From Bitcoin to “Britcoin”: The Rise of Central Bank Digital Currencies
Crypto and freedom go hand to hand since Satoshi Nakamoto, Bitcoin’s creator, launched the network’s whitepaper amid the 2008 financial crisis.
Satoshi had a clear vision of an open finance world with transparency and integrity rooted in its core foundation. With Bitcoin — the original cryptocurrency, anyone could send and receive this new digital asset without borders 24/7, with low fees, and with the assurance of blockchain technology. Blockchain allows anyone to send, track, and verify any transfer made with a digital asset like Bitcoin in an incorruptible way.
Since Bitcoin’s inception, many cryptocurrencies with several use-cases have emerged, but with one common goal: democratising financial systems.
Governments Enter the Picture
The mainstream adoption of cryptocurrency led this new asset class to cross $1.5T in recent months while attracting major financial institutions (e.g. hedge funds, banks, corporate treasuries, endowment funds).
At the same time, crypto’s open mantra is a challenge for governments and regulators due to their threat to the traditional financial system. Blockchain’s success poses a test to incumbents as its technology and use-case make any financial transaction more cost-effective, anonymous, and faster while remaining in a 100% digital native environment.
Now, governments are looking to increase regulations for the sector, as the recent infrastructure bill in the US, while central banks explore their own digital assets — Central Bank Digital Currencies (CBDCs) — to compete with crypto.
What are CBDCs & What Entails for Crypto?
With an increasingly digital native society and the mainstream appeal of crypto for new generations, governments and central banks are trying to adapt and take a piece of the pie.
Central Bank Digital Currencies are government-backed digital assets pegged to each country’s national currency, complementing the current physical cash ecosystem. Think of them as stablecoins (e.g. USDT, USDC) but issued and governed by your country’s central bank.
Central banks want to retain their predominance over the financial system by introducing digital versions of their local currencies to counter crypto’s popularity.
The emergence of the Digital Yuan, the Digital Dollar, or the Digital Euro would bring additional oversight to traditional financial authorities but also offer some advantages such as faster payments, more accessibility, and security.
A Race to the First Global Digital Currency
In the UK, the Bank of England is in the initial steps of evaluating whether to issue “Britcoin“ — the coined name for the Digital Pound. The UK is not alone in pursuing government-backed digital currencies, with China’s Digital Yuan at the helm among developed nations.
The Chinese government is already partnering with private and public banks to test the Digital Yuan in several provinces, where citizens can pay with the digital currency. The project is in the final stages of its pilot, with estimations of launch pointing to 2022 while the government introduces new regulatory frameworks.
Atlantic Council’s CBDC tracker revealed that 81 countries are exploring digital national currencies, while 5 of them have already fully launched. The Sand Dollar — the digital currency of the Bahamas — was one of the first projects to see the green light, aiming to facilitate payments for its population and generate more business opportunities for the country. The other four fully-fledged CBDCs are also operating in other Caribbean countries.
Among the 81 countries studying CBDCs, 14 are already implementing pilots including Sweden’s Sveriges Riksbank, while the Federal Reserve and the European Commission are still studying the risks, benefits, and implementation steps of issuing their digital currencies.
The Implications of CBDCs Worldwide
The full rollout of more CBDCs seems inevitable at this point, propelled by the recent development in the digital yuan and the expected response by the FED in the US.
Currently, the digital yuan continues its progress with more than $5.3B traded and more than 70 million transactions. The progress of the Digital Yuan can have deep geopolitical implications for financial systems and crypto. The Chinese government plans to run the Digital Yuan as the de-facto global digital currency, potentially undermining the future value and use-case of the Digital Dollar and the Digital Euro. At the same time, Chinese authorities are cracking down on the sector, with blockage on mining activities and further regulations for individuals and businesses.
As governments worldwide launch their national digital currencies, we can expect an increase in regulations for crypto. At its core, cryptocurrencies are the decentralized alternative to controlled CBDCs, showing outstanding popular interest, but authorities can still try to undermine that growth.
Crypto Counters Back
Crypto’s decentralized, permissionless, and global nature makes it practically impossible to stop, even by governments. A recent case was Nigeria’s attempt to restrict crypto, which resulted in more use by citizens, who see Bitcoin as the best store of value and payment gateway amid local inflation.
Other trends in crypto, such as decentralized finance (DeFi), make it even harder for regulators to blindly stop crypto’s adoption. Its open mantra, with more cost-effective transactions and flexibility, spark interest in consumers. At the same time, governments cannot create that sort of interest in centralized digital assets. The only way to stop crypto would essentially be to turn off the internet, which is impossible.
What does the future hold?
The introduction of CBDCs causes more challenges to cash itself as a physical payment form than the emergence of decentralized digital assets. The interest, use-cases, and performance of crypto as a new asset class won’t go anywhere and can co-exist with the launch of CBDCs.
Governments can create more value by expanding the use-cases of digital money while creating common frameworks for individuals and businesses dealing with crypto rather than trying to stop crypto’s mainstream attention. CBDCs can improve cross-border payments for businesses, bolstering economic activity while cutting costs and time. Additionally, CBDCs can reduce the bureaucracy involved in banking, facilitating loans (i.e. down-payments), investments, and spending.
Decentralized finance brings an entirely new set of ownership models compared to CBDCs, offering other use-cases and return potential for investors across risk profiles. Both scenarios can co-exist while the consumer will choose the real winner in the open-free markets. At CoinBurp, we believe the mainstream adoption of crypto-leading assets, DeFi protocols, and NFTs will heavily mould the new financial system.
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