With over 19,000 different cryptocurrencies available, it seems everyone wants to get into crypto – and the federal government is no exception. The Federal Reserve is now considering launching a central bank digital currency (CBDC), and they are not alone. The Bank of England and European Central Bank are also exploring this possibility. But the question remains: will that digital currency really be a cryptocurrency?

What is a CBDC?

A central bank digital currency is a currency that is backed by a central bank. In contrast to other digital currencies like Bitcoin, the central bank acts as the third party to enforce transactions rather than a decentralized consensus protocol. 

Out front, we must first address the great irony of the very name CBDC. A digital currency is built on a blockchain, an inherently decentralized type of database that is revolutionary in its own right. 

A digital currency, therefore, is itself decentral; no central party can lay claim to “managing” the currency’s valuation as is done with fiat currency.

CBDC vs. cryptocurrency

Let’s look again at the name: a “central bank” is going to oversee a “digital currency.” In other words, there is no decentralization. No decentralization, no digital currency. 

Even more comical is the Fed’s stated aim, that its “key focus is on whether and how a CBDC could improve on an already safe and efficient U.S. domestic payments system.” 

Safe and efficient? The U.S. domestic payments system is precisely the reason for Bitcoin, et al. 

It is no coincidence that Bitcoin was launched in 2009, just after the global financial crisis of 2008. Not to mention the two major recessions that the U.S. has endured since; the current inflation rate that is rivaling Carter-era levels and the contrarian measures the Fed has taken to both start and control inflation.

In short, to answer the question, no, a CBDC is not genuine crypto. 

CBDC meaning

When – not if – the Federal Reserve launches its CBDC it will function like a decentralized currency in style and form, yet it will bear all the hallmarks of a centrally-controlled fiat currency. 

This form of digital currency is perhaps the gravest type of currency because, like the U.S. dollar, the Fed will have the ability to:

1. Centrally fluctuate CBDC valuation

2. Mint and burn coins

3. Track transactions and the spend histories of specific coins

4. Individual accounts could be hacked through central security weaknesses

Central bank cryptocurrency

A central bank’s power to control a digital currency is a two-edged sword: transactions will be publicly visible to the entire world on the distributed ledger; money laundering, racketeering and theft will be much harder to conduct; book-cooking and funds unaccounted for will presumably be a thing of the past. 

For these reasons and more, some large banks have ignominiously urged governments not to launch CBDCs; indeed some have capitulated to public sentiment, such as the Bank of Japan.

Though CBDCs will still come about in time, they will never be able to offer the value, security, transparency and private ownership of a real asset like Bitcoin.