No topic is more contentious in crypto than Central Bank Digital Currencies (CBDCs).

Although in their infancy,  81 countries are now exploring central bank digital currencies.  That’s 46 more countries than this time last year. 

For better or worse, it seems inevitable that CBDCs will become ubiquitous soon. This not only has implications for fiat currencies, but for cryptocurrencies like Bitcoin and Ethereum as well. 

But what are CBDCs, and should blockchain investors worry about them?

 

What are CBDCs?

Central Bank Digital Currencies (CBDCs), as the name suggests, are digital currencies issued by central banks. 

Because central banks are responsible for issuing traditional fiat currencies such as USD or EUR, CBDCs can be considered digitized versions of these currencies. 

There are several pragmatic benefits to a fully digital fiat currency:

• No service or exchange fees, unlike with BTC and ETH
• More convenient instead of holding physical bills, cards or coins. CBDCs are stored directly on your smartphone and don’t even require a wifi connection.
• Payment are faster than that of credit cards or cash
• Backed by a government, unlike Bitcoin or Ethereum
• Easier storage for governments

CBDC of any given country are often referred to as a digital counterpart; however, some countries anticipate CBDCs overtaking physical fiat entirely.

 

How Are CBDCs Different From Decentralized Cryptocurrencies?

The core feature of digital currencies like Bitcoin or Ethereum is decentralization. 

Cryptocurrencies are characterized by the fact that they can’t be controlled by a centralized authority. 

In other words, nobody can stop a Bitcoin or Ethereum user from sending or receiving a transaction on the network, and nobody can seize the funds stored in someone’s personal wallet.

Another major reason why cryptocurrencies have become so popular is that most of them are deflationary. Bitcoin is a great example: it has a fixed total supply of 21,000,000 bitcoins, and nobody in the world can create even 1 BTC over that limit. 

Because of that, cryptocurrencies like Bitcoin, Cardano and XRP, to name a few, are completely immune to inflation.

CBDCs, on the other hand, are issued by the same central banks that distribute traditional dollars and euros. They do have a middleman and they aren’t immune to money printing from governments.

To be blunt, CBDCs have very little in common with decentralized cryptocurrencies. Rather, they should be considered a digital form of fiat currency. 

CBDCs can be printed at will. As is the case with traditional fiat currency, unrestricted money printing can also result in devaluation. 

The main difference between CBDCs and crypto — and the predominant reason why governments and central banks are pushing for them on a global scale — is the fact that Central Bank Digital Currencies enable total financial surveillance.

While cryptocurrencies like Bitcoin can be used in a private manner, CBDCs enable the recording of every single transaction in a centralized database owned by the government. 

In this Brave New World governed by Central Bank Digital Currencies, the government will know every single detail of your life. Every payment you make will be registered and stored — potentially forever.

Simply put, CBDCs are the complete opposite of decentralized cryptocurrencies like Bitcoin. While real crypto is an empowering technology allowing everyone to take control of their financial future, CBDCs are a tool of total control and surveillance.

 

Which Countries Are Working on Their CBDCs?

According to estimates, over 70% of central banks in the world are planning to launch their own CBDCs in the future. 

China is leading the way with its Digital Yuan, while India, Turkey, the European Union and Russia are at an advanced stage with their own CBDCs.

So where does the United States stand?

It’s tricky.

Federal Reserve Chairman Jerome Powell hates cryptocurrencies especially stablecoins. He even stated he’d create a CBDC as long as congress votes for it. 

“You wouldn’t need stablecoins; you wouldn’t need cryptocurrencies if you had a digital U.S. currency,” said Powell in a congressional hearing. “I think that’s one of the stronger arguments in its favor.”

Although the United States is also interested in launching a CBDC in the future, the work on the digital dollar is at a very early stage.

While China has already airdropped some of its Digital Yuan to Chinese citizens, America is barely entering the initial phase of planning and consulting the digital dollar.

Powell did promise, however, that there will be an important announcement regarding a U.S. CBDC sometime in 2021.  

Are CBDCs a Threat to Bitcoin?

CBDCs are the antithesis of Bitcoin and this is not entirely a bad thing. 

The velocity of money is going to increase tenfold through CBDCs. This is because CBDCs are instantaneous and would enable cryptocurrencies and currencies around the world to easily convert to them.

It’ll also make collecting taxes more efficient. 

Now for the bad news.

First and foremost, CBDCs will make collecting taxes more efficient.

Furthermore, Central Bank Digital Currencies are fully controlled by the politicians, provide no real privacy or anonymity whatsoever, and just like traditional fiat currencies, they are also prone to devaluation caused by unrestricted money printing.

 

If given a choice, moreover, the financial literacy almost nobody would want to own CBDCs instead of real cryptocurrencies such as Bitcoin or Ethereum. But many governments around the world are not intending to give you that choice. 

This is echoed through stricter regulations or even bans of crypto around the globe.

Even Ethereum creator Vitalik Butrein said governments could severely marginalize cryptocurrency and make it something only fringe communities use.

Ok, so will decentralized cryptocurrencies be able to survive the onslaught on Central Bank Digital Currencies? Only time will tell.

One thing is for certain: Crypto enthusiasts should start preparing for what is inevitable because CBDCs will be ubiquitous very soon.