As more countries are developing their own digital currencies, how will they compare and compete with the existing and popular cryptocurrency, Bitcoin?
The rise of CBDCs
Digital versions of physical currencies, known as central bank digital currencies (CBDCs), are produced and overseen by central banks. They use distributed ledger technology (DLT) such as blockchain to record and verify transactions in a secure and transparent manner.
CBDCs are designed to offer the benefits of both cash and digital payments, such as convenience, speed, low cost, and financial inclusion. They also aim to enhance the efficiency and stability of the monetary system, as well as to support monetary policy and financial regulation.
According to the Bank for International Settlements (BIS), more than 80% of central banks are exploring or experimenting with CBDCs, and some of them are already launching pilot projects or preparing for full-scale deployment1.
For instance, China is leading the race with its digital yuan, which has been tested in several cities and regions since 20202. The Bahamas became the first country to issue a CBDC, the sand dollar, in October 20203. India also declared in June 2023 to begin the trial run of its own CBDC, the “Digital Rupee.
However, CBDCs are not without challenges and risks. Some of the problems that require close attention are the following:
- The impact of CBDCs on the demand and supply of money, and the implications for inflation and interest rates.
- The potential competition and disruption of the existing banking and payment systems, and the effects on financial intermediation and innovation.
- The legal and regulatory framework for CBDCs, and the coordination and cooperation among different jurisdictions and authorities.
- The cybersecurity and privacy risks of CBDCs, and the trade-offs between security and convenience.
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The resilience of Bitcoin
Bitcoin is the first and most widely used cryptocurrency, which is a form of digital money that is created and controlled by a decentralized network of users. Unlike CBDCs, Bitcoin is not backed by any government or central authority, and its supply is limited by a predetermined algorithm.
Bitcoin operates on a peer-to-peer network that uses a consensus mechanism called proof-of-work (PoW) to validate transactions and generate new bitcoins. Transactions are recorded in a public and immutable ledger called the blockchain, which is maintained by a network of nodes called miners.
Bitcoin offers the advantages of being censorship-resistant, borderless, permissionless, and pseudonymous. It also enables fast and low-cost cross-border payments, as well as a hedge against inflation and currency devaluation.
According to CoinMarketCap, Bitcoin has a market capitalization of over $1 trillion as of February 2024, and accounts for more than 60% of the total cryptocurrency market. Bitcoin also has a loyal and growing community of users, investors, developers, and enthusiasts, who believe in its vision and value proposition.
However, Bitcoin also faces several challenges and limitations, such as:
- The high volatility and unpredictability of its price, which affects its usability and adoption as a medium of exchange and store of value.
- The high energy consumption and environmental impact of its mining process, which raises concerns about its sustainability and scalability.
- The lack of regulation and oversight of its market and ecosystem, which exposes users to fraud, theft, hacking, and legal uncertainty.
- The technical complexity and user-unfriendliness of its system, which poses barriers to entry and education for the general public.
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The future of digital money
The debate over the future of digital money is heating up as both Bitcoin and CBDCs have their own strengths and weaknesses, and cater to different needs and preferences of users. Moreover, the development and adoption of both types of digital money are influenced by various factors, such as technological innovation, market competition, consumer demand, and regulatory environment.
Some experts believe that Bitcoin and CBDCs can coexist and complement each other, as they serve different purposes and niches in the digital economy. For instance, Bitcoin can provide an alternative and independent form of money that is free from government control and interference, while CBDCs can offer a more efficient and inclusive form of money that is backed by the credibility and authority of central banks.
Others argue that Bitcoin and CBDCs are incompatible and will compete for the same market share and user base. For example, CBDCs can pose a threat to Bitcoin by offering a more convenient and secure way of digital payments, as well as by undermining its value proposition and attractiveness as a hedge against fiat currencies. Conversely, Bitcoin can challenge CBDCs by offering a more transparent and democratic way of digital money, as well as by resisting the potential abuse and manipulation of central banks.
Last Updated on 9 months
