Are CBDCs a Threat to Bitcoin’s Supremacy?
When Bitcoin was launched in January 2009, it did not receive much attention from the general public, let alone from major players in the financial scene such as central banks and other relevant institutions. It was mostly seen as a feeble attempt to introduce a new and decentralized medium of exchange that wouldn’t amount to much in the grand scheme of things. But opinions changed drastically a few years after the birth of the original crypto when Bitcoin broke the $1000 mark and everyone and their dog was researching how to buy Bitcoin. Those who jumped on the wave at the right moment ended up making huge profits, while those who didn’t have the inspiration to do so regretted the lost opportunity.
What followed is ancient history. Several crypto projects appeared on the scene, most of them following Bitcoin’s model, giving birth to a new category of digital currencies known as altcoins. Crypto prices fluctuated wildly but continued to increase over time, and the industry expanded year after year. Today, the cryptocurrency market is worth billions of dollars, and despite the setback it suffered in the wake of the last crypto winter, it continues to push forward. There are also many voices saying that crypto represents the future of money and will one day replace fiat currencies altogether.
In the current economic context, with crypto being adopted by an increasing number of businesses, organizations and individuals, governments and central banks can no longer turn a blind eye to the phenomenon. So, recognizing the potential and influence that digital currencies and the underlying blockchain technology have, they have decided to fight back and issue their own version of digital currencies, called central bank digital currencies (CBDCs).
What are CBDCs?
Before the rise of digital technologies, banknotes and coins issued by central banks were the most common form of fiat money that people could use to make payments. Then technological advances entered the picture and money started migrating to the digital space. With the emergence of digital means of payment such as credit and debit cards, electronic money transfers, mobile payment apps, mobile wallets or QR payments, the public began to move further away from cash. Physical money is still used on a large scale at the moment, but the general tendency is to phase it out over time and create a cashless financial system at some point.
In a sense, CBDCs are in line with the race towards digitization and are often compared to other digital payment methods that are already prevalent in today’s society. But despite the many similarities between these two payment instruments, there are also some important differences that set them apart.
First, we need to clarify that CBDC is an electronic version of a country’s official fiat currency that is issued and backed by a central bank. As such, the CBDC is expected to complement and coexist with the country’s sovereign currency and have the same value. Given that economies vary widely around the world, there is no universal framework for issuing CBDCs, but a growing number of countries have already begun to explore different issuance options based on the technology popularized by Bitcoin in 2009. Many of them have developed projects which are either in an advanced pilot or launch phase. China, the Bahamas, Jamaica and Sweden are some of the countries that have already rolled out their own CBDCs and started testing them, while Australia, Thailand, Brazil, India, South Korea and Russia are expected to follow suit this year.
What differentiates CBDCs from other forms of digital payments is the fact that they are issued and backed by a central bank, as opposed to using commercial banks that manage customers’ accounts, and therefore represent a direct liability to the issuing bank. CBDCs also aim to provide universal accessibility, a feature that is still in the works, while digital payments have many limitations. Moreover, CBDCs are designed as a completely new type of payment instrument, while digital payments are nothing more than a digital representation of an existing instrument. But probably the biggest differentiator is represented by the frictionless payments that CBDCs would provide by eliminating third-party intermediaries and adopting a peer-to-peer model that allows people to engage directly with central banks.
How will the introduction of CBDC affect Bitcoin and the crypto industry?
So far, the idea of introducing CBDCs into the banking system sounds promising, despite the many challenges it entails. But beyond the potential benefits that CBDCs could bring, there are also growing concerns about how they could affect Bitcoin’s position and the cryptocurrency industry at large.
Some pundits place CBDCs and crypto in direct competition, predicting that CBDCs could topple Bitcoin in the future. But on closer analysis it becomes obvious that there can be no such thing. First, we must remember that the same concerns were raised when altcoins and stablecoins joined the market, only to later see how their rise strengthened Bitcoin’s position as a leader.
It’s also important to point out that Bitcoin and other cryptos’ appeal stems from their decentralized nature, ruling out a central point of failure and putting control in the hands of users. While CBDCs promise to ensure accessibility, financial inclusion and price stability, they are centrally controlled and regulated by each country’s government, which goes against the very ethos of cryptocurrencies.
Just like their physical counterparts, CBDCs have an unlimited supply, so inflation remains a significant issue. In contrast, Bitcoin and other crypto projects have been designed with a hard cap, which proves protection against inflation. Also, Bitcoin and Co. known for ensuring transparency and traceability while keeping users’ identities private. The same cannot be said for CBDCs as they do not guarantee anonymity.
As you can see, the strengths of CBDC and crypto are different, making it highly unlikely for these two financial instruments to compete for supremacy. If anything, CBDCs and Bitcoin will peacefully coexist and enrich the financial ecosystem for years to come.
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