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Does The Rise of CBDCs Pose A Threat to Cryptocurrencies?

cryptoknowmics.com 26 May 2022 04:37, UTC
Reading time: ~5 m

The rise of Bitcoin and the crypto world opened many opportunities for the global financial systems and individual investors. Unlike any other time, you can now control your economic activities in a single wallet. The main idea of crypto and digital space is to remove the control of finances from centralizing organizations like banks. But, since the rice of the first crypto, many others followed, offering upgrades to this new financial system. One of the most vital developments across the blockchain space is CBDCs. Through this article, let us try to understand what the rise of CBDCs means to cryptocurrencies.

Central Bank Digital Currencies (CBDCs)

CBDCs are digital assets issued directly by central banks. It's a digital version of a country's native or fiat currency. At the moment, several countries are already exploring the idea of CBDCs. Years ago, China began experimenting with a digital version of its Yuan. The country has already launched the Yuan and is conducting tests in various government facilities. The Japan financial system has also had talks about creating a CBDC. The Canadian central banks also began exploring the idea of CBDCs, and how to implement them successfully. The US government and federal reserves have also been linked with a move into a CBDC-based financial system. Israeli, Nigeria, the Philippines, Qatar, and other countries have been exploring the concept of CBDCs in an attempt to capitalize upon the potential of digital assets like cryptocurrencies.

Benefits of CBDCs

Of course, there are many benefits associated with CBDCs in the crypto space. It's due to the many benefits that CBDCs are gaining attention massively. The main features and benefits of CBDCs include-

  • Frictionless payments: Payments leveraging blockchain tech are nearly immune to bank failures, making transactions more reliable.
  • Low-cost cross-border transfers: Research shows that almost 7% of global transfer value is charged as a fee. But CBDCs cut these hefty sums to near nothing.
  • Faster transfers: Cross-border transfers could easily take a week or even longer. CBDCs cut the transaction completion period to almost instant.
  • Ability to curb fraud: Based on blockchain, CBDCs host the ability to store data immutably. This can easily eradicate fraud.

Are CBDCs a Threat to Cryptocurrencies?

As mentioned already, several countries are either experimenting or exploring the concept of CBDCs. But, NO! CBDCs are not at all a threat to the crypto space. Here are a few reasons why CBDCs do not threaten cryptocurrencies.

CBDCs are Centralized

One of the main attributes of CBDCs is centralization. As already mentioned, CBDCs are controlled by some form of a central authority like a central bank. Like fiat, the central bank will oversee the creation and supply of CBDCs. Due to central bank monitoring, CBDCs are subject to the policies set by the bank. For instance, in the case of inflation, central banks set policies to control the money supply. Being a central bank project, CBDCs will be subject to such policies as interest and taxation. Now, the influence of central banks leaves CBDCs susceptible to failures caused by the banking system. Essentially, CBDCs are subject to central points of failure. Cryptocurrencies are decentralized, meaning they are not controlled by centralizing authorities. It's almost impossible for an individual to manipulate the ledger. Unlike CBDCs, crypto assets are not bound to particular regions. Cryptos can reach more significant markets with more use cases due to decentralization.

Most Cryptos Have Controlled Supply

When it comes to creating CBDCs and cryptocurrencies, the latter has controlled supplies. CBDCs are fiat currencies, meaning the central bank could continue to increase the number of such assets as time goes by. When it comes to paper money, the central bank will often print more as they deem fit. In attempts to manage the money supply and economy, the central bank could open the native currency to a crisis, causing inflation and loss of value. But, cryptos have proper mechanisms to control the supply of money. Bitcoin, for instance, set a limit of 21 million coins. Others with no limits have policies like burning, which could maintain the supply of coins. Having a controlled supply leaves the assets with higher values.

CBDCs Aren’t Private

By default, blockchains are transparent, meaning every transaction is open. But, in programming, they are set to be private to protect the identity of the investors. The use of coin mixers and other privacy tools in crypto can help ensure you remain pseudonymous. CBDCs do not offer any privacy to the average user. The government can easily track the transactions of the CBDC users. CBDCs must adhere to all anonymity requirements of the central bank and government in general. As such, there is no privacy with CBDCs.

So, Do CBDCs Pose A Risk to Crypto?

No, CBDCs are not a threat to crypto assets. CBDCs are unique digital currencies controlled by a country's central bank. These projects target to improve the country's fiat currency and legal tender. Yes, CBDCs offer many benefits for the country and central bank. But, they do not threaten cryptocurrencies like Bitcoin and Ethereum. CBDCs are centralized; basically, they are controlled by a single large entity called the central bank. Due to central banks' influence, CBDCs are limited mainly by a country's geographical bounds. Cryptocurrencies, however, are decentralized and can operate globally. Moreover, cryptos have controlled supply, unlike CBDCs, whose control is under central banks. The lack of privacy and pseudonym in CBDCs is also an advantage to other classes of cryptocurrencies.

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