They might not be cryptocurrencies, but they’re currencies, and they’re digital, and they’re what the people want. Speaking, of course, of Central Bank Digital Currencies (CBDCs).
Central Bank Digital Currencies
A CBDC is an evolving concept in banking, undoubtedly brought on by the rise and rise of Bitcoin and other cryptocurrencies.
As Bitcoin economist Saifedean Ammous famously told Stephen Livera on his podcast, the best way for governments, and by extension their central banks, to kill Bitcoin is to create a better version of it.
What Ammous means is that banks can strike to the core of the matter, rather than worry much about regulating Bitcoin out of existence, the effect of which is to make it stronger.
Instead of trying to kill Bitcoin through force, central banks can leverage their existing network effect and simply offer all the benefits that Bitcoin does.
Some might think it’s impossible for a central bank to offer the same benefits of Bitcoin. What Bitcoin does is bring the concept of a cash – a bearer asset – to the digital world.
Cash is not the most coveted form of money simply because it can’t be “frozen” in quite the same way as a bank account, though.
Fiat cash is preferred by many because it is the dominant mode of money. It really is that simple.
So far, central banks pursuing digital currencies haven’t credited cryptocurrency. The feared, massive disruption of the world’s financial fabric hasn’t yet come to pass. But it may be exactly what the People’s Bank of China, Bank of Japan, Russia’s central bank, and others are up to.
India, China, and Russia make up a significant section of the BRICS agreement, which is a business council involving Brazil, China, Russia, India, and South Africa. For its part, Russia has previously suggested that a digital currency be used between the five nations.
Then there are countries like Iran and Cuba, who have actual cryptocurrencies for international settlements.
Reportedly, at least China is coming along swimmingly with its digital currency project. Russia has been working on theirs since 2017. India has made multiple conclusions about a digital Rupee. One time, it said that it should ban Bitcoin but create its own digital currency.
Just yesterday, Cambodia announced that it will be creating a form of digital currency soon.
Bitcoin Will Abide. What About Stablecoins?
So, what’s the real threat to cryptocurrency?
At this point, that much is unclear. Mass adoption certainly relies on there being something worth replacing.
If legacy systems are modernized, and provide all the same services that people find themselves getting from the fintech revolution, then certainly adoption of cryptocurrency purely for its user experience might see a decline.
While banks can create a currency that mimics Bitcoin and other cryptocurrencies in many ways, there’s one crucial thing they can’t fix: their inflationary supply model.
Thus what CBDCs will share with fiat currency that Bitcoin never will is something perhaps more important than usability issues: a continually declining value.
This makes it hard to surmise what effect actual cryptocurrencies will feel when digital currencies begin to become the norm. What they look like in practice will also be interesting.
There are two groups who will definitely be impacted by CBDCs: consumer banks and stablecoin issuers.
In both cases, they rely on the existing system to remain the same. Many of the digital services that people use banks for today would be outmoded in a world where you can simply store your fiat on your phone, as if you were carrying it.
Likewise, cryptocurrency exchanges and traders may no longer have a need for stablecoins, which act like central bank digital currencies would without the benefit of being issued by the central government.
Thus, while CBDCs may certainly be something to watch out for, they’re far and away from being a “Bitcoin killer” of any stripe.
They may, in fact, have the opposite effect, onboarding billions more people into the user experience. Already being comfortable with the mechanics of digital currency, everyday people might be more likely to try things like Bitcoin Cash out.