Much Anticipated Central Bank Digital Currencies Raise Privacy Concerns

Central Bank Digital Currencies, or CBDCs, have been an increasingly popular topic in the cryptosphere and financial world as a whole, especially with the onset of the COVID-19 crisis.

A recent report by the Bank for International Settlements has also revealed that the development of CBDCs may be accelerated by the impact of the coronavirus on retail payments, which have seen a sharp decline in cash payments due to concerns over viral transmission.

Put shortly, CBDCs are basically a digital version of a country's fiat currency.

While this already exists for virtually all national currencies in the form of bank account balances, the main idea around CBDCs is that all the information regarding transactions and balances would be centralized in one or several databases run by the government or assigned proxies.

In the U.S., the aftermath of the coronavirus and the ever-growing "Digital arms race" with China has led to CBDCs taking a central role in last month's Senate Banking Committee.

The Bank of Japan, for example, has recently announced it will begin working on its own CBDC, a digital yen.

While some may see the recent growth around CBDCs as a positive sign for Bitcoin and digital assets as a whole, further reaffirming the validity of blockchain technology, others believe they will compete with cryptocurrencies while removing their founding ethos: financial privacy and sovereignty built on top of a peer-to-peer transaction system.

Tone Vays notes that CBDC's may be the first step toward demonetization while providing none of the advantages that pseudonymous currencies like Bitcoin do.

As concerns around digital privacy continue to grow in 2020, CBDCs seem to pose a serious threat, given that they may signal the demise of paper currency.

It's unclear whether stablecoins will overcome CBDCs in the long-run or if privacy coins will even still be around, but according to Matthew Graham, a veteran investment banker in China and the CEO of Beijing-based Sino Global Capital, the digital yuan aims to displace the dollar and not Bitcoin or cryptocurrencies, and the same may be true for other countries.