Central bank digital currencies will (not) make bitcoin obsolete

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Recent comments from Federal Reserve Chairman Jerome Powell underscore the need for more productive conversations around crypto competition.

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AFP via Getty Images

During testimony before the House and Senate, the topic of a central bank digital currency (CBDC) was raised and discussed, and illustrated just how serious this conversation has become. Far from the early days when crypto was seen as a tool for criminals and other illegal actors, central governments around the world are rapidly working on various types of crypto-fiat hybrid currencies. It’s not news, but comments about the possibility of bitcoin potentially being obsolete by a U.S. CBDC show how much more education and awareness is needed.

Bitcoin may have been the first crypto to go mainstream, and certainly tends to dominate blockchain and crypto conversations, but is just one of the thousands of cryptoassets that exist on the market. The introduction of new crypto variants has not weakened or diminished the attractiveness, functionality, or fundamentals of bitcoin. On the contrary, the proliferation of stablecoins, CBDCs and other applications related to blockchain and crypto has strengthened the health of the ecosystem as a whole.

Seen in this light, there is no reason to believe that the continued introduction of CBDCs will render bitcoin or other cryptos obsolete.

What is certain, however, is that crypto competition will only improve the dynamism of the sector. Let’s take a look at some potential implications of this increased crypto competition, both now and in the future.

Adoption of cryptography. What has already happened more and more is that, aside from the views of bitcoin maximalists, it is that for most individuals and institutions, bitcoin is currently viewed as an investment. against a currency. Stablecoins and CBDCs, directly related to how these instruments were designed and built, continue to play the role of crypto that can be used for transactional purposes. Bitcoin could indeed become the global currency of the future, and news from El Salvador and other countries adopting bitcoin as legal tender points to this possibility.

That said, price volatility and the high cost of entry (when valued in dollars) seem to oppose the use of bitcoin as a currency at this time. CBDCs, instead of making bitcoin obsolete, seem well placed to play a complementary role.

Better cryptography. Even though they are currently being incorporated, crypto transactions offer several substantial advantages over fiat transactions in place. Crypto transactions are generally faster, cheaper, easier to confirm, and instantly accessible compared to fiat transactions. This does not mean that this is the final step in cryptography; quite the contrary. Even over the past few years, several protocol improvements (on both bitcoin and Ethereum blockchains) have improved the performance and speed of these networks.

The introduction of a US CBDC would not immediately wipe out all other crypto assets, but rather trigger a new wave of innovation in space.

An improved ecosystem. Until recently, some institutions and policymakers still believed that cryptography would be, if not outright banned, regulated and limited to such an extent that it would become virtually unusable. This has obviously turned out to be a wrong view, and in fact the opposite has happened; almost all major financial institutions and many countries have actively entered the crypto space. Despite this, there is a certain segment of the population that has been reluctant to get directly involved in what has admittedly been an area that has been volatile and that exists in an ambiguous regulatory environment.

The introduction of a CBDC by a large global economy will not solve all crypto-related issues, and there will still be regulatory issues to be addressed, but it would go a long way in ironing out the remaining open elements.

The crypto market has repeatedly proven to be robust, resilient, and continually open to new ideas and ways of doing things. Crypto has rapidly evolved from a simple bitcoin to a complex and fast-paced ecosystem made up of thousands of different cryptoassets, but it’s important to remember that this is still a new area of ​​economics. CBDCs and other types of cryptoassets will invariably be introduced to the market and could in fact challenge bitcoin and other earlier versions of crypto for market leadership. That said, there is no reason to believe that CBDCs will lead to bitcoin obsolescence. On the contrary, as CBDCs become more and more mainstream and mainstream the cryptoasset industry, including bitcoin, will become stronger as a result.

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