Many countries are taking a look at central bank digital currencies (CBDC). The idea is to remove cash from the system while adopting the benefit of crypto technology. One issue that many bring up is the control this hands governments.

Cash is the enemy of governments. There is a privacy element which puts it out of reach. This is what leads to the formation of black markets, activity that is unregulated and, more importantly, untaxed.

Politicians are always on the hunt for taxes. They want to pull in more money, which increases their power. It is a scenario repeated throughout history.

A CBDC will allow the government to know how much is paid to the babysitter. On top of this, they could be configured where the tax is removed instantly, before it even reaches his or her wallet.

There is just one problem: it will not work.

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Vitalik Buterin Shares Why CBDC Will Not Prevail

Sweden sought to be the leader in the race to the cashless society. Again, from a politician's point of view, this is a logical move.

Unfortunately, it fails the real world test.

The country established the goal to be cashless back in 2018. Its target date was 2025.

How is the country faring with this pursuit?

Over 90% of the transactions occur in digital form. However, the country is now going back on the idea of being cashless. It is now recommending people keep some cash.

It turns out there are a host of problems with centralized payment systems. They are subject to cyber attacks. Then we have the ever present threat of war. Finally, there is inherent fragility in centralized systems.

Buterin Points Out Flaws

Centralized systems excel at efficiency. There is a tradeoff that has to be considered.

Buterin noted the reversal illustrates that while centralized solutions may be efficient, they may not be reliable during times of crisis.

“Nordics are walking back the cashless society initiative because their centralized implementation of the concept is too fragile,” Buterin wrote, citing a March 16 article by The Guardian. “Cash turns out necessary as a backup.”

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When the options are a centralized digital system or cash, this shows where both are needed. It also highlights why a CBDC is going to fail.

CBDC, by definition, are centralized. Therefore, in times of attack, the entire money supply is threatened.

This goes counter to the present money supply in most countries.

Due to fractional reserve banking, the money supply is controlled by the commercial banks. Each runs their own ledger with backup in the form of total balances done with the central bank. The cash comes from the latter yet the digital units are from the former.

An attack on Bank of America is not going to affect Wells Fargo.

CBDC is a concept that centralizes the activity (control). This means that fragility is introduced into the system, something that escalates in times of nefarious activity.

The reality is that centralized servers are never fully protected. Most major institutions, including governments, have experienced hacks. My guess is the attacks on CBDCs will be frequent and continuous. It is a honeypot that is simply to appealing.

Crypto's Decentralized Answer

At the core of this is the network. It always reverts back to the control and distribution of this.

Vitalik points out that Ethereum could be a solution. Obviously, he is going to promote his chain as the answer. However, if we step back, this is a piece of a larger monetary (and financial) puzzle.

The key is options. This is what creates resiliency.

As it pertains to this conversation, that means more networks. Ethereum headlines a number of EVMs that can help fill the void. Then we have Bitcoin, Litecoin, and Cardano. While some might not be ideal mediums of exchange, it can serve that purpose along with a store of value.

We also have newcomers like SUI, layer 2 solutions along the lines of Arbitrum, and a host of other blockchains that provide the ability to move value from wallet A to wallet B.

As Governor Waller of the Federal Reserves once remarked, CBDCs are a solution in search of a problem.

Building a single, foolproof network is not possible. This is basically what proponents of CBDCs are focused upon.

We are already to the point where the totality of crypto networks removed any fragility or instability. Sure, we can point to an individual chain or coin. However, if we look at the full scope of things, decentralization has occurred.

Posted Using INLEO