Will a Central Bank Digital Currency (CBDC) Make Bitcoin Obsolete?

The launch of a central bank digital currency (CBDC) in Europe appears to be approaching. In China, there are plans to officially launch the digital yuan, e-CNY, sometime next year. The European Central Bank aims to end the research phase of a digital euro in October 2023. Will Bitcoin still be necessary with the arrival of digital coins issued by central banks?

CBDCs should lead to higher financial inclusion and reduce systemic risk, Queen Maxima explained in a speech at the IMF event “CBDC and Financial Inclusion: Risk and Reward“. In addition, according to Maxima, a CBDC can combine the best of both worlds: cheap and fast”cross-border payments” combined with high security, liquidity and robustness.

ECB

Last week, the president of the European Central Bank, Christine Lagarde, gave a speech about the progress in creating the digital euro. Lagarde explains that there are currently three developments that could potentially disrupt the current payment system:

  • More and more payments are made digitally. As a result, cash may lose its role as a monetary anchor. According to the ECB, this has major consequences for confidence in the economy and the euro.
  • In the absence of a monetary anchor, people will look for an alternative form of money, explains Lagarde. As an example, she gives bitcoin and other cryptocurrencies that, according to her, cannot function as a medium of exchange due to their volatility. Additionally, Bitcoin operates independently of the ECB or other agencies. If the use of bitcoin as a means of payment or savings increases, central banks will lose control and power over the money.
  • Big Tech has entered the payment market and can therefore dominate the (foreign) payment market. The growing use of services increases the dependence on such companies. According to the ECB, Europe’s autonomy may be threatened as a result. After all, many Big Tech companies are located outside the EU and are therefore subject to different rules. Examples of such companies are Venmo and Paypal.

For these three reasons, according to Lagarde, it is crucial for the ECB to prepare for the next step in the digitization of the economy.

A less frequently mentioned reason is that a CBDC makes it easier for the ECB to make a looser and more personal monetary policy.

A CBDC, like bitcoin, is programmable money. For example, you can assign an expiration date to money to encourage spending, program social benefits, and create spending vouchers.

A CBDC enables public authorities and private sector actors to program money, create smart contracts and enable targeted political functions.

Managing Director IMF-World Bank Bo Li

Criticism

Not everyone is in favor of the digital euro. For example, CBDCs would give central banks even more power and put citizens’ privacy at risk. Using a CBDC always requires citizens to trust that one central party handles users’ money and personal data correctly.

There are fears that central banks and governments will soon be able to decide what people can and cannot spend money on.

By the way, not all bankers are fans of the whole development of CBDCs. For example, the president of the Federal Reserve in Minneapolis, Neel Kashkari, does not see the point and has yet to receive an answer to the question of exactly what problem a CBDC would solve.

I can see why China wants a CBDC. If you want to monitor all citizens’ transactions, this can actually be done more easily with a CBDC than when users use alternatives like Venmo or Paypal. Enacting negative interest and collecting direct taxes is easier with a CBDC. Why would the American people want that?

Neel Kashkari, President of the Minneapolis Federal Reserve

Difference between Bitcoin and CBDC

Although both coins operate completely digitally, they differ greatly from each other. For example, Bitcoin has no owner, CEO, president or board of directors. The rules of Bitcoin are immutable. Where the supply of the digital euro is not fixed and new coins can easily be created, Bitcoin has a maximum supply of 21 million. This number did not come out of the blue, but is relatively easy to calculate with the following mathematical sum:

The 32 above the sigma represents the number of times the block reward is halved. The 210,000 represents the number of blocks between the halvings. Finally, the 50 gives the number of bitcoins used per block and the 2 to the power of in the cumulative number of all halvings so far.

The result of this sum is rounded to DKK 21 million.

Privacy

In addition, the use of a CBDC requires an identity and trust in the central bank. Bitcoin is an open monetary network that anyone can join regardless of nationality, race, age, wealth or residence. Bitcoin is politically neutral money.

An internet connection and a smartphone are all it takes to join the decentralized network and gain access to send and receive value worldwide, without intermediaries.

In conclusion, Bitcoin and CBDCs are fundamentally different from each other and do not really compete with each other. One does not rule out the other, but a CBDC does not make Bitcoin obsolete.


Financial inclusion in a township in South Africa demonstrates the power and accessibility of bitcoin.

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