About two years ago, the International Monetary Fund (IMF) published a research paper exploring the rise of digital money. Much of the text dealt with how Central Banks could mitigate risks that threaten their monetary hegemony, with particular emphasis on fiat-pegged stablecoins.
At the time, the paper’s inclusion of bitcoin as public money appeared relevant, but the crypto itself wasn’t given too much attention and deemed of little consequence. A lot has changed since then, and yet, the discussion regarding Central Bank Digital Currencies (CBDCs) remains within the realm of payment rails, programmability of money and the promise of financial inclusion without any noteworthy consideration of public confidence.
Fast forward to today, and the US Federal Reserve Chairman, Jerome Powell has gone on record to outline a new digital payment system, cementing expectations of a ‘Fedcoin’ being launched sometimes in the next 4 years. As discussions around CBDCs accelerate across countries, some might think bitcoin irrelevant or obsolete. Nothing could be further from the truth.
Indeed, when we shift our focus from the practical element of programmable money to a conversation about trust, integrity, ownership and individual agency, bitcoin quickly becomes the focal point of the entire digital money landscape. It could even be argued that the success of CBDCs is wholly dependant on bitcoin’s success.
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CBDCs in a nutshell
For digital natives even mildly familiar with cryptocurrencies, CBDCs are antithetical to bitcoin. Issued by a Central Bank on a permission blockchain, they operate within the same bureaucratic and political structure as fiat currencies, and are therefore beholden to the same compromises that govern traditional financial systems.
From the onset, CBDCs appear wholly undesirable. However, since governments all over the world retain a mandate to control the money supply, various CBDC offerings are in the process of being piloted in preparation for an eventual roll out. In this regard, China’s digital Yuan is likely to be first to market. In the international arena and within the context of the traditional financial system, CBDCs could optimise remittance flows, inter-bank settlement and commerce. Similar to the success of stablecoins like USDT and USDC, government-led programmable money initiatives will probably be successful from a pragmatic standpoint.
Domestically, CBDCs would provide more avenues to reach unbanked communities and in doing so acting as an interface to push stimulus, payments, subsidies and social security benefits, among other things. The technology will also be used to harvest data, raise taxes or enforce sanctions to a never-seen-before degree, bringing behavioural economics to a whole new level by providing central bankers the keys to targetted fiscal policy.
With this in mind, it’s hard to talk about central bank digital currencies without immediately noticing the potentially dystopian downside of such technology in the hands of rogue governments.
An already growing rift between governments and citizens worldwide was exacerbated during global corona-virus lockdowns. The resulting misery, business closures and general public harm will be debated and realised for years to come, as scrutiny on fiscal and monetary policies are weighed against the real threat of the virus.
As the crisis unfolded, bitcoin saw a significant uptake as a hedge against inflation. All the while, corona-virus lockdown measures seemingly justified a continuous outpouring of trillion-euro-dollar cash injections, which took the form of large-scale corporate and retail bailouts. Increasingly, this money found its way into financial markets, propping up some of the largest asset bubbles ever witnessed as the real economy stalled.
Some of that money made its way into bitcoin, sending the total market cap to $1.2 trillion, over 1/9th the market-capitalisation of gold. This was the moment bitcoin was officially recognised as a digital, decentralised and globally accessible store of value that suits the needs of the 21st century.
Unlike CBDCs, which are an extension of the kind of top-down policies justified by arbitrary covid-19 lockdown measures, bitcoin is rooted in a set of core principles around trust, integrity and absolute respect for individual financial agency. This makes it a unique asset that is entirely independent of questionable central bank policies.
Since its inception, bitcoin has organically taken root at all levels of society. From local grocers to corporations and high-net-worth individuals and asset managers; we are witnessing the steady transition away from government currencies to an apolitical digital store of value, bitcoin.
As mentioned, it’s not just institutional money that’s moving. Grass-roots initiatives such as the one in a village in El Salvador are working to promote bitcoin adoption at a local level as well. Such projects are essentially working in parallel to local monetary jurisdictions, giving disenfranchised people a chance to plug into bitcoin’s robust global network and operate outside the confines of fiat currency.
One analyst places bitcoin’s adoption at 150 million users, which is on par with where the Internet was in 1996. At the rate the network is growing, bitcoin could reach 1 billion users in just four years.
Is there a Future for CBDCs?
If enough public and private capital flows into bitcoin over the coming years, it will become the de-facto public money used for global trade and settlement. In this case, individual countries will have a hard time selling any new system or currency to their citizens or any international community.
Naturally, this won’t stop governments from using every strategy in the political play book to maintain control over the money supply. With their inevitable introduction, CBDCs will likely remain in a gridlock with bitcoin as the battle for monetary dominance is fought in relative perpetuity, with bitcoin acting as an interim mechanism for reigning in over-zealous policy makers.
In this scenario, global currencies will coexist in an emerging multi-verse of liquidity and payment rails intermingling over the internet. More than anything else, the real battle for CBDCs will be for the hearts and minds of people in order to restore trust in money by government decree. Some nation states will likely have to adopt bitcoin as a reserve currency in order to bolster legitimacy, in which case the purpose of a CBDC might be lost in translation over time as bitcoin continues to scale.
Ultimately, bitcoin would end up fulfilling one of its roles as pristine collateral, all the while acting as a publicly verifiable layer of accountability for government worldwide. After the internet, money over internet-protocol (MOIP) is the defining technology of the 21st century, and while governments will re-create public money in their own way, it’s palpable that ‘Fedcoin’ or ‘Eurocoin’ do not threaten bitcoin by design.
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