Introduction
Over the past decade, we have seen a very rapid emergence of digital currencies; first with decentralized currencies (i.e. cryptocurrencies like Bitcoin, Ethereum, Solana), and more recently, Central Bank Digital Currencies (CBDCs). With cryptocurrencies initially providing a baseline of decentralization, privacy and independence from the traditional finance, CBDCs will provide a baseline of government-backed volatility and regulatory clarity.
As central banks around the world continue down their path toward developing and launching their respective digital currencies, an important question has risen: will CBDCs kill crypto?
In this article, we will explain what CBDCs are, some of the reason for their growing popularity, the differences between CBDC and cryptocurrencies, and ask if CBDCs will be a risk, or a blessing, for the broader crypto ecosystem.
Table of contents
Table of Contents
What are CBDCs?
Why are CBDCs growing in popularity?
How CBDCs work – a technical overview
CBDCs versus cryptocurrencies – The main differences
Global CBDC projects – Who is leading the way?
Impact of CBDCs on cryptocurrencies
The case for coexistence: Why CBDCs may not kill crypto
The risks and concerns of CBDCs
CBDCs and financial surveillance – A double-edged sword
What does
What Are Central Bank Digital Currencies (CBDCs)?
CBDCs are digital forms of a country’s currency, issued and regulated by the country’s central bank. Unlike cryptocurrencies, CBDCs are centralized and guaranteed by the full faith and credit of the issuing government.
They are not new “currencies” like Bitcoin or Ethereum, but rather digital forms of cash in the fiat sense: digital dollars, euros, yuan, or rupees.
CBDCs hope to provide the benefits of digital payments—speed, convenience, and efficiency—with the safety and trust that come from central banks.
Forms of CBDCs
Retail CBDCs: For use by the public, a digital form of cash
Wholesale CBDCs: For use by financial institutions, mainly for interbank settlements
Why Are CBDCs Increasingly Acclaimed?
The government and central banks are exploring CBDCs quickly for numerous political and economic reasons:
a. A decrease in cash transactions
As societies continue on the path toward cashless economies, there is a curiosity about what a country’s sovereign digital alternative looks like to physical currency.
b. Competition with cryptocurrencies and stablecoins
The tremendous growth of crypto, including stablecoins such as USDT and USDC, has prompted central banks to act. They want to protect their monetary policy environment while guaranteeing financial stability.
c. Financial inclusion
The unbanked could be provided access to the financial system. CBDCs vs. Cryptocurrencies: Key Differences
CBDCs cryptocurrencies
Central Bank issuance Decentralized (no issuance)
Government-backed Unregulated (varies)
Central authority controls supply Algorithmically or by market mechanisms
Kinship People know I have it, but don’t know who I am (i.e. Monero, Zcash)
Price stability Controllable price (pegged to fiat) Price volatility
Centralized (permissioned) Decentralized (open network)
CBDCs are not cryptocurrencies. CBDCs are state-controlled and do not possess decentralization or anonymity (censorship resistant).
- Global CBDC projects: Who is winning?.
a. China – Digital Yuan (e-CNY)
No country is as far advanced as China in developing their CBDC. China is conducting public trials of their Digital Yuan in the largest cities of consumer activity and have integrated e-CNY into major Chinese apps like WeChat and Alipay.
b. Europe – Digital Euro
The European Central Bank is preparing for preliminary issuance of a Digital Euro focused on privacy issues, access and inclusion, and mitigation of systemic risks to the financial system.
c. USA – Digital Dollar
The Federal Reserve is examining a digital dollar framework, but is taking a cautious view on the CBDC in relation to banking and payment systems.
d. Bahamas – Sand Dollar
In October 2020 the Bahamas launched the world’s first CBDC, the Sand Dollar. The government-run digital currency aims to promote financial inclusion whilst providing a stable monetary figure for its residents, and aims to counter seaside tourism with a digital alternative able to retain the endemic goods 만든 safety.
d. Bahamas – Sand Dollar
In October 2020 the Bahamas launched the world’s first CBDC, the Sand Dollar. The government-run digital currency aims to promote financial inclusion whilst providing a stable monetary figure for its residents, and aims to counter seaside tourism with a digital alternative able to retain the endemic goods 만든 safety.
CBDCs and Financial Surveillance: A Binary Choice
CBDCs are powerful tools for governments to oversee and manage the economy. This is advantageous—stopping terrorist financing, stimulus distribution—but it can also be overreach.
Potential uses for programmable CBDCs:
Automatic expiration of unspent funds.
Rules governing how citizens can spend their money (e.g. no alcohol, no gaming).
Real-time tax deduction from transactions.
This type of control raises very serious issues related to privacy, autonomy, and civil liberties.
What is Next? The future of CBDCs and cryptocurrencies is not binary; it is complicated and ever-evolving. Several scenarios may occur:
a. Coexistence Scenario
CBDCs become the norm for everyday transactions while cryptocurrencies flourish in DeFi and Web3 and serve as stores of value.
b. Regulatory Actions
Governments can take a heavy hand and quash crypto to favor CBDCs that squelch innovation.
c. New Hybrid Ecosystems Approach
Innovators create new platforms where CBDCs and crypto coexist, making them options for users.
d. Decentralized CBDCs in the far-off future?
Maybe one day governments will adopt decentralized base layer infrastructure for their CBDCs that blends trust with transparency.
Conclusion
The launch of CBDCs into payments is a monumental development in the history of money. While CBDCs exist as perfect solutions to address payment efficiency, payment accessibility inequities, or lack of monetary control, they fundamentally undermine privacy, agency, and the decentralization ethos of the crypto movement.
Are CBDCs going to outright end crypto? Probably not.
CBDCs will reduce certain use cases, they will create challenges for certain use cases, and they will create more regulations, but at the end of the day, cryptocurrencies provide services that CBDCs cannot do at all. Moreover, as we increasingly transition to residing in digital spaces, having selection may be the most important aspect.
CBDCs and cryptocurrencies are both needed and are going to be critical parts of the future of finance as commit to a more digital economy and they each have advantages, disadvantages, and potential for disruption.
