As the adoption of cryptocurrencies continues to accelerate and hit new all time highs (BTC $63k today), a number of major developed countries are signaling their intention to develop their own digital currency in the form of a Central Bank Digital Currency (or CBDC). In most cases, these currencies will sit on a permissioned blockchain and represent a digital version of the particular nation’s fiat currency.
Countries that are in advanced stages of developing a native CBDC include China, The Bahamas, Sweden and the European Union. While Singapore, South Korea, Japan, the United Kingdom, Canada and others appear to be considering launching their own digital currencies although they are at an earlier stage.
While these digital currencies will undoubtedly offer a layer of innovation that’s previously been associated with cryptocurrencies like Bitcoin, they can’t offer the promise of decentralization (permissionless blockchain). In large part, Bitcoin and other cryptocurrencies were born as a response to the control exerted over the financial system by central banks. As such, it’s hard to imagine those that embrace decentralized solutions gravitating towards a CBDC.
CBDC’s are an opportunity for central banks to innovate and streamline very disjointed and inefficient systems (that they themselves established). They have the potential to be a superior alternative to existing monetary systems, but given their centralized control they should not be viewed as a threat to decentralized cryptocurrencies.
There is some inherent risk with a centrally backed digital currency – namely that the government body may implement smart contracts that automate tax collections and ultimately have more visibility into its' citizens transactions. This will be a shift in fiat however we believe this will simultaneously normalize digital currencies and provide an easier onramp and drive increased adoption for decentralized digital currencies like Bitcoin and Ethereum.