Autor Cointelegraph By Christos Makridis

Central bank digital currencies — digital currencies backed by a central bank — have received renewed interest with the United States President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets. Proponents of CBDCs argue that widespread adoption will promote financial inclusion, expand public access to safe money, improve the efficiency of payments and more.But their rationale remains tenuous. Many analysts and practitioners increasingly view CBDCs as fundamentally at odds with the purpose of cryptocurrency, which is to provide a secure, decentralized peer-to-peer mechanism for transferring funds. And the hypothetical benefits of CBDCs remain hypothetical — no evidence exists yet that suggests any advantages over other examples of distributed ledger technologies in financial services, especially given the new risks they pose.The status of CBDCs worldwideNine countries have already developed their own CBDCs, and the U.S. has joined a list of over 100 countries exploring issuing one. Most CBDCs take a hybrid approach whereby “The central bank issues the CBDC to banks and other and other payment service providers, which in turn distribute the CBDC to users throughout the economy and provide them with account-related services,” according to a recent report by the Hoover Institution.There are other types, according to leading experts at the Bank for International Settlements — which consists of stakeholders from major central banks. These include a synthetic CBDC, where the consumer has a claim on an intermediary, with the central bank only keeping track of wholesale accounts; and a direct CBDC, where the consumer has a claim on the central bank, with it handling all the retail.Bitcoiners have launched a campaign against CBDCs, warning that they allow the government to control what you spend money on.Some scholars have underscored that DLT has a role to play in helping central banks become more efficient and secure, but such technology should be introduced with “a ‘minimally invasive’ CBDC design — one that upgrades money to current needs without disrupting the proven two-tier architecture of the monetary system,” according to Raphael Auer, head of the BIS Innovation Hub Eurosystem Centre, and Rainer Böhme, a professor at the University of Innsbruck.The fact that central banks are interested in digital currencies is not surprising. As countries look to rebound from nearly two years of lockdowns and other restrictions on mobility, coupled with rising inflation, central banks have been feeling the pressure to promote employment and manage price levels u20 their “dual mandate.” Across the world, central banks have bought a significant amount of bonds, thereby expanding the money supply and arguably further contributing to inflation. For example, the Federal Reserve has expanded the U.S. money supply from roughly $4 trillion to over $20 trillion over the past two years, but we are only now seeing the resulting inflationary effects.Evaluating the potential benefitsIn a 2020 report, the BIS outlined a handful of potential benefits brought up by proponents of CBDCs: financial inclusion, cross-border payments, financial resilience and stability, increased efficiency of fiscal transfers, and privacy. But cryptocurrency fulfills all of these aims better than government-backed currencies.Let’s take a look at these potential benefits one by one.Financial inclusion: The expansion of decentralized finance and emergence of nonfungible tokens are already changing the economic landscape. Thousands of content creators have sold NFTs and joined the DeFi community, removing intermediaries and allowing revenues to go directly to the creators.“We’re entering a ‘Web2.5 era’ where content creators have benefited from the rise of social media, but what they create is owned by centralized groups,” Avery Akkineni, president of VaynerNFT, tells Magazine. “Now they are starting to own the end-to-end process, and we’ve seen some of these creators become wildly successful. […] That is inspiring a new generation of creators.”Furthermore, existing financial institutions have already expanded access to credit by lowering the barriers to adoption. My research from 2021 found that the expansion of mobile banking in the U.S. since 2014 has been concentrated among those who are younger, single or a part of minority groups.Even if these patterns were not true, it’s unclear how CBDCs expand financial inclusion.CBDC proponents cite numerous advantages, but anything a digital dollar can do, crypto can do better.Cross-border payments and efficiency of fiscal transfers: While financial transactions across borders are already possible, they are time-intensive and costly. However, several Web3 companies enabling cross-border transactions have emerged, including Ripple.Financial resilience and stability: Resilience is integral to cushion against unanticipated shocks to the system. The 2007–2008 financial crisis in the U.S. and many developed countries was arguably driven by a concentration of risky, securitized assets. In the run-up to the crisis, the number of mortgages increased rapidly, but many new homeowners were not financially prepared to pay their mortgages — a pattern that was, at least partially, influenced by the Federal Reserve through its impact on interest rates and failure to attend to the warning signs.The financial crisis could have been avoided if these warning signs had been taken more seriously. The United States’ 2011 Financial Crisis Inquiry Report reads: “The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.”Central banks are making analogous claims to those made in the run-up to the financial crisis when they play down the risks of CBDCs, especially the possible monopolization of the financial system by the central bank, and talk only about their benefits. “A core instrument by which central banks carry out their public policy objectives is providing the safest form of money to banks, businesses and the public — central bank money,” according to the BIS.CBDCs are designed to attack crypto and shore up the power of central banks, according to critics.Charles Calomiris, Henry Kaufman professor of financial institutions at Columbia Business School, tells Magazine that CBDCs seem more like a power grab than useful financial technology.“CBDC is the latest attempt to expand their power at our expense by self-interested central bankers, which have done more in developed countries to expand their power at the expense of democracy over the past two decades than any other instrument of government.”The architectural design of CBDCs matters. If they are designed so that they, even if not explicitly stated, can replace private commercial and retail banking, as the Peoples’ Bank of China has suggested, then central banks will have yet another mechanism for creating money that has no collateral or underlying asset value. Such an approach would have grave inflationary implications.Last year, several economists published research on CBDCs and bank runs, finding that large-scale intermediation by central banks could lead to them becoming monopolies. Since central banks’ contracts with investment banks tend to be rigid, they have the potential to deter bank runs. Consumers “internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector,” according to the research’s authors.A nail in the coffin for privacyEven though public documents from central bankers talk about privacy as a feature of CBDCs, no explanation exists for how this will work. In contrast, the BIS reported that “Full anonymity is not plausible. […] For a CBDC and its system, payments data will exist, and a key national policy question will be deciding who can access which parts of it and under what circumstances.”Such a rollout could mean that every central bank would be able to identify each user. Today, a bank cannot tell who is using a euro versus a dollar bill, but “The key difference with the CBDC is the central bank will have absolute control [over] the rules and regulations that will determine the use of that expression of central bank liability, and also, we will have the technology to enforce that,” said Agustin Carstens, general manager of the BIS, during a 2020 panel discussion.The U.S. is looking into a digital dollar, but will it be in keeping with the principles that make America what it is? Source: PexelsThere is little doubt that illicit transactions occur with cryptocurrency, but illicit transactions have always taken place, whether a thousand years ago with gold or today with cash. The question is how to create a framework that preserves privacy and counters illicit activity.If central banks can track every transaction, what is to stop them from shutting down people’s access to finance, travel and their livelihoods? Furthermore, what would stop central banks from coordinating, as outlined in the BIS’ 2020 report?“CBDCs don’t just threaten but fully infringe upon our financial autonomy, stripping away our most basic rights and freedoms as enumerated by our forefathers,” Eric Waisanen, co-founder of Hydro.Finance and host of the Secret Code Podcast, tells Magazine. In contrast, “DeFi provides freedom from the alleged protection that strips us of our ability to participate,” Waisanen continues.pic.twitter.com/VGa6W52a6J— Sats Symbol (@SymbolSatoshi) March 31, 2022The future of money and DeFiThe future of finance lies in decentralization. While we have traditionally known and interacted with large, centralized institutions, we have seen a widespread preference for and adoption of decentralized technologies arise from technological advances coupled with a recognition of the ills of centralization.But DLT, and blockchain more generally, is only a tool. It still needs good governance and proper stewarding. The emergence of CBDCs is likely to centralize the “creation” and flow of finance even further by granting central banks even more authority to issue tokens rather than buy and sell bonds on a somewhat “open” market.“A CBDC is an authoritarian government’s dream and represents a giant step backward for consumer privacy,” says Paul Watkins, managing director at Patomak Global Partners.Many architectures for CBDCs have been proposed. There is widespread enthusiasm for the use of DLT in central banking, but not for retail CBDCs that simultaneously can create money without collateral and require individuals to share personally identifiable information. It is important to seriously consider the architecture of a CBDC when thinking about design; otherwise, CBDCs will be launched in competition with the growing move and appetite for decentralization.

Recent research shows that decentralized exchanges that distribute tokens via airdrops see a big boost in user numbers and transactions. But, is building communities this way just crypto’s version of printing money?Airdrops — the disbursal of free tokens to early users as a way of rewarding and building momentum — have been around for years but came to prominence thanks to Uniswap’s retroactive largesse in 2020. Nearly anyone who’d used the exchange before a certain date was gifted 400 UNI tokens and those who held their tokens saw a substantial increase.But, as the market became more mature and more people entered the space, the use cases for airdrops have become more complex. For example, LooksRare more recently sought to siphon off some of OpenSea’s user base by airdropping tokens to new users but with two key rules: They had to have bought or sold a minimum of 3 ETH of NFTs on OpenSea and would need to contribute a new NFT to the LooksRare marketplace.There have also been notable bad airdrop examples, ranging from a lack of liquidity for Fees.wtf to phishing expeditions whereby recipients of the airdrop are baited into connecting their wallets to a malicious site.The question for builders is: Are airdrops effective tools for galvanizing new users and building communities?Building a communityUnless you’re an already established exchange or NFT project, attracting new users is very difficult and handing out free tokens is one way to do it. In the DeFi and DAO space, tokens often come with governance rights that confer the authority to vote on the protocol’s development so airdrops can create both value and skin in the game.But, how do you avoid devaluing the token and attracting a large group of freeloaders with no interest in contributing apart from receiving the airdrop?Airdrops can be a very successful marketing strategy.If you do it right, instead of just attracting attention, airdrops can be an effective vehicle for building community. They can reward loyal users and generate buzz and momentum in the market. Many exchanges are simply looking for relevance and traction in decentralized communities. Having something to talk about is a way to stay relevant and build value for the audience.That’s what Gary Vaynerchuk, chair of VaynerX and creator of VeeFriends, did in 2021 when he announced that every customer who bought 12 print copies of his new leadership book — about twelve essential emotional skills that are integral to his life — would also receive one mystery NFT through an airdrop to their digital wallets. While the book was interesting on its own, the novelty of a mystery NFT coupled with the success and appreciation of his even earlier VeeFriends NFTs created a significant splash and demand.In fact, Vaynerchuk received over a million pre-orders of the book within a 24-hour period.Airdrops and scamsAre there scams with airdrops? Scams are inevitable, especially with new technologies and markets where it is harder for new users to cut through the noise.That means that the more important question is not whether all airdrops are scams, but rather how to work out which airdrops come from meaningful and high-impact projects. Especially for public-facing personalities, like Vaynerchuk, who make their business around legacy and reputation, even a whiff of a scam — or simply failing to deliver value — has costs.“When a startup fails in Web3, the audience loses money. I don’t know how to run around the earth when the audience has lost money and think that I can do business again,” Vaynerchuk tells Magazine. In other words, if customers who ordered 12 print copies never ended up receiving an NFT or were underwhelmed by the experience, then there would be consequences on Vaynerchuk’s reputation in the marketplace. Indeed, most, if not all, of the customers who bought 12 print copies were doing so to get the NFT, not for the 12 copies.Reputational effects are sometimes easy to forget in new projects. It’s so easy to get caught up in being busy and dealing with problems that certain commitments can slip by.However, small projects can attract serious attention if they excite people about their growth, build a community along with a set of common principles and then execute on what they’ve said.“Value accrues to the community as more people become interested,” Justin “3LAU” Blau tells Magazine. He is, of course, the famed American DJ and co-founder and CEO of the Royal platform with the tagline: “Own music and earn royalties alongside artists.” Since airdrops are one way to accelerate community development, particularly early on, they can be incredibly strategic when done right.3lau is music royalty. See what we did there?Dropping new music3LAU has been especially effective in leveraging airdrops with music NFTs.Shortly after co-founding Royal, which has flipped the business model in the music sector by allowing fans to journey with artists by having rights to future royalties, he announced a surprise airdrop of his latest track “Worst Case” to the 333 users who provided the most referrals. That, in turn, incentivized greater engagement and created value for the holders. The floor price of these NFTs stands at 2 ETH, coming to over $6,200 at current prices.Although Royal is still in its infancy, there are many opportunities for artists to surprise their fans, inculcate enthusiasm and encourage participation through airdrops. 3LAU says:“Simply rewarding a community for engaging with your product in a retroactive way is not scammy. It is up to that community to decide what to do.”That ownership over the music creates a new level of connectivity between fans and the artist. Royal’s business model also provides a way for artists to acquire the capital they need to launch a career without selling themselves out to record labels and other intermediaries who end up making a killing and leaving the artist with very little.Do these anecdotal experiences line up with the data? In short, yes.Been asking how we get paid streaming royalties for @join_royal and @3LAU’s “worst case” launch #LDA. Today is the day we got an answer! Airdrops of #Eth! #WorstCase turned out to be best case! #LFG pic.twitter.com/6KE6LB6zzK— Daniel Marks – PDMarks.Eth (@PDmarks) February 10, 2022We have the dataIn my work as a computational social scientist and economist at Stanford University and Columbia Business School, one of my recent research papers quantitatively investigated the rise of decentralized finance by collecting data on the major crypto exchanges between 2014 and 2021. We documented a much more rapid growth among DEXs and found that decentralized exchanges that did an airdrop exhibit gained an additional 16.1% in their growth rate of market capitalization and 7.3% in their growth rate of transactions, relative to their centralized exchange peers.Moreover, airdrops had a positive effect on market capitalization and volume growth even after controlling for other factors like when the exchange launched. While time will tell whether these patterns continue, the data supports the strategic use of airdrops.Further, these results likely underestimate the value of airdrops given that they create more value than just the price associated with the corresponding digital asset. In fact, there could be broader social value if they also serve an educational and community-building purpose.“Airdropping tokens to new people in the space feels amazing, education through doing helps a lot, helping people get a first NFT and giving exposure to the project is just a nice feeling,” said Vaynerchuk on Twitter. Assuming that the Web3 revolution is inevitable, then airdropping tokens provides an easy way for new users to test the waters.Airdrops can be a great way to build communities.Money printer goes brrrAnd, yet, airdrops don’t come for free — even in the cryptocurrency market, says Vaynerchuk.“Supply and demand is supply and demand. You are still going to have to create more than short term financial gifts by printing more money.”Airdrops still have value if they are used sparingly, but the well can be tapped only so many times before they lose their surprise and appeal among prospective or existing users.In that sense, airdrops might have a big impact once or twice at the launch of a project, but they can exhibit some diminishing marginal returns if artists are not thoughtful.“Airdrops in and of themselves are fine, but the mechanics of them might not be,” 3LAU says. If a project is going to lead with another identical airdrop, it may be a dud. Rather, pointing toward something new and exciting may continue to drive engagement.Know your productWeb3, especially DeFi, remains a wild west and the rules of the game have not fully formed. However, the United States Department of Treasury’s Office of Foreign Asset Controls applies regulations on all U.S. companies. “That means projects need to conduct Know Your Customer and Anti-Money Laundering checks on individuals receiving airdrops,” Ivan Ravlich, co-founder and CEO of Hypernet Labs, tells Magazine.Verifying identities is not easy, but Hypernet Labs has created hypernet.id, a digitally-native and privacy-preserving nonfungible token that is minted to the end user‘s crypto wallet. In this sense, “users can now transact compliantly with blockchain-based decentralization projects, which was impossible in the past,” says Ravlich.That service — whether by Hypernet Labs or someone else — is what the Web3 community desperately needs. For example, consider the recent confusion between CryptoPunks v1 and v2. Because of a glitch in the first version of CryptoPunks minted in 2017, Larva Labs issued a second version. However, some community members nonetheless created variants of the initial mint with different background colors, selling these NFTs as historical relics which led to a backlash by Larva Labs threatening to pursue legal action. In the presence of privacy-preserving validation mechanisms, these incidents could be entirely avoided.CryptoPunks V1 were delisted from OpenSea.While technology is never a panacea, it can be an important tool and airdrops are one such mechanism for creating momentum and cultivating community. However, caution is required: Even when a project owner does not have bad intent, airdrops can be executed poorly and not achieve the desired results.Ultimately, potential token and NFT holders need to evaluate a project on its merits and believe it actually holds value. Simply accepting tokens from a project without a plan and clear value proposition is, at best, a short-term play and not a long-term wealth creation strategy.