Central bank digital currencies (CBDCs) pose no threat to Bitcoin’s value proposition, instead, they will spur its growth toward mass adoption.
In a new report, Grayscale Investments said CBDCs will never replace BTC because unlike the top cryptocurrency, they can be inflationary and are open to manipulation by central banks. CBDCs are merely digital versions of fiat currencies, which cannot escape government control, it said, adding that government-backed cryptocurrencies simply maintain the status quo.
Bitcoin’s growing popularity, the digitization of payment systems, and the demand for stablecoins have prompted countries to explore central bank digital currencies (CBDCs). In the wake of COVID-19, CBDCs have also been discussed as a way to improve stimulus distribution. CBDCs are sometimes viewed as synonymous to, or as replacements for, digital currencies like Bitcoin, but they represent a meaningful departure from the decentralized protocols inherent to many cryptocurrencies. CBDCs attempt to upgrade payment infrastructure while Bitcoin is an attempt to upgrade money. If CBDCs gain traction, they may actually bolster the value proposition for Bitcoin and other digital currencies. As the discussion around CBDCs intensifies, it’s important to understand what they are, how they would work, and what the implications are for investors.
State control is anathema to bitcoin, an asset created to challenge the conventional financial system and return the ownership of money to the people, beyond the reach of the state. “CBDCs may censor non-ordained addresses, and central banks will continue to control the monetary policy,” says the report, which examined the potential impact of state-issued digital currencies on the status of bitcoin. “On the surface, it seems like a digital dollar might displace Bitcoin’s growth because they are both digital, but it actually fails to address these principal concerns,” it added.
CBDCs are digital currencies issued by central banks, created, in part, to neutralize BTC. About 25% of central banks around the world are now actively exploring the possibility of issuing state-backed cryptocurrencies, but none is closer to doing so more imminently than China.