Bitcoin Came as a Disrupter, but CBDCs Took Over
“A purely peer-to-peer version of
electronic cash”: that’s how Satoshi Nakamoto defined Bitcoin in the original
whitepaper. Electronic cash or not, Bitcoin has now attracted the
attention of everyone: tech enthusiasts, consumers, traders, investors, bakers,
and even regulators.
Although Bitcoin dominates the
multitrillion-dollar market, there are tens of thousands of other
cryptocurrencies; some were developed for particular purposes, while others are
based on mere internet jokes.
So, the question remains: Does Bitcoin
or any other cryptocurrency have the potential to replace existing forms of
fiat currencies?
Well, the governments of two sovereign
countries, El Salvador and the Central African Republic, think so, as Bitcoin
is a legal tender there. However, things are different in other countries,
especially the developed ones that dictate the global economy.
Understanding the Basics
Before diving into the details, it is
crucial to understand the fundamental difference between fiat currencies and
cryptocurrencies. Although the basics might be distinct on the surface, the
adaptation of both has created co-relations.
Fiat currencies, such as the US
dollar, euro, or yen, are issued by the central banks of the countries. The World Bank defines fiat currencies as “any
legal tender designated and issued by a central authority that people are
willing to accept in exchange for goods and services because it is backed by
regulation.” The government backs them, ensuring legal guarantees for them.
Interestingly, some fiats, like the Belize dollar, the Hong Kong dollar, and
the United Arab Emirates dirham, are pegged to the US dollar.
On the other hand, cryptocurrencies
are decentralised and not backed by any centralised authority. According to the
World Bank, cryptocurrencies are “a type of unregulated, digital money, which
is issued and usually controlled by its developers, and used and accepted among
the members of a specific virtual community.”
But what was the psyche of Satoshi
Nakamoto, the creator of Bitcoin, in creating it?
In the Bitcoin
whitepaper, the mysterious Satoshi Nakamoto wanted to create “an
electronic payment system based on cryptographic proof instead of trust.” He
structured the controlling infrastructure of Bitcoin as “an electronic payment
system based on cryptographic proof instead of trust.” It is beyond the
controlling scope of any central bank or other governmental authority.
Proof-of-work-based blockchains also
consider security, as the transactions on the blockchain cannot be reversed or
modified without a majority consensus of the node operators, which is
practically impossible.
What Makes Money, Money?
The ancient economy was based on
barter systems. Cows and pots in that age had the same use as a dollar bill
today—they were all widely accepted in exchange for goods and services.
Then, the modern monetary system came.
Coins made out of precious metals were pumped into the markets. As the economy
and institutions modernised further, paper money took over. Although the use of
fiat money can be traced back to the 10th century by the Song Dynasty in China,
the global use of it came in recent centuries.
The key behind the trust in fiat
currencies is the government’s guarantee.
Cryptocurrency, as it is
decentralised, has eliminated the necessity of such guarantees. However, people
still need to trust and accept it as a payment to make it replace fiats. Unless
people accept or believe in its value, it is just a number on the internet.
Although going by the architecture of
blockchain, cryptocurrencies might look promising, there are other factors,
like technological challenges.
Can Crypto Be the Next Money?
Cryptocurrencies can break the barrier
of centralisation when it comes to payments. However, the real benefit of using
cryptocurrencies comes from the underlying technology – blockchain.
One of the most highlighted advantages
of cryptocurrencies in the monetary system is cross-border payments. The
existing cross-border payment system involves intermediary banks, and the
settlement sometimes takes days. Further, the SWIFT-based cross-border payments
infrastructure is opaque and costly—the fees can be significant.
Blockchain-based cryptocurrencies can
directly impact and mitigate these challenges. Due to its decentralised nature,
the crypto settlements do not involve banks or other authorities. Also, the
transfers can be fast and cost a fraction of the traditional systems.
Many blockchain companies, like
Ripple, mainly focus on this area with their services. And instead of excluding
banks, they are working with banks, offering them blockchain-based
infrastructure for cross-border payment settlements using cryptocurrencies.
Another selling point of
cryptocurrencies as a currency is the safety net against inflation. Bitcoin,
the dominant cryptocurrency, has a hard cap of 21 million Bitcoins in its
supply, meaning only that many Bitcoins can exist. “Once a predetermined number
of coins have entered circulation, the incentive can transition entirely to
transaction fees and be completely inflation-free,” the Bitcoin whitepaper
explains, adding that “the incentive may help encourage nodes to stay honest.”
Now, when it comes to fiat currencies,
inflation is a significant problem. While strong economies often succeed in
keeping inflation in control, many countries like Venezuela, Argentina, and
Zimbabwe are experiencing hyperinflation—their currency notes are more valuable
as scraps of paper than their face value. Under such circumstances, using
cryptocurrencies, like Bitcoin, in inflation-hit currencies also skyrocketed.
Trump just gave full credit to Vivek for alerting him as to the dangers of a CBDC
He proceeds to promise that he will never allow for one to be created
This is really good news. A CBDC would lead to complete financial tyranny. pic.twitter.com/StMUixt9ct
— Clint Russell (@LibertyLockPod) January 23, 2024
Cryptocurrencies Are Not
Immune to Challenges
The advantages of cryptocurrencies as
a payment mode must be considered in the challenges – and there are some
significant ones.
The most notable challenge for Bitcoin
or any other top cryptocurrency is the increase in its dollar value. Due to its
rising value, Bitcoin has more resemblance to an asset class rather than a
payment system. The cryptocurrency even attracted the attention of Wall Street
investors as an asset, and exchange-traded funds tracking its value are being
traded on stock exchanges globally. “The market characteristics of the Bitcoin easily make it an asset and not a payment mode. Any legal tender must be stable, even the fiats,” Ultima Markets’ Regional Business Director, Freddy Wu, pointed out, adding, “Any legal tender must be stable, even the fiats… Bitcoin’s volatility will never make it an effective payment mode.”
Another major roadblock to using
Bitcoin or other cryptocurrencies as a payment mode is their decentralised
architecture, based on privately controlled nodes. If such a decentralised
payment mode takes over, it will undermine the role of central banks in
controlling the monetary system. Further, regulating a cryptocurrency as a
payment instrument is very complex, if possible.
Although El Salvador and the Central
African Republic made Bitcoin legal tender, the success of such moves is highly
questionable. Top regulators around the world are inclined to regulate Bitcoin
and other top cryptocurrencies as assets rather than as payment modes.
Also, there is the question of
scalability. The infrastructure of Bitcoin or another existing cryptocurrency
is not a match for handling payments on a mass scale. During many high-demand
hours, the Bitcoin network is clogged, resulting in slower transaction times
and massive transaction fees.
I don’t want to see a digital yuan world. To have every transaction centrally tracked in that way by a hostile state is like slapping a digital dog collar on your neck.
But that doesn’t mean I’m in denial about the fact that RMB is quietly gaining strength, and that we need… pic.twitter.com/fqHzGiWgJB
— Balaji (@balajis) April 1, 2023
The Future of Money
Bitcoin has already been accepted as
an asset class by investors, and regulators are also moving in that direction.
Also, many cryptocurrencies explicitly launched for micro-payments are now
struggling. Although the chances of cryptocurrency dominating as a mainstream
payment mode are very slim, the promise of blockchain technology has been
acknowledged. “While I believe coins and tokens, in their present format, have no place in the existing fiat system I do feel that the stable coin concept has great promise.” added the CEO of EBC Financial’s UK unit, David Barrett, adding that “regulatory and central bank concerns around the lack of clarity of its operations have hindered its acceptance within the fiat world.”
Although central banks are hostile
towards Bitcoin and other cryptocurrencies, most are working on the digital
version of fiats, otherwise known as central bank digital currencies (CBDCs),
which are based on blockchain.
Although these CBDCs are built on top
of blockchain-based infrastructures, they are exclusively controlled by central
banks. In other words, they are just the other version of the existing physical
fiat currencies. Barret continued that “CBDC’s are the solution to the confidence side, their ability to draw in the fiat system will make legitimate stable coins very important to the financial systems evolution.”
Three countries, the Bahamas, Jamaica,
and Nigeria, have fully launched their CBDCs. Among the G20 nations, China is
leading the CBDC race and has been piloting digital yuan at a mass scale for
years now. Eighteen others in the bloc are also in the advanced stages of CBDC
development, and multiple are in the pilot phase.
There is no doubt that Bitcoin’s development,
particularly its underlying technology, blockchain, has disrupted the existing
monetary system. However, the burning question is how that change is coming.
Based on the regulatory actions, digital fiat will likely co-exist with
physical fiat currencies, while cryptocurrencies like Bitcoin will dominate as
an asset class rather than a payment mode.
“A purely peer-to-peer version of
electronic cash”: that’s how Satoshi Nakamoto defined Bitcoin in the original
whitepaper. Electronic cash or not, Bitcoin has now attracted the
attention of everyone: tech enthusiasts, consumers, traders, investors, bakers,
and even regulators.
Although Bitcoin dominates the
multitrillion-dollar market, there are tens of thousands of other
cryptocurrencies; some were developed for particular purposes, while others are
based on mere internet jokes.
So, the question remains: Does Bitcoin
or any other cryptocurrency have the potential to replace existing forms of
fiat currencies?
Well, the governments of two sovereign
countries, El Salvador and the Central African Republic, think so, as Bitcoin
is a legal tender there. However, things are different in other countries,
especially the developed ones that dictate the global economy.
Understanding the Basics
Before diving into the details, it is
crucial to understand the fundamental difference between fiat currencies and
cryptocurrencies. Although the basics might be distinct on the surface, the
adaptation of both has created co-relations.
Fiat currencies, such as the US
dollar, euro, or yen, are issued by the central banks of the countries. The World Bank defines fiat currencies as “any
legal tender designated and issued by a central authority that people are
willing to accept in exchange for goods and services because it is backed by
regulation.” The government backs them, ensuring legal guarantees for them.
Interestingly, some fiats, like the Belize dollar, the Hong Kong dollar, and
the United Arab Emirates dirham, are pegged to the US dollar.
On the other hand, cryptocurrencies
are decentralised and not backed by any centralised authority. According to the
World Bank, cryptocurrencies are “a type of unregulated, digital money, which
is issued and usually controlled by its developers, and used and accepted among
the members of a specific virtual community.”
But what was the psyche of Satoshi
Nakamoto, the creator of Bitcoin, in creating it?
In the Bitcoin
whitepaper, the mysterious Satoshi Nakamoto wanted to create “an
electronic payment system based on cryptographic proof instead of trust.” He
structured the controlling infrastructure of Bitcoin as “an electronic payment
system based on cryptographic proof instead of trust.” It is beyond the
controlling scope of any central bank or other governmental authority.
Proof-of-work-based blockchains also
consider security, as the transactions on the blockchain cannot be reversed or
modified without a majority consensus of the node operators, which is
practically impossible.
What Makes Money, Money?
The ancient economy was based on
barter systems. Cows and pots in that age had the same use as a dollar bill
today—they were all widely accepted in exchange for goods and services.
Then, the modern monetary system came.
Coins made out of precious metals were pumped into the markets. As the economy
and institutions modernised further, paper money took over. Although the use of
fiat money can be traced back to the 10th century by the Song Dynasty in China,
the global use of it came in recent centuries.
The key behind the trust in fiat
currencies is the government’s guarantee.
Cryptocurrency, as it is
decentralised, has eliminated the necessity of such guarantees. However, people
still need to trust and accept it as a payment to make it replace fiats. Unless
people accept or believe in its value, it is just a number on the internet.
Although going by the architecture of
blockchain, cryptocurrencies might look promising, there are other factors,
like technological challenges.
Can Crypto Be the Next Money?
Cryptocurrencies can break the barrier
of centralisation when it comes to payments. However, the real benefit of using
cryptocurrencies comes from the underlying technology – blockchain.
One of the most highlighted advantages
of cryptocurrencies in the monetary system is cross-border payments. The
existing cross-border payment system involves intermediary banks, and the
settlement sometimes takes days. Further, the SWIFT-based cross-border payments
infrastructure is opaque and costly—the fees can be significant.
Blockchain-based cryptocurrencies can
directly impact and mitigate these challenges. Due to its decentralised nature,
the crypto settlements do not involve banks or other authorities. Also, the
transfers can be fast and cost a fraction of the traditional systems.
Many blockchain companies, like
Ripple, mainly focus on this area with their services. And instead of excluding
banks, they are working with banks, offering them blockchain-based
infrastructure for cross-border payment settlements using cryptocurrencies.
Another selling point of
cryptocurrencies as a currency is the safety net against inflation. Bitcoin,
the dominant cryptocurrency, has a hard cap of 21 million Bitcoins in its
supply, meaning only that many Bitcoins can exist. “Once a predetermined number
of coins have entered circulation, the incentive can transition entirely to
transaction fees and be completely inflation-free,” the Bitcoin whitepaper
explains, adding that “the incentive may help encourage nodes to stay honest.”
Now, when it comes to fiat currencies,
inflation is a significant problem. While strong economies often succeed in
keeping inflation in control, many countries like Venezuela, Argentina, and
Zimbabwe are experiencing hyperinflation—their currency notes are more valuable
as scraps of paper than their face value. Under such circumstances, using
cryptocurrencies, like Bitcoin, in inflation-hit currencies also skyrocketed.
Trump just gave full credit to Vivek for alerting him as to the dangers of a CBDC
He proceeds to promise that he will never allow for one to be created
This is really good news. A CBDC would lead to complete financial tyranny. pic.twitter.com/StMUixt9ct
— Clint Russell (@LibertyLockPod) January 23, 2024
Cryptocurrencies Are Not
Immune to Challenges
The advantages of cryptocurrencies as
a payment mode must be considered in the challenges – and there are some
significant ones.
The most notable challenge for Bitcoin
or any other top cryptocurrency is the increase in its dollar value. Due to its
rising value, Bitcoin has more resemblance to an asset class rather than a
payment system. The cryptocurrency even attracted the attention of Wall Street
investors as an asset, and exchange-traded funds tracking its value are being
traded on stock exchanges globally. “The market characteristics of the Bitcoin easily make it an asset and not a payment mode. Any legal tender must be stable, even the fiats,” Ultima Markets’ Regional Business Director, Freddy Wu, pointed out, adding, “Any legal tender must be stable, even the fiats… Bitcoin’s volatility will never make it an effective payment mode.”
Another major roadblock to using
Bitcoin or other cryptocurrencies as a payment mode is their decentralised
architecture, based on privately controlled nodes. If such a decentralised
payment mode takes over, it will undermine the role of central banks in
controlling the monetary system. Further, regulating a cryptocurrency as a
payment instrument is very complex, if possible.
Although El Salvador and the Central
African Republic made Bitcoin legal tender, the success of such moves is highly
questionable. Top regulators around the world are inclined to regulate Bitcoin
and other top cryptocurrencies as assets rather than as payment modes.
Also, there is the question of
scalability. The infrastructure of Bitcoin or another existing cryptocurrency
is not a match for handling payments on a mass scale. During many high-demand
hours, the Bitcoin network is clogged, resulting in slower transaction times
and massive transaction fees.
I don’t want to see a digital yuan world. To have every transaction centrally tracked in that way by a hostile state is like slapping a digital dog collar on your neck.
But that doesn’t mean I’m in denial about the fact that RMB is quietly gaining strength, and that we need… pic.twitter.com/fqHzGiWgJB
— Balaji (@balajis) April 1, 2023
The Future of Money
Bitcoin has already been accepted as
an asset class by investors, and regulators are also moving in that direction.
Also, many cryptocurrencies explicitly launched for micro-payments are now
struggling. Although the chances of cryptocurrency dominating as a mainstream
payment mode are very slim, the promise of blockchain technology has been
acknowledged. “While I believe coins and tokens, in their present format, have no place in the existing fiat system I do feel that the stable coin concept has great promise.” added the CEO of EBC Financial’s UK unit, David Barrett, adding that “regulatory and central bank concerns around the lack of clarity of its operations have hindered its acceptance within the fiat world.”
Although central banks are hostile
towards Bitcoin and other cryptocurrencies, most are working on the digital
version of fiats, otherwise known as central bank digital currencies (CBDCs),
which are based on blockchain.
Although these CBDCs are built on top
of blockchain-based infrastructures, they are exclusively controlled by central
banks. In other words, they are just the other version of the existing physical
fiat currencies. Barret continued that “CBDC’s are the solution to the confidence side, their ability to draw in the fiat system will make legitimate stable coins very important to the financial systems evolution.”
Three countries, the Bahamas, Jamaica,
and Nigeria, have fully launched their CBDCs. Among the G20 nations, China is
leading the CBDC race and has been piloting digital yuan at a mass scale for
years now. Eighteen others in the bloc are also in the advanced stages of CBDC
development, and multiple are in the pilot phase.
There is no doubt that Bitcoin’s development,
particularly its underlying technology, blockchain, has disrupted the existing
monetary system. However, the burning question is how that change is coming.
Based on the regulatory actions, digital fiat will likely co-exist with
physical fiat currencies, while cryptocurrencies like Bitcoin will dominate as
an asset class rather than a payment mode.
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