Central banks all over the world, including the Federal Reserve in the United States, have been considering the development and circulation of a central bank digital currency (CBDC).
If you’re a cryptocurrency fan, you might be concerned about how this would affect the future of these coins. If you’re a crypto skeptic, you might be concerned that a centralized digital currency would have even more disadvantages than independent cryptocurrencies. And if you’re new to the world of crypto, you might have absolutely no idea what’s going on.
Here’s what you need to know.
The Premise of a Central Bank Digital Currency
First, let’s establish what a CBDC might look like. The Federal Reserve currently has no firm plans to release a CBDC, even as a pilot program. However, it remains open to the possibility. Some central banks in other developed countries are currently running pilot programs of CBDCs of their own.
For the most part, you can think of this as just another blockchain-based digital currency. Except there would be a few major differences. First, a CBDC would be centrally controlled by a central bank, rather than being democratically controlled by users. Second, the introduction of a CBDC would likely be backed by the full power of the federal government. This means it might displace several monetary and financial institutions to which we’ve become accustomed. For example, to eliminate competition, the government might criminalize other types of crypto or ban cash transactions.
Proponents of a CBDC believe this could be a step forward in terms of currency security and technological advancement. Skeptics believe a centralized digital currency would lose many of the advantages of standard crypto. Additionally, such a currency would allow the government to have too much control over our lives.
Why Bitcoin and Other Crypto Still Matter
If a CBDC is moved forward, conventional crypto enthusiasts can rest easy knowing that other types of crypto are still going to be relevant, at least in principle.
Security
Crypto enthusiasts love crypto in part because of its inherent security. If you’re conscious about cybersecurity, as everyone should be, you understand that blockchain-based transactions are inherently safer than cash, card, or conventional digital transactions.
A CBDC could be created using a nearly identical blockchain, but countries like Sweden and France are looking into using permissioned blockchains, effectively centralizing the ledger and privileging certain participants within the network. You could argue that this is a decent security measure, as this would prevent a 51% attack. However, it also introduces new vulnerabilities and negates one of the biggest advantages of conventional crypto — its decentralized nature.
Privacy
One of the biggest concerns about CBDC is that it would rob us of our privacy. If this currency is controlled by a central bank, the government would hypothetically be able to trace all activities. And they could possibly even stop certain transactions. If you want to remain anonymous, or civilly disobedient, it might be important to retain access to other currencies.
Sound Foundation
Bitcoin initially attracted many enthusiasts because of its sound foundation. Unlike the Fed, which can artificially inflate the money supply at will with no repercussions, Bitcoin is inherently finite. We don’t know exactly what CBDC would look like, but we can reasonably suspect it will be unsound.
Competition
In any market, competition is valuable. Savvy investors and financial gurus understand this. That’s one reason why you’d want there to be competing cryptocurrencies. If for no other reason, competing cryptos could keep a CBDC in line.
[Related: Exploring Bitcoin As a Retirement Investment Avenue]
The Shaky Foothold of CBDC
Right now, a mere 16% of Americans support the idea of a CBDC. In contrast, 68% of people claim they would oppose a CBDC if the government could see what you buy.
There are several reasons for this.
Distrust of digital currencies.
For some people, digital currencies are inherently untrustworthy. They already hate Bitcoin, so they’re naturally going to hate a CBDC — sometimes even more.
Distrust of the federal government.
Millions of crypto supporters are drawn to this world because they already distrust the federal government. They don’t want the State breathing down their necks and tracking all of their earnings and spending patterns.
Lack of understanding.
Some people fear change or dislike cryptocurrency because they simply don’t understand it. They understand cash and debit cards, so why should they have to learn something new?
Uncertainty.
Of course, some people are reluctant to move forward with a CBDC because the model for this currency is ambiguous. With its future totally uncertain, some hesitation is understandable.
Accordingly, CBDCs might become a total non-issue. If the majority of the population resists it, the government will not be able to move it forward.
A Vision for Coexistence
It’s also possible that CBDC can coexist peacefully alongside various other cryptocurrencies. After all, there is no true global currency now. People are freely making cryptocurrency exchanges despite there being a centralized, official currency in the United States already.
Policymakers have made no firm statements about whether the introduction of a CBDC would prompt the criminalization or stricter regulation of other cryptocurrencies. A cynical take here would suggest that this is to artificially increase support for the introduction of a CBDC. Still, it’s a positive sign that regulators have not moved to restrict crypto operations to a crippling degree.
The Possibility of a CBDC Takeover
There’s also the possibility of a total CBDC takeover. A central bank-controlled currency could effectively make other coins obsolete or unusable.
There are also several possible tracks for this.
Practical Superiority
It’s conceivable that, with nearly two decades of ongoing research and advancements in the blockchain world, a new CBDC would be practically superior to other cryptocurrencies. It’s hard to imagine how, exactly, this could be the case. But we need to be open minded. If a new coin emerges that is naturally superior and promoted by the federal government, it’s understandable that other coins would eventually die out.
Mainstream Acceptance
A bigger threat is the possibility of mainstream acceptance. After all, the perception of legitimacy is what gives the government its power in the first place. If enough vendors accept a CBDC and enough citizens use it, it’ll be a death knell for other crypto.
Stricter Regulations
Regulatory bodies have been intentionally ambiguous about what a CBDC would mean for the crypto world. However, it’s reasonable to suspect that the biggest threat is stricter regulations or the outlawing of other coins.
The good news is that because the government needs people to accept a CBDC, it’s unlikely that they’ll take such extreme measures so soon.
It’s hard to say exactly how CBDC introduction could affect cryptocurrency, but there are a few facts we know. We know Americans overwhelmingly reject this idea. We know there are no immediate plans for the introduction of a CBDC. And we know that the central bank and federal government will have to tread cautiously if they want people to accept this type of digital currency.
It’s unlikely that CBDC would have the power to influence conventional crypto in the next few years. And, with how fast the government acts, we may not see any changes for the next couple of decades. However, the future that lies beyond that is anyone’s guess.
Featured Image Credit: Photo by RDNE Stock project; Pexels; Thank you.
