By Nick Saponaro, CEO of Decentralized Payment Platform Provider, Divi Labs
FTX’s implosion was a significant moment. Not just because of the millions of people who have seen their assets wiped out or the damage its contagion effect has inflicted on the industry. But because it has proven crypto’s central thesis - the importance of a trustless financial system that isn’t exposed to the mismanagement and manipulation of human interference.
It is worth remembering that FTX was not a crypto company, per se. As a centralized exchange (CEX), it was more like an unregulated bank that positioned itself as a trusted third party and custodian of the funds on its platform. That was the theory, anyway. In reality, it was playing fast and loose with users’ assets.
Much of this will be blamed on a lack of compliance. But the traditional financial markets are far from immune from this type of greed-driven apocalypse, despite the numerous weights and measures put in place by regulators. We only have to look back to 2008 and the subprime scandal for an all-too-pertinent example.
Unsurprisingly, in the wake of the FTX debacle, the industry has seen an exodus from CEXs like FTX and an increase in people using decentralized exchanges (DEXs) and self-custody solutions. This, in many ways, is why blockchain-based cryptocurrencies were first developed - to give people an alternative. While crypto has some way to go before it can claim to have become a true alternative, I believe there is a catalyst brewing in traditional finance that could provide the trigger needed to drive mainstream adoption. That catalyst is Central Bank Digital Currencies (CBDCs).
As faith in the current financial system dwindles, governments worldwide are scrambling to roll out their CBDCs. As fiat currencies continue to decline, a CBDC would enable central banks to mitigate competition from crypto, fintechs or large private companies like Apple or Meta launching their own digital coins.
It is important to highlight that while there are some surface-level similarities, CBDCs are not cryptocurrencies. CBDCs are digitized, centralized, national currencies that carry significantly different sets of risks to consumers. According to a recently published research paper by the European Central Bank, 90% of central banks are exploring their use.
There are several major motivations for this trend. None of which are particularly beneficial to the average consumer. What you’ll most likely hear about are the potential benefits that echo crypto’s promise. For example, creating a more inclusive system that ensures everyone has access to financial services or more efficient cross-border transactions. You may also hear narratives touting a reduction in illegal activity and a simpler system where central banks have a closer relationship with the individual.
However, it’s the downsides that we should all be paying close attention to. CBDCs will end anonymity and kill cash once and for all, removing an important safe harbor from declining economic fortunes. But perhaps most concerning is the control they give central banks to drive or curtail spending.
Ultimately, CBDCs will allow central banks to improve their control over payment infrastructures. One of the key features is the programmability of currency which would allow central banks to set limits on how much you can buy, where you can buy it, when you can buy it and how much you can save. Moreover, leveraging your social credit score and ESG rating, can further restrict your ability to access services.
The biggest concern is the ability to create negative interest rates. This is not the same as the negative interest rates we’ve recently seen in the Eurozone. Whereas negative interest rates with traditional currencies effectively pay you to borrow, negative interest rates in a CBDC system mean any currency you don’t spend would be slowly destroyed. This would give central banks even greater economic control, the likes of which have never been seen before. The end game is the complete loss of financial sovereignty for the user.
While worrying, many have taken solace in the knowledge that CBDCs will likely take some time to develop and are some way off. In the western world at least. But recently, their development has been accelerating.
While China has been trialling its digital Yuan for some time, several banks have recently completed trials of a blockchain platform designed to encourage faster adoption of CBDCs earlier this year. India started trialling its digital Rupee this month, and the UK is also building up momentum, with the Bank of England formerly opening up applications for a proof-of-concept CDBC wallet.
When you consider that Fiat currencies worldwide, including the Dollar, Pound and Euro are in decline or have collapsed altogether, it makes sense that central banks would look for new mechanisms through which to seize control.
For now, despite its volatility, crypto remains a haven against fiat’s decline and the sanctions of central banks. Only last month, Harvard University published a research paper arguing that central banks of sanctioned nations should start buying Bitcoin to protect themselves against sanctions. This might sound crazy until you realize that countries like Russia have announced their intention to adopt cryptocurrency, and Iran is reportedly already using it. Even countries with outright laws against cryptocurrency, like Nigeria, have seen adoption accelerating at staggering rates. Case in point, necessity breeds adoption.
Is it any wonder that rather than trying to create a safe space where retail investors can benefit from the crypto environment, many regulators are instead looking to restrict retail access to it?
In a world of CBDCs, where individuals could face similar sanctions, having alternative financial means will be imperative. As more people realize this, they will escape to decentralized finance and cryptocurrencies. Let’s just hope they have the ability to do so when the time comes.
About the author:
Nick Saponaro is the co-founder and CEO of Divi Labs, developers of a decentralized payment ecosystem that's on a mission to improve people’s lives by making crypto easy and accelerating its mainstream adoption.
A dedicated proponent of the founding principles of the crypto movement, Nick is working towards the delivery of a new paradigm for financial services. One that is truly decentralized, accessible to all, and works for everyone.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.