Will Central Banks' Money Fly?

Central Bank Digital Currencies (CBDCs)—nationally sanctioned and sanitized takes on the cryptocurrency phenomenon—are already well known to the public. Governments and banks have broadly agreed on the main design principles, while potential end-users have voiced concerns over privacy, control, and the true nature of these digital currencies.

Yet, in most CBDC initiatives, a foundational principle of blockchain—decentralization—is quietly omitted. The idea of eliminating a single, trusted central authority, as envisioned in Bitcoin’s whitepaper, has been discarded in favor of systems where control remains centralized.

Bitcoin proposed a permissionless ledger, where cryptographic rules—not institutions—safeguard transactions. Its "CAPTCHA" for participating nodes removed the need for a trusted database operator. This was meant to counter two critical concerns:

1. Reversibility – the ability of a centralized authority to block or reverse any transaction at its discretion. With growing use of financial sanctions, this capability has become more prominent.
2. Inflationary issuance – the power of the central issuer to "print" money, thereby diluting the savings of users. Today’s euphemism for this is “monetary easing,” but the economic effect remains the same.

While both powers are supposedly constrained by regulation, history has shown they can be overridden when needed. Satoshi Nakamoto's vision was of a system that operates above governance, not within it.

An analogy helps: gold and cash. Gold can be mined by anyone, albeit under physical constraints. Cash, however, can only be printed by authorized entities. Gold represents a permissionless asset; cash, a permissioned one. Permissioned systems entail administrative overhead, regulatory enforcement, and risk of abuse—like when central banks declare old banknotes invalid overnight.

But permissionless systems also have trade-offs. They come with complexity and performance penalties. Bitcoin’s Proof-of-Work (PoW) system, for example, slows transactions by design to protect integrity. Proof-of-Stake (PoS) systems are faster but still nascent and vulnerable to implementation flaws.

Additionally, current permissionless platforms suffer from infrastructure centralization and limited privacy. For instance, despite Bitcoin’s decentralized ethos, the majority of its full nodes are concentrated in a handful of hosting providers and geographic regions, leaving the network vulnerable to coordinated outages or surveillance. Mining pools dominate block production, with the top two often controlling over 50% of the total hashrate, undermining the idea of evenly distributed consensus.

Ethereum, after its transition to Proof of Stake, now faces centralization among validators and staking infrastructure. A significant share of Ethereum’s staked ETH is held by a few large providers like Lido, Coinbase, and Kraken, raising concerns about governance capture and collusion. Lido alone has at times approached or exceeded 30% of total staked ETH—well above any comfort threshold for decentralization.

On the infrastructure side, both Bitcoin and Ethereum rely heavily on cloud-based node operators like AWS, Google Cloud, and Hetzner. In Ethereum’s case, more than 60% of beacon chain nodes are hosted in data centers rather than run by individuals—creating potential chokepoints and exposing the network to de-platforming risks.

Central Banks Choose Permissioned Blockchains

It’s no surprise, then, that most CBDCs abandon permissionless designs altogether. They opt for permissioned blockchains, where only designated actors—central banks and selected institutions—can validate transactions. For policymakers, the choice is clear: retain centralized control, just in digital form.

China’s e-CNY, the world’s most advanced CBDC pilot, doesn’t even use a blockchain—it runs on traditional centralized databases. The digital euro, digital shekel, digital yen, and e-krona follow similar designs. While they may borrow some ideas from distributed ledgers, they are ultimately centralized financial tools with restricted access.

The Bank for International Settlements (BIS), which guides global central bank policy, is involved in more than a dozen CBDC-related initiatives. Virtually all use permissioned platforms. Only one, Project Mariana, has experimented with transactions on a public blockchain—Ethereum’s testnet.

BIS CBDC Projects and Platforms

According to a 2023 study by Quinlan & Associates, only 24% of CBDC-developing institutions expressed a preference for using public blockchains.

The reasons are clear: public chains lack native tools for meeting regulatory requirements like AML, KYC, and compliance auditing. One of the most widely used platforms in CBDC development is Hyperledger, developed by the Linux Foundation with IBM, Intel, and SAP. According to CBDCTracker, seven national projects—including Nigeria’s e-Naira—use Hyperledger.

However, the promise of Bitcoin was much more ambitious than user-friendly payments or financial inclusion—problems fintechs and banks are already solving. It aimed to remove central authority from money altogether: no one could block or reverse a transaction, inflate the supply, or dictate policy unilaterally. A system like this must be borderless and resilient—capable of withstanding global disruptions.

In that sense, central banks should be clients of such systems, not their operators.

Permissionless Systems at Work

Even when CBDCs touch public blockchains, it’s in a limited way. In Project Mariana and the Royal Bank of Australia’s Ethereum experiment, public blockchains are simply alternate rails—used to move wrapped versions of centrally controlled currencies.

A notable exception is the Solomon Islands CBDC, where the permissioned Hyperledger system is integrated with the SORA network—a permissionless blockchain developed by Soramitsu. This hybrid setup aims to combine the control of central issuance with the global reach and resilience of a public network.

Still, these experiments stop short of relinquishing control. The assets remain under central bank custody. There’s no scenario yet where inflation targeting or monetary policy is governed by smart contracts or DAOs.

Admittedly, even decentralized systems haven’t solved monetary governance. Bitcoin’s issuance is hardcoded via block rewards. Ethereum uses a more flexible, but still manually adjusted, combination of staking, burning, and upgrades to maintain balance. Some projects, like Truflation, aim to bring real-world economic data on-chain via oracles—but oracles have their own risks and are not widely adopted in live monetary systems.

The U.S. Genius Choice

While other central banks try to modernize money by retaining legacy control, the U.S. may have found a more elegant solution: stablecoins. These tokens are still centrally issued and can be censored, but they move on open, permissionless rails—Ethereum, Solana, and others—beyond the control of any single party.

This hybrid model offers the best of both worlds. It combines the stability and regulatory oversight of fiat with the openness and composability of decentralized infrastructure. Oversight is not enforced by a central protocol, but by market-driven competition and self-regulation by private issuers.

Challenges remain. Stablecoins have addressed reversibility, but not issuance discipline. Since they’re pegged to the dollar, they inherit the Fed’s monetary policy. They don’t offer independence from inflation or monetary shocks.

Still, if crypto-native tools can one day address these open questions, the U.S. approach could prove to be more than just a pragmatic compromise—it might be the future of money itself.