of citizens in free nations.
And the ability of government to granularly track money and payments of citizens, which CBDCs will facilitate, is also virtually unprecedented.
The shutdown of digital accounts and fundraising efforts of the Canadian Truckers Convoy protest against vaccine mandates in early 2022 was a blueprint for how governments are now leveraging people’s reliance on digital payment systems to crush unwanted dissent.
Meanwhile, China’s digital yuan CBDC has been criticized as not only a currency, but a mechanism of enforcement of its political “social credit” system, which can punish and disenfranchise people who engage in verboten political and other activities.
The Algorand report made no mention of these thorny issues.
For further reading, see:
- “ACLU CALLS FOR A RETAIL DIGITAL CASH THAT FUNCTIONS LIKE PHYSICAL CASH” (7 Jun 2022)
- “A PERVERSION OF CRYPTOCURRENCY” (12 Oct 2021)
- “DIGGING INTO THE FED’S LONG AWAITED REPORT ON A U.S. CBDC” (25 Jan 2022)