CBDCs do not threaten Bitcoin — their success might depend on it

A little less than two years ago, the International Monetary Fund (IMF) published a research paper on the rise of digital money. Much of the text dealt with how Central Banks could mitigate potential risks that digital money and in particular stablecoins posed to the existing system.

At the time, the paper’s inclusion of Bitcoin as public money seemed relevant, but the currency itself was actually not given too much attention and deemed to be of little significance.

Much has changed since then. And yet, the discussion around Central Bank Digital Currencies (CBDCs) remains limited to payment rails, the programmability of money and the promise of financial inclusion, without ample consideration of how public confidence comes into play. 

This might lead some to believe that CBDCs could render Bitcoin redundant.  However, when we shift our focus from pragmatics to a conversation about trust, ownership and agency, it becomes clear that CBDCs do not pose a threat to Bitcoin. Their success might even depend on it. 

CBDCs reconsidered

For most crypto enthusiasts, CBDCs are antithetical to Bitcoin. Issued by a Central Bank on a permissioned blockchain, CBDCs operate within a skewed power-structure and are therefore unlikely to offer a monetary policy as reliable and predictable as Bitcoin does. 

Nonetheless, in public discourse these state-mandated digital currencies are generally presented as offering a wide range of benefits. In the international arena, CBDCs could be used to optimize remittance flows, inter-bank settlement and commerce. In trade, CBDC networks could be leveraged to challenge US hegemony, especially in the context of China’s Belt & Road Initiative. 

Domestically, CBDCs could provide additional avenues to reach unbanked communities and act as an interface to provide stimulus payments, subsidies or distribute other benefits. The technology could also be used to collect data, raise tax or enforce sanctions.

Back when the prospect of CBDCs really flared up, around the same time Facebook proposed its Libra project, at AAX we mostly saw CBDCs in terms of an endorsement of blockchain and as potentially improving the liquidity rails between fiat and crypto. Now, however, we believe the dynamic between Bitcoin and CBDCs to be of a much more contentious nature, especially in the wake of the pandemic and the unrest that has followed.

Bitcoin’s Appeal

It’s undeniable that during the pandemic we’ve seen a widening rift between governments and their citizens, from the commotion around the US election to protests in cities around the world. In the meantime, Bitcoin has seen significant uptake as a hedge against inflation – or essentially, as a better alternative to fiat.  More than price alone, Bitcoin indexes a growing collective recognition that a digital, decentralised globally accessible store of value, that features fixed scarcity, suits the needs of the 21st century better than some of the instruments that date back to the Stone Age, so to speak. 

From creation, Bitcoin is rooted in a set of core principles around privacy, ownership, trust and financial agency, and as such it has the unique ability to change speculators into staunch HODLers. 

Unlike CBDCs, which require top-down implementation, Bitcoin is organically taking root at all levels of society. From corporations, to high-net-worth individuals and asset managers, and reportedly even sovereign wealth funds; the transition to Bitcoin is happening. And it’s not just institutional money that’s moving. Grassroots initiatives such as the one in a village in El Salvador are working to promote Bitcoin adoption at a local level as well. Projects like these essentially disembed local market economies from their monetary jurisdiction, in which they find themselves disenfranchised, and plug them into Bitcoin’s global network. 

According to one analyst, in terms of adoption, Bitcoin’s 150 million users currently puts it on par with where the Internet was in 1996, and at the rate the network is growing, Bitcoin could reach 1 billion users within four years.

Is There A Future For CBDCs?

If enough public and private capital flows into Bitcoin over the coming years, and it becomes a currency used for global trade and settlement, then states might have a hard time selling any new system or currency to their citizens, let alone to the international community. 

In an already contentious world, CBDCs are likely to remain gridlocked in a battle for dominance and give rise to a monetary version of what some have called the Splinternet – i.e. a politicized multiverse of liquidity and payment rails. 

The real battle, therefore, will be for the hearts and minds of people and to restore trust in government-decreed money. Some smaller city- or island-states could move to adopt Bitcoin as a reserve currency and use it to back a domestic CBDC. This can be seen as a form of inverse tokenization where digital assets no longer represent an economy, but start to form the foundation of an economy itself. 

For larger jurisdictions such as the US, China, India or the EU, the process is likely to be much more arduous. If they choose not to follow the private sector in adopting Bitcoin, then the success of their CBDCs will rest on the ease with which their users can exchange their funds for other currencies – including crypto – as well as the extent to which crypto regulation is favourable for business. 

How it all plays out will have to be determined on the ground. Undoubtedly, CBDCs can bring a lot of benefits to society. However, neither adoption nor prolonged success of any CBDC can be taken for granted, especially with Bitcoin on the rise. It is ultimately a choice of the people.  

Contributed by CryptoSlate.