In the rapidly evolving world of finance, a new battle is brewing between two distinct forms of digital currency: cryptocurrency and central bank digital currencies (CBDCs). While both crypto and CBDCs aim to revolutionize the way we interact with money, this BOLD Awards blog looks at how they differ significantly in their underlying principles, governance structures, and potential impact.
Cryptocurrency: A Decentralized Revolution
Cryptocurrency emerged as a decentralized alternative to traditional fiat currencies, powered by blockchain technology. It operates on a distributed ledger system, eliminating the need for intermediaries like banks or governments. This decentralized nature has attracted proponents who value transparency, security, and the potential to democratize finance.
However, most Governments appear opposed to greater use of cryptocurrencies for a variety of reasons.
- The decentralized anonymity of ownership makes it harder for authorities to track transactions and calculate tax liabilities.
- Any alternative investment opportunity weakens demand for holding fiat cash or buying government bonds and gilts.
- Crypto is beyond their control to issue, and restrict or track ownership.
- They cite its common use as ransomware payments to demonize crypto.
- Governments also claim to protect their citizenry from extreme market volatility, cryptocurrency scams and failures. The trial and sentencing of Sam Bankman-Fried, CEO of FTX, is a case in point.
- Crypto can be easily transferred across national borders, potentially facilitating money laundering and funding terrorism.
For investors and speculators, crypto remains an attractive asset. The value of Bitcoin has risen by over 140% in the last 12 months.
CBDCs: Centralized Control over Digital Money
There is no denying that crypto is a digital currency solution for the digital age. In response to its rise, central banks worldwide are exploring the development of CBDCs, digital versions of their national currencies. Their aim is to let people enjoy the benefits of crypto though without what governments deem to be its down-sides (itemised previously). While crypto and CBDCs share some similarities, CBDCs remain under the control of central banks, maintaining centralized oversight and authority.
In June 2023, the Reuters news agency announced that 130 countries, representing 98% of the global economy, were exploring digital currencies. Almost half were in advanced development, pilot or launch stages, a closely-followed study shows. Eleven countries, including a number in the Caribbean, and Nigeria, had already launched central bank digital currencies
Central bank control enables greater government involvement in people’s lives. Governments will effectively retain access to the digital currency they issue, and thus gain greater control of “our money.”
CBDC testing in China has reached 260 million people, and has included boosting the short-term economy by attaching expiry dates to digital currency, meaning owners have to “use it or lose it.” Chinese authorities have also streamlined (done away with?) legal processes in cases such as jaywalking or people dropping litter, identified through facial recognition systems, can have payment for fines taken from their personal bank accounts without any recourse.
In Norway, spending digital kroner in supermarkets will be linked to citizens’ identities in order to check what could be unhealthy diets. The health service say it’s a benefit as they can help people avoid serious issues earlier, and also spot increased use of painkillers that could be masking serious underlying conditions. Though who wants such intrusions in to our privacy? Imagine someone else calculating your tax bill and “helping you” by taking payment in CBDC from your digital wallet.
Each nation’s CBDC will be tied in value to its fiat currency. Cross-border usage will still require a foreign exchange process. Here is a video on how that could develop, and how the banking and financial system works nationally, in the U.S. or in your country.
The Battleground: Key Differences
The debate between crypto and CBDCs hinges on several key differences:
Decentralization vs. Centralization
Cryptocurrency’s decentralized nature contrasts with the centralized control of CBDCs. This distinction therefore has implications for governance, privacy, and potential for innovation.
Regulatory Landscape
Cryptocurrency faces a complex regulatory landscape, with varying approaches across jurisdictions. CBDCs, being issued by central banks, may benefit from clearer regulatory frameworks within each issuing country, though compatibility from one country to another remains a gray area.
Adoption and Use Cases
Cryptocurrency has seen significant adoption in recent years, primarily for investment and speculative purposes. CBDCs are still in relative early stages of development, with potential use cases ranging from cross-border payments to retail transactions.
As at June 2023, two methods of coordination CBDC cross-border payments were being tested. Both aim to reduce the costs and increase the speed of cross-border transactions. However, there are key differences in the design and architecture of the two models.
- Project Icebreaker is a collaboration between the central banks of Israel, Norway and Sweden, in coordination with the Bank for International Settlements Innovation Hub Nordic Centre, and it aims to connect retail CBDC systems.
- Project mBridge is a multi-CBDC platform developed by the BIS Innovation Hub Hong Kong Centre, Hong Kong Monetary Authority, Bank of Thailand, People’s Bank of China and the Central Bank of the United Arab Emirates. This project is based on settlements between banks.
The Future of Money: A Convergence or Competition?
The future of money remains uncertain, with both crypto and CBDCs vying for dominance. While some envision a future with multiple forms of digital currency coexisting, others predict a consolidation towards a single dominant form. However, shared currencies can seriously restrict governments’ abilities to set monetary policies that address their particular economic circumstances.
The outcome of this battle will likely depend on several factors, including technological advancements, regulatory developments, and broader societal shifts towards digitalization.
Conclusion: A Paradigm Shift in Finance
Regardless of the ultimate victor, the emergence of crypto and CBDCs has undoubtedly ushered in a new era in finance. These digital currencies have the potential to transform the way we make payments, invest, and interact with the financial system.
As the battle for the future of money unfolds, it is crucial to understand the intricacies of both cryptocurrency and CBDCs to make informed decisions about their adoption and use. While challenges remain, the potential benefits of these digital currencies are undeniable, paving the way for a more efficient, inclusive, and secure financial future.
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