Skip to content

Central bank digital currencies do not replace Bitcoin

May 27, 2020

Senior cryptocurrency fund manager, Grayscale Investments, outlined some fundamental differences in the nature of digital currencies between the Central Bank (CBDC) and Bitcoin (BTC).

In a recent report Grayscale suggests that CBDCs are an upgrade to traditional digital payment infrastructure, while Bitcoin is an updated version of the money itself.. The document says:

“CBDCs are sometimes seen as synonyms or substitutes for digital currencies like Bitcoin. However, they represent a significant deviation from the decentralized protocols that are inherent in many cryptocurrencies. CBDCs try to update the payment infrastructure, while Bitcoin tries to update the money. If CBDCs gain momentum, they can actually strengthen the value proposition for Bitcoin and other digital currencies. “

The author of the report, Philip Bonello, Research Director at Grayscale Investments, explained this CBDCs are digital versions of fiat currencies and retain many of their characteristics.

Central bank digital currencies do not replace BitcoinCentral bank digital currencies do not replace Bitcoin

A successful CBDC could, according to Bonello, rationalize the distribution of benefits to citizens and ensure automated compliance with the Know Your Customer and Anti-Money Laundering protocols through a centrally controlled digital book.

However, this also raises important privacy concerns The party that controls this central registration can view and manage all transactions made through the CBDC.

Interestingly, the former U.S. Treasury Secretary, Lawrence Summers recently argued that the current financial system offers too much privacy. According to him, a CBDC could solve this problem:

“Of all the major freedoms, the ability to hold, transfer, and do multimillion-dollar amounts seems to me to be one of the least important freedoms that governments should preserve. […] Central bank digital currencies are about improving competitive conditions between smaller and larger players and making it more difficult for anonymous forms of finance to thrive. “

Bonello explains that implementing a CBDC would require financial infrastructure such as merchant payment solutions, digital asset custody, exchange services, and wallets to upgrade. Implementing such changes on a large scale would certainly pose some challenges, he said:

Operative This type of change would also require new management policies and practices at various levels, including monitoring the digital wallets of hundreds of millions of users.. This would mean a significant change in money control, movement and accounting. “

CBDCs do not set monetary policy

Bonello also points this out “CBDC initiatives tend to focus on payment advantages over legacy systems, but do not show how a CBDC would maintain its value in a monetary inflation environment.”. In fact, this apparently suggests that digitizing fiat money would make it easier to create new fiat money:

“”If a central bank successfully digitizes its currency, it can continue to dictate and implement monetary policy.. With the logic encoded in a CBDC, it would be even easier for a central bank to issue new currencies and even set effective interest rates on assets held in personal custody. In stark contrast, Bitcoin’s monetary policy is set, a feature that is widely known to users. “

Bonello concludes “Policy makers will decide how to use a CBDC,” while “Bitcoin can be viewed as an apolitical alternative.”. He reiterated that a hypothetical digital dollar will not kill Bitcoin:

“With Bitcoin, any value can be stored and transferred without the risk of deterioration, censorship or seizure. CBDCs can censor disordered addresses, and central banks will continue to control monetary policy. On the surface, it appears that a digital dollar is driving the growth of Bitcoin could displace since both are digital, but these main issues are not really addressed. “