As China continues to make advances in developing its own central bank digital currency (CBDC), it’s worth asking how the arrival of currencies like the eYuan will impact the world of cryptocurrencies. Could CBDCs pose a threat to bitcoin’s dominance?
China’s state-sponsored digital currency, the digital renminbi, commonly referred to as the eYuan, is already being developed to solve fiat currency’s inefficiencies in cross-border transactions.
The country’s central bank, the People’s Bank of China, claimed in a recent white paper that the digital renminbi is “ready for cross-border use,” however, for China’s new digital currency to be operational, it will need other international CBDCs to be functional to trade with.
With this in mind, the People’s Bank of China supports the development of global central bank digital currency standards and works alongside other monetary authorities to launch multi-CBDC arrangements.
As the data shows, global efforts towards the development of CBDCs has grown significantly over the past three years, with more than 84 institutions actively engaged in CBDC work, while experimentation towards the development of digital currencies has also grown globally in the same time frame.
So what will central bank digital currencies look like? And will they have the potential to muscle in on a cryptocurrency market dominated by the likes of bitcoin? Let’s take a deeper look at a growing movement that has the potential to overhaul finance as we know it:
What is a CBDC?
As an emerging technology, there are no templates for what a CBDC should look like as a currency.
Typically, these digital currencies are formed by government priorities, constitutional limits and individual policy and design decisions, meaning that each national CBDC is likely to look different depending on where you are.
But what is a central bank digital currency? The term refers to the virtual form of a fiat currency. CBDCs act as a form of an electronic record or digital token of a country’s official currency.
This means that it can be issued and regulated by a nation’s central bank. The currencies’ digital nature can help simplify the implementation of monetary and fiscal policy whilst promoting better financial inclusion in developing economies through fintech solutions.
Also read: What does the future of CBDCs actually look like and why does it matter?
Unlike cryptocurrencies, which run on decentralised blockchains– meaning that no single entity holds the assets or retains the information about individuals using them– the centralised nature of CBDCs has some privacy concerns depending on how respective governments use the digital currency.
China’s system isn’t even the most advanced form of CBDC globally, with both Cambodia’s Bakong and the Bahamas’ ‘Sand Dollar’ being rolled out on a larger scale, according to PwC data.
However, it’s worth noting that China is the world’s first major advanced economy to start implementing a digital currency at any scale. Its lofty ambitions make the country a significant innovator in the field.
Could CBDCs Replace Cryptocurrencies?
As news of international projects to develop central bank digital currencies spread around the world, In 2018, Nouriel Roubini, a professor of economics at New York University’s Stern School of Business, wrote in The Guardian that “if a CBDC were to be issued, it would immediately displace cryptocurrencies, which are not scalable, cheap, secure, or decentralised.
Enthusiasts will argue that cryptocurrencies would remain attractive to those who wish to remain anonymous. But, like private bank deposits today, CBDC transactions could also be made anonymous, with access to account-holder information available, when necessary, only to law-enforcement authorities or regulators, as already happens with private banks.
Besides, cryptocurrencies such as bitcoin are not anonymous, given that individuals and organisations using crypto-wallets still leave a digital footprint,” Roubini added.
However, in a recent CoinShares article, James Butterfill rebukes the notion that CBDCs can replace bitcoin and other cryptocurrencies, noting that crypto’s purpose is far too different to that of digital currencies.
“Bitcoin and CBDCs are very different, with the former being of fixed supply while the latter is backed by fiat currencies,” Butterfill explains.
With this in mind, CBDCs take on a far more similar role to stablecoins, where users are far more inclined to spend their money.
Whilst Roubini is correct in claiming that CBDCs can outperform many cryptocurrencies practically, fixed supply means that crypto will always be seen as a far more effective investment opportunity.
Maxim Manturov, head of investment research at Freedom Finance Europe, points to the mainstream emergence of cryptocurrency as a critical reason behind its coexistence alongside CBDCs, highlighting the emergence of major fintechs like Revolut and their efforts to accommodate cryptocurrency trading:
“Revolut has grown into one of Europe’s dominant consumer financial technology companies, constantly adding new features. The app started as a way to avoid currency conversion fees when travelling but quickly added banking, trading and crypto features among dozens of products,” Manturov explained.
Also read: How interoperability between private and public players will accelerate the CBDC Race
Today, bitcoin is a globally recognised store of wealth, which has been adopted by significant finance players like PayPal and is accepted worldwide. The cryptocurrency’s fixed supply makes the asset closer to assets like gold rather than CBDCs, which behave more like stablecoins.
As CBDCs make their emergence, it’s clear that digital currencies will play a key role in shaping the future of finance.
Though, it’s far more likely that they will emerge alongside the likes of bitcoin rather than replace the world’s most popular cryptocurrency.
–
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic
Join our e27 Telegram group, FB community, or like the e27 Facebook page
Image credit: rhj2017
The post Could China’s CBDC threaten decentralised cryptocurrencies? appeared first on e27.