Two weeks ago, the UK ushered in a new prime minister, Rishi Sunak.
Formerly running the country’s finances and the richest of all former UK leaders, Mr Sunak is seen by many as a crypto-friendly figure.
However, digging a little deeper, it seems the new prime minister is primarily a proponent of central bank digital currencies — or CBDCs.
While the idea of CBDCs stems from blockchain technology, there are many reasons why they are not the same as cryptocurrencies.
The idea of a retail central bank digital currency dates as far back as 1987, when it was proposed by Nobel laureate James Tobin.
However, practical attempts to launch CBDCs didn’t materialise until 2014, spearheaded by China.
It took China six years before it was finally ready to test its digital yuan project, led by the People’s Bank of China (PBOC), in four of its largest cities: Shenzhen, Suzhou, Xiong’an and Chengdu.
Since then, its transaction volume has reached $14 billion (100bn yuan).
China’s central bank launched the “digital yuan” project as a solution to reduce transaction costs and make payments more efficient.
Feedback on the project has confirmed this use case, but concerns have been raised over the level of control CBDCs allow.
For example, in some cases, citizens have a limited time to spend their digital money, risking a complete loss of their savings if they fail to do so. This discourages saving for the future, opponents warn.
Meanwhile, some banks have also expressed concerns that CBDCs could undermine their role in the financial ecosystem, increasing the risk of a potential bank run.
CBDCs vs crypto
Many governments across the world are moving towards CBDCs.
About 105 countries, representing more than 95 per cent of global gross domestic product, are now exploring CBDCs.
This includes 19 of the G20 countries, with 10 countries having already launched their own digital currencies.
One of these countries is Nigeria, which brought out its digital currency — the eNaira — a year ago.
However, its anniversary is a bittersweet one for the Nigerian government, as recent figures show that only 0.5 per cent of its population is using the eNaira today.
Yet, it isn’t a general mistrust of cryptocurrency that is keeping the local population from using CBDCs.
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Nigeria is one of the leading countries globally for cryptocurrency adoption, despite a government ban on cryptocurrency trades in 2021.
Nigerians prefer to use cryptocurrencies for inflation protection and for the financial freedoms they afford, but the eNaira does not provide this benefit.
Amid economic woes in Nigeria and rampant inflation, which reached a new high of 20.77 per cent in September, it is no surprise that digital assets are enjoying more popularity than the languishing fiat alternative.
However, this is the case not only in Nigeria but around the globe as central banks struggle to keep a lid on rising prices.
At the same time, while it remains unclear what shape CBDCs will take in countries such as the US, it is indisputable that they are coming.
CBDCs could allow governments to control exactly what you spend money on.
As history shows, some may be prone to abuse this power. We need only remember that time last year when Canadian Prime Minister Justin Trudeau froze the bank accounts of those protesting against the Covid-19 vaccine mandates to put things into perspective.
This is exactly the reason why the world needs a new global form of digital money that is not linked to any one fiat currency; a truly depoliticised, censorship-resistant, decentralised world currency that is not subject to inflation or other restrictions.
Stefan Rust is the founder of Laguna Labs, a blockchain development house, and former chief executive of bitcoin.com
