Why do CBDCs Increase Bitcoin’s Value Proposition

Original post (Spanish) = https://criptoblog.tutellus.com/untitled/

In recent years, the growth of Bitcoin together with the increase in demand for stable coins has caused an avalanche of countries interested in exploring CBDCs (Central Bank Digital Currencies). Not counting also the COVID-19 crisis, which has driven the search for new ways to improve the distribution of financial stimuli. In my opinion, if CBDCs at some point gain popularity and manage to face all the challenges that lie ahead, they will only make the value proposition more visible and present, especially Bitcoin, and some other digital assets with similar characteristics. After all, CBDCs are an intention to improve specific elements of the current infrastructure, and Bitcoin aims to improve the system itself.

What are Digital Assets?

The first “decentralized digital currency” appeared in 2008 when Satoshi Nakamoto gave its name to Bitcoin, the first digital asset that allowed you to transact and save value outside the current financial system. Its objective was to solve and improve some challenges that the current system failed to solve, and 11 years later it seems that it is on its way. Due to the volatility present in the asset — fully understandable if we take into account the long-term and current role expected of it — an asset that has to increase its market capitalization to globally relevant magnitudes must be volatile during this period. However, this volatility makes its adoption less interesting for people who want to benefit from the advantages of digital assets such as Bitcoin without the disadvantages of this volatility.

As a result of here we saw a worrying innovation for leaders on the sovereignty of money such as governments and central banks with stable coins. These assets have the function of maintaining the value through a 1: 1 peg with FIAT currencies, but maintaining the “digital” state. That is, we now have stable values such as dollars but in a network that works outside the financial system, which is transferable globally at minimal costs, which will not be affected by volatility and above all, with an available settlement 24/7, with less regulation and lower barriers to entry compared to current banking services.

Stablecoin Market Evolution

The development of these new assets has received interest not only from national economies but also from large corporations. Most of the current currencies, leaving aside Dai — the most special and that contributes the greatest value of all thanks to its decentralization (to see this concept better you can go here) — are generated by private companies with which we must trust. The number of stable coins generated will depend on the amount in dollars that are in a bank account, therefore users must trust that issuers do not generate more coins than they have backed. Obviously there are some more reliable than others, such as USDC, which constantly proves its veracity through audits.

Apart from these corporations that are usually almost all centralized exchanges (Coinbase, Binance, Bitfinex) there have been other giants that have shown interest. In 2019 Facebook made public its intentions to generate a stable coin called “Libra” available to its 2.7 billion users. This undoubtedly made most economies rethink the issuance of digital fiat currencies, since if they did not they would lose this race against corporations, which could take over the most precious power of institutions: the issuance and control over money.

According to a study carried out by “the Bank of International Settlements” the interest in CBDCs in developed economies had skyrocketed. 80% of them were working on one, including the Fed, ECB, BoE and BoJ. In contrast, many of the developing countries were not giving it as much affection as the more advanced economies.

Central Banks exploring CBDC

CBDCs would represent a system upgrade, this is clear, but with a lot of collateral damage. It should not be remembered that what makes Bitcoin an incredibly interesting asset is its decentralization and its inability to interfere with its monetary policies. CBDCs are nothing more than currencies created and controlled by Central Banks. They are a version of the FIAT coins but in digital format, so there is no doubt that it will inherit many of its control characteristics.

Main challenges of CBDC

Despite sounding like something very nice, the fact that the European Central Bank now issues a digital euro entails many conflicts and problems that must be solved first.

First, this innovation poses a great threat to commercial banks. With a stable coin, users will have the ability to transfer and save value outside the financial system. They will not have the need to depend on third parties to carry out these actions. This will also cause a huge reduction in the continuous inflow of capital into central banks, making them less liquid and less profitable.

On the other hand, it will also be necessary to improve the financial infrastructure at a global level. This includes creating payment solutions, offering custody services for digital assets, exchange services, wallets and a new regulation to deal with this new form of money. These regulations would include surveillance of the wallet movement of hundreds of millions of users. In other words, we are talking about an unprecedented control by governments over the movement and accounting of money, in addition to the control of issuance and transfers.

Differential value of Bitcoin against CBDC

In contrast, the most important characteristics of Bitcoin are contrary to what the CBDC offers: decentralization and its resistance to being manipulated or censored. Its users can transfer and save value without the risk of their payments being blocked, their funds being frozen or withdrawn, or without their accounts being seized or confiscated. As we have seen, CBDCs are the other side of the coin; All transactions can be analyzed and your funds can be confiscated or frozen at will. Let’s take the case of China, if in the following years China manages to generate its CBDC effectively, it will obtain unprecedented control over its population, already controlled today. CBDCs underscore Bitcoin’s value proposition, especially in democratic societies, where increased control and loss of privacy will raise many concerns.

In addition, Bitcoin would not only grow due to its clearly differentiated value proposition to CBDCs, but a push by the government to encourage the adoption of digital assets would bring more knowledge and education about them to the population. Institutions would begin to adopt digital assets, and the population would begin to do so as well, while receiving education about them, arriving thanks to Bitcoin to the inevitable question:

What exactly is money, why does it have value, and what is the best form of money?

CBDCs offer advantages in terms of current payment infrastructures but maintaining, even increasing the worst of FIAT currencies: maintaining the ability to dictate monetary policies thus managing inflation, more vigilance and control over what you do with your money, and more ability to interfere with your savings by blocking transactions, freezing accounts, garnishing them or even robbing you through the invisible inflation tax. One thing is clear: we must not confuse CBDC with Bitcoin.

Bitcoin VS CBDC

Given this, the adoption of CBDC not only has internal challenges such as the loss of the importance of commercial banks, or the risk that there is no liquidity in that form of money, but also that a competitor with many numbers will win the game. . CBDCs provide less freedom to their citizens without providing security regarding their monetary policies. Bitcoin instead provides freedom and security to all its users. Nadia has to ask for permission to use it, it allows everyone to trade and store value without being exposed to the risk of devaluations, censorship or embargoes. On the surface, CBDCs appear to be able to displace Bitcoin, as both are digital. But the truth is that for this same reason Bitcoin is clearly superior: both are digital but with completely different monetary characteristics.

As a conclusion, CBDCs focus on improving the payment infrastructure while Bitcoin aims to offer an improvement of money itself, improving the monetary technology used in our society. In the same way that the internet outperformed other telecommunications technologies, simply because it was superior. Monetary technologies are also subject to an evolutionary process driven by the free market, which seeks the best technology to be able to store and transact value in time and space. During the last 100 years this competition between monetary technologies has been paralyzed by the centralization of the currency by the central banks; Bitcoin is the first phenomenon outside this “legal monopoly”.

Bitcoin was invented to avoid having to place our trust in the Central Banks that administer the monetary policies of money that we use to save our wealth or third parties (banks, payment companies …) and to be able to store and transfer money. Instead, Bitcoin users trust the worldwide open and verifiable source and incentive system that make Bitcoin the safest and most reliable network, as well as being open to everyone without exception.

To better know the intrinsic value of Bitcoin, you can also see this post divided into six parts (1, 2, 3, 4, 5, 6) or see our training products in both the Blockchain Master and the DeFi Bootcamp.

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arnau ramio

Blockchain-Business Developer & DeFi Manager. Co-Founder & COO at Themar Solutions and Co-Founder of Cryptomaster Academy.