Are CBDCs a threat to Bitcoin’s supremacy?

When Bitcoin was launched in January 2009, it didn’t receive much attention from the general public, let alone from big players in the financial scene like central banks and other relevant institutions. It was mostly regarded as a feeble attempt at introducing a new and decentralized medium of exchange that would not 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 USD mark and everyone and their dog was looking into how to buy Bitcoin. Those who jumped on the bandwagon at the right moment ended up making huge profits, while those who didn’t have the inspiration to do so regrated the missed opportunity.

What followed next is old history. More crypto projects emerged onto 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 kept appreciating over time and the industry expanded year after year. Today, the cryptocurrency market is worth billions of dollars, and despite the setback it has suffered in the wake of the latest 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 financial 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 hold, they have decided to strike back and issue their own version of digital currencies, named 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 conduct payments. Then tech advances came into play, and money started migrating to the digital space. With the emergence of digital means of payment such as credit and debit cards, electronic funds transfers, mobile payment apps, mobile wallets, or QR payments, the public started moving further away from cash. Physical money is still being used at a large scale at the moment, but the general tendency is to phase them out over time and create a cashless financial system at one point.

In a way, CBDCs are in line with the race to digitalization and they’re often compared with other digital payment methods already prevalent in today’s society. But despite the numerous similarities between these two payment instruments, there are also some key differences that set them apart.

For starters, we have to clarify that CBDCs are an electronic version of a country’s official fiat currency that is issued and backed by a central bank. As such, CBDCs are expected to complement and coexist with the country’s sovereign currency and hold the same value. Given that economies vary widely across the world, there’s no universal framework for issuing CBDCs, but an increasing number of countries have already started exploring different issuance options based on the technology popularized by Bitcoin in 2009. Many of them have developed projects that 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 begun testing them, while Australia, Thailand, Brazil, India, South Korea and Russia are expected to follow suit this year.

What separates CBDCs from other forms of digital payments is the fact that they’re issued and backed by a central bank, as opposed to utilizing commercial banks that manage customers’ accounts and therefore, they represent a direct liability to the issuing bank. CBDCs also aim to provide universal accessibility, a feature that’s still in the works, while digital payments have numerous limitations. What’s more, CBDCs are designed as an entirely 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 CBDCs influence Bitcoin and the crypto industry?

So far, the idea of introducing CBDCs in the banking system sounds promising, despite the numerous challenges it implies. But beyond the potential benefits that CBDCs may provide, there are also growing concerns about how they might affect Bitcoin’s position and the cryptocurrency industry at large.

Some pundits place CBDCs and crypto in direct competition, predicting that CBDCs might overthrow Bitcoin in the future. But at a closer analysis, it becomes obvious that there can be no such thing. Firstly, we need to remember that the same concerns were raised when altcoins and stablecoins joined the market, only to witness later on how their emergence strengthened Bitcoin’s position as a leader.

It’s also important to point out that Bitcoin and other crypto’s appeal stems from their decentralized nature, ruling out a central point of failure and placing 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, and that goes against the very ethos of cryptocurrencies.

Just like their physical counterparts, CBDCs have an unlimited supply, so inflation remains a significant issue. By contrast, Bitcoin and other crypto projects have been designed with a hard cap, proving protection against inflation. Besides, Bitcoin and Co. are known for ensuring transparency and traceability while keeping the identity of users private. The same cannot be said about CBDCs as they don’t guarantee anonymity.

As you can see, the strong suits differ for CBDCs and crypto, 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 in the years to come.

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