“The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” said Satoshi Nakamoto in a message that introduced Bitcoin to the world for the first time. It was clear that this peer-to-peer digital currency was a reaction to government control of the currency system.
Now, more than a decade later, central banks and governments seem to have embraced Nakamoto’s technology to further entrench their fiat currencies. Several countries are actively experimenting with blockchain-based digital currencies. Here’s a closer look at this new crop of so-called “central bank digital currencies” or CBDCs.
What is a CBDC?
The key differentiator between cryptocurrencies like Bitcoin and a CBDC is permission. The Bitcoin network doesn’t need permission to operate or control supply. Instead, supply is limited by the network, and operations are handled by a distributed network of nodes and miners. This system is completely decentralized.
CBDCs, as the name suggests, are centralized. The central bank or government of a nation seeks to deploy a CBDC. Effectively, this central entity also controls the supply and validators on the network. Besides that, the underlying distributed ledger technology is similar to Bitcoin and other digital assets.
While several countries are actively experimenting with digital currencies, China seems to be at the forefront. Earlier this week, the Chinese central bank distributed $40 million in red envelopes with digital yuan to a limited group of early testers. Roughly 10 million citizens have been whitelisted to participate in the program. If successful, China could become the first nation to roll out a CBDC nationwide.
Rumored features of the digital yuan could indicate the benefits of this transition for central banks. A digital currency could be easier to track, cheaper to use, and much more programmable than traditional currencies. For instance, some reports suggest the Chinese government could designate what purposes certain e-CNY tokens can be used for (food, ridesharing, etc.). The tokens could also be locked or confiscated easily if the user runs afoul of local laws.
In short, a CBDC offers governments greater control of the economy with less friction.
What impact does this have on Bitcoin?
Bitcoin’s appeal as a decentralized currency that is beyond the control of central banks and governments is, perhaps, enhanced by these CBDCs. However, if these CBDC experiments are successful, it could alter the regulatory treatment of Bitcoin.
Chinese authorities, for instance, have banned Bitcoin mining and blocked crypto transactions from traditional banks as their CBDC experiments ramp up. If the digital yuan is a success, this regulatory clampdown on BTC could expand.
Whether the introduction of CBDCs in other nations will have a similar impact remains to be seen.
Bitcoin was created as an alternative to sovereign fiat currencies. However, its underlying technology is now being used by some nations to introduce their own CBDCs. These centralized digital currencies further entrench government surveillance and economic powers. Whether they’ll be successful and mainstream remains to be seen.