Central bank digital currencies (CBDCs) and cryptocurrencies like Bitcoin may both operate on the blockchain, but each has inherent traits that make it unique from the other. While it is true that they each fill a different niche in the market, there are still scenarios where CBDCs and Bitcoin could clash and affect each other’s performance.
CBDCs are digital currencies that are directly issued by the central bank, backed by foreign reserves, and controlled by the entity that issued them, which is either the central bank or the government. Cryptocurrencies, on the other hand, are decentralized and private-sector-issued, and they may or may not represent the liability of any government or central authority. In the case of Bitcoin, it operates via a peer-to-peer network in the blockchain composed of users, miners, developers, nodes, exchanges, and a proof-of-work mechanism that means no single entity has control over it.
CBDC’s Threats to Bitcoin
The rise of CBDCs poses a significant threat to Bitcoin, the first and largest cryptocurrency, in various ways. These include but are not limited to the following:
1. Competition for Digital Payments
One of the primary use cases of CBDCs is for digital payments. With CBDCs, central banks can offer a digital alternative to cash that is faster, cheaper, and more efficient than traditional payment methods. This would compete directly with Bitcoin and other cryptocurrencies that also aim to provide fast and low-cost payments.
2. Regulatory Pressure
Central banks and governments are becoming increasingly interested in regulating cryptocurrencies. The rise of CBDCs could increase this pressure, as they provide a more regulated and controlled alternative to cryptocurrencies. This could result in stricter regulations for cryptocurrencies, making it more difficult for them to operate.
3. Lower Demand for Cryptocurrencies
If CBDCs become widely adopted, they could reduce the demand for cryptocurrencies as a store of value or investment asset. CBDCs are likely to be less volatile and more stable than cryptocurrencies, making them a safer option for investors.
4. Reduced Adoption in Countries with CBDCs
Countries that adopt CBDCs may be less likely to adopt cryptocurrencies as an alternative. This could limit the growth of cryptocurrencies in those countries, reducing their overall adoption and value.
Threats Posed to CBDCs by Bitcoin
While CBDCs pose a threat to Bitcoin, the latter similarly challenges the former in some ways. Here are some of the key features that Bitcoin possesses over CBDCs:
1. Competition for Digital Payments
Bitcoin is already established as a fast and low-cost digital payment method. As CBDCs aim to provide a similar service, Bitcoin may provide direct competition. Bitcoin’s decentralization and borderless nature may also be attractive to those who value privacy and freedom from government control.
2. Reduced Control for Central Banks
CBDCs give central banks more control over the money supply and the ability to track and monitor transactions. Bitcoin’s decentralization and anonymity make it more difficult for central banks to control the flow of money and monitor transactions.
3. Technical challenges
CBDCs are a relatively new technology that requires significant infrastructure and technical expertise to develop and implement. Bitcoin, on the other hand, is already established and has a large and growing user base. CBDCs may struggle to compete with Bitcoin’s existing network and infrastructure.
CBDCs and Bitcoin pose threats to each other in various ways. While CBDCs offer significant advantages over cryptocurrencies in terms of stability, security, and regulatory control, they also face significant challenges in terms of technical implementation, user adoption, and competition from established cryptocurrencies like Bitcoin. On the other hand, Bitcoin’s decentralized and borderless nature provides an attractive alternative to CBDCs for those who value privacy and freedom from government control.
Ultimately, it remains to be seen how CBDCs and cryptocurrencies will coexist and compete in the future, but both are likely to play a significant role in shaping the future of money and finance.
Giancarlo is an economist by profession with a career spanning nearly two decades. His professional journey has seen him assume vital roles in various government and private organizations such as the Department of the Interior and Local Government (DILG), the National Economic and Development Authority (NEDA), Megaworld Corporation, and the China Banking Corporation in the Republic of the Philippines.
In addition to his civic and corporate pursuits, his forward-thinking approach has led him to manage several prominent websites in the banking and finance sector, notably the Australia-based RateChoice, where he immersed himself in the world of emerging financial technologies and where he found particular interest in Bitcoin all the way back to 2013.
Prior to his addition to Blockzeit’s dynamic team, he held an essential role as Project Manager for initiatives encompassing blockchain, stablecoin, mining, special economic zone development, and iGaming. This noteworthy chapter in his career unfolded under the auspices of InPlan Consultancy Services, Inc., the think-tank of IMPERO Consortium Management Corporation headquartered in Manila, Philippines, and Tokyo, Japan. InPlan, led by a distinguished retired Cabinet member of the Philippines, collaborates directly with IMPERO’s core management team, contributing to strategic planning and business development endeavors.