Are Central Bank Digital Currencies A Threat To Cryptocurrencies?

Central Bank Digital Currencies (popularly referred to as CBDCs) have gained increasing popularity. When they first appeared, they were argued to mostly be governments’ replacements for cryptocurrencies. Today, they have and are still proving (if at all) to be more than replacements for cryptocurrencies. They are fast becoming the solution for the drive to create a cashless economy by governments. The introduction of cryptocurrencies and blockchain technology did not only increase interest in cashless societies and digital currencies but also widened the possibilities of operating truly cashless societies.

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With digital currencies, the possibilities are endless! Apart from helping to narrow the financial gaps of countries, they can also be used for seamless, secure, and cheaper cross-border remittances; limiting fraudulent activities; fostering economic growth and inclusion; and providing monetary security.

Although CBDCs are hitting new milestones in various countries across the world, there is still a lot to be achieved. Generally, CBDCs are still in their infantile stages with only a handful of countries fully operating them. Cryptocurrencies, on the other hand, seem to have reached their peak. Volatility as well as market conditions have sent various cryptocurrencies spiraling down from all-time highs and milestones they set. Bitcoin, for instance, is trading at around $17,000 (as of the time of writing this article), down from its November all-time high of $69,000.

With the increasing popularity of CBDCs and the downward trends being experienced by cryptocurrencies, a lot of comparisons have been done, and a handful of questions have been asked. One very crucial question that may require an in-depth answer is the question of “Are Central Bank Digital Currencies A Threat To Cryptocurrencies?”

In this article, we will be making a few points to answer this question but first, we must clearly define what CBDCs and cryptocurrencies are and their differences, the reasons for governments’ aversion towards cryptocurrencies, and why several governments across the world decided to issue a CBDC.

What Are Cryptocurrencies And CBDCs?

According to Wikipedia, “ a cryptocurrency, or crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.”

Central Bank Digital Currencies (CBDCs), according to Investopedia, are “digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country’s fiat currency.” CBDCs are, therefore, government-back and government-run digital currencies.

Differences Between Cryptocurrencies and CBDCs

	Cryptocurrencies	CBDCs
Purpose of creation	Cryptocurrencies were created to give people the ability to conduct financial transactions without the need to rely on governments and banks. They were also created as an investment scheme where investors can gain profit from their investments.	The purpose of central bank digital currencies is to provide businesses and individual citizens privacy, transferability, convenience, accessibility, and financial security. CBDCs are created with the nation in mind. They are usually created to narrow the financial inclusion gap, and make cross-border payments and foreign remittances processes faster, safer, and more efficient, etc.,
Anonymity and privacy	Cryptocurrencies offer anonymity and ‘privacy’ as a result of their decentralized nature.	CBDCs are centralized and do not offer users any form of anonymity; the central bank knows who uses the CBDCs and how much of the CBDC they own or hold.
Regulation	Cryptocurrencies are decentralized (designed to be unregulated) and completely controlled by their owners.	CBDCs are a digital extension of a country’s fiat currency and are issued on a centralized blockchain network. CBDCs are issued and regulated by a country’s central bank and operate on government laws, policies, and government-operated blockchain systems.
Volatility and value	A distinguishing feature of cryptocurrencies is their volatility and instability in price value which are caused or influenced by quite a number of factors.	CBDCs are relatively stable compared to cryptocurrencies. Also, their value is tied to the value of a country’s fiat currency.
Government backing	While some governments may allow them to operate on specified regulations, cryptocurrencies do not have government backing.	CBDCs are fully backed by both a country’s government and central bank.

Now that we’ve highlighted the differences between cryptocurrencies and CBDCs, let’s also see some of the similarities between them.

Similarities Between Cryptocurrencies And CBDCs

Digital currency	Both cryptocurrencies and CBDCs are virtual or digital-based currencies. That is, they are digital representations of value available in electronic form, and are stored and transacted through designated software, mobile, or computer applications.
Blockchain-based	Cryptocurrencies and CBDCs are both based on blockchain technology.
Internet	Transactions that involve these currencies are done through secure and dedicated networks over the internet.
Transparency	Both cryptocurrencies and CBDCs promote transparency. Due to their nature of being unhackable, unchangeable, and impossible to tamper with, cryptocurrencies and CBDCs promote transparency, unlike fiat money which can be faked or tampered with.
Damage	The nature of both currencies makes them not susceptible to damage, unlike fiat money.
Security	Both cryptocurrencies offer safer ways of transacting and storing wealth, making holding these currencies a goal. They also promote cashless systems and with them, people can go around without having to carry physical cash while being able to make payments for goods and services seamlessly.

Why Have Governments Across The World Shown Aversion Towards Cryptocurrencies?

Governments across the world have shown aversion towards cryptocurrencies for various reasons. Some of them include;

Regulation

Cryptocurrencies have been in circulation for at least a decade and governments around the world still find it quite a herculean task to regulate them. Unlike fiat currency, there is no universal way to regulate cryptocurrencies. Also, various governments have different views about cryptocurrencies and the drive to regulate them. It is still quite a dilemma if cryptocurrencies are a currency to be used for day-to-day financial transactions or if they were created solely for investment purposes, hence the problem of regulation.

Illegal activity

One of the biggest reasons for governments’ aversion towards cryptocurrencies is that they can be used to fuel illegal activities. Governments fear that because they are mostly unregulated and can hardly be adequately monitored, cryptocurrencies can be used in illegal activities such as money laundering and the movement of funds for causes such as terrorism.

There is the problem of the lack of transparency

Governments dislike cryptocurrencies because of their lack of transparency. This coupled with the presence of unidentifiable “whales” makes governments across the world to be wary of cryptocurrencies.

Volatility

Cryptocurrencies are highly volatile assets, thus making governments see them as financial risks to their citizens. The world’s biggest cryptocurrency, for example, is currently trading at around $20,000, far below its November all-time high of $69,000.

Controversy and Influence

Another reason for governments’ aversion towards cryptocurrencies is because of the controversies they are mostly surrounded with and how these controversies can make or mar their value. Last year, the world’s richest man Elon Musk was able to influence the prices of cryptocurrencies such as Bitcoin and Dogecoin. Associating these cryptocurrencies with his company Tesla helped them soar. They also declined when he disassociated his electric vehicle company from them.

Why Are Governments Embracing CBDCs?

There are several reasons why governments around the world are embracing CBDCs. Some of them include;

Unlike cryptocurrencies, CBDCs give governments total control; governments issue, regulate and control the use of CBDCs.
CBDCs are very instrumental in the implementation of government policies and have the potential to achieve a fully cashless society.
CBDCs provide fast, safe, easy, and cheap means of payment.
They offer economic growth by offering easier access to capital and financial services. This increases economic activities at little or no interest transaction rate
CBDCs are secure and cheaper options for remittances.
CBDCs, unlike cryptocurrencies, do not foster illegal activities.
CBDCs are an extension of fiat money; they have the same value as a nation’s currency, only that they are an electronic version.

Are CBDCs A Threat To Cryptocurrencies?

Both CBDCs and cryptocurrencies have their similarities and differences. They, however, do not overlap each other. The purposes of the two are completely different and cannot replace each other. CBDCs, therefore, do not pose a threat to cryptocurrencies. In fact, with time, they would help build trust among critics as they would validate blockchain technology. The idea of cryptocurrencies cannot be changed; by design and purpose, one single entity will not be able to regulate them. CBDCs, on the other hand, stemmed from cryptocurrencies and blockchain technology but the goal of CBDCs remains in the interest of a nation. They will undoubtedly impact the cryptocurrency sector but cannot replace cryptocurrencies since they serve entirely different purposes.

While speaking recently at the Web Summit held in Lisbon, Binance chief executive officer Changpeng Zhao said that “Is it (CBDC) a threat to Binance or other crypto-currencies? I don’t think so. I very much think that the more we have, the better. It will validate the blockchain concept, so that anybody who still has concerns about the technology, will say: OK, our government is using the technology now.” He also added that “In theory, they should be inversely correlated, but today they go the same way, mainly because most of the people who trade on crypto (assets) also trade stocks.”

Conclusion

Both CBDCs and cryptocurrencies are different, both in design and purpose. Although CBDCs are gaining more popularity thanks to government backing and the ongoing decline of cryptocurrencies, they cannot replace cryptocurrencies. They cannot even serve the purpose that cryptocurrencies serve. Instead, both CBDCs and cryptocurrencies can be said to have an interwoven relationship, thanks to blockchain technology.