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How Will Countries Adopting Their Own Digital Currency Impact Crypto?

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How Will Countries Adopting Their Own Digital Currency Impact Crypto

When cryptocurrency was conceptualised back in 2009, governments across the world had a choice: either ignore it or attempt to regulate it. Being worth $0 at the time that the whitepaper was created, Bitcoin was ultimately ignored, and two years later, it forged its way to an equivalent value of $1 – achieving parity with the US dollar.

Since it was realised that there was true value to crypto, a further 12,000 crypto coins came into circulation. With users beginning to trade Bitcoin for a record high of $65,000 in 2021 – making it the highest-value coin alongside Ethereum, which peaked at $4,800 – cryptocurrency as a concept became impossible to ignore, and governments had already begun putting in the work to regulate.

The Problem With Regulation

With cryptocurrency only taking a couple of years to ascertain its strength and potential, the attempt to regulate was a difficult one, especially when governments had to work around the fundamental concept of decentralisation, rather than change it altogether – essentially, as soon as Bitcoin realised itself as a true competitor to fiat currency, regulation had to adapt to crypto, not the other way around.

Cue the concept of CBDC – or “central bank digital currency”. These are currencies that have been created specifically by government authorities around the world, attempting to navigate the crypto metaverse by creating coins that they can adequately control.

What Exactly Does CDBC Mean?

The main goal and reason behind CBDCs is very similar to that of cryptocurrency. They have been created to provide both businesses and consumers with far more accessibility, convenience, privacy and financial security. They also get rid of the complicated financial system maintenance and reduce the cost of cross-border transactions, providing users with a lower-cost coin which can be utilised anywhere.

According to many central banks, they have also been designed to take over cryptocurrency, which is highly volatile and has fluctuating values, which could lead to financial stress and economic instability. There are two types of CBDCs – wholesale and retail. Wholesale CBDCs are akin to holding reserves in a central bank, while retail CBDCs are utilised by both consumers and businesses and designed to eliminate intermediary risks – much like crypto.

Which Countries Have Introduced CBDCs?

A handful of CBDCs have already been launched, with the first being the “Sand Dollar” in the Bahamas. Nigeria became the first country in Africa to launch a CBDC in October 2021. Named the eNaira, it has received an amount of 700,000 downloads but has led to criticism due to its requirement for a national identification number (NIN) and the small amount of population that actually own a smartphone – between 10% and 20% in a population of 219 million. China has also recently rolled out its digital yuan, which was launched for testing in 2019.

As well as these countries, there are many more that are currently testing CBDCs as pilot projects. These include Sweden – who have developed a proof of concept and are attempting to achieve broad access – India – who are set to launch their digital rupee in 2023 – and the EU – who have proposed the launch of a CBDC bill in the early stages of next year.

What Are The Disadvantages Of CBDCs?

While many might believe that CBDCs could spell the end for cryptocurrency – just as CBDCs are being developed and gaining traction, cryptocurrency is heading into its second winter in five years, which could be a cause of doubt for previous crypto-backers – it is not all plain sailing. While there are advantages to centralised digital coins, they hold their own unique disadvantages, just as cryptocurrency does.

For starters, the centralised nature of CBDCs could easily allow governments to essentially tag citizens and use the currency as a surveillance system. This could similarly lead to the adoption of a social credit score, with rewards and punishments being dished out in accordance with an individual’s own score – this is already being piloted by China’s DCEP. In this case, governments and central banks could heavily control the money that people own, with users potentially being denied access to their own finances if blacklisted by the government.

How Will CBDCs Impact Crypto?

It can be argued that CBDCs not only fail to threaten cryptocurrency’s longevity but actually further aid it in its growth. As mentioned previously, after the success of cryptocurrency was proved by Bitcoin, many alternative coins came into the market, many of them being dubbed “Bitcoin Killers”. Rather than killing off Bitcoin, however, most of them actually boosted demand, as they have pushed a need for innovations within Bitcoin’s ecosystem and legitimised the market to further improve its acceptance – the more altcoins come into existence, the more the market grows and becomes a legitimate entity.

As well as this, the problems with CBDC – and, in many ways, the concept of it to start with – are enough to keep cryptocurrency popular. For instance, one of the main reasons why the cryptocurrency is so popular is due to its decentralised nature, adding more privacy, transparency and efficiency. Bitcoin, specifically, also has worth in its limited supply, while fiat currencies – including CBDCs – are inflationary with an unlimited supply.

The Future For Cryptocurrency 

While there are plenty of positives to be found in CBDCs, it is hard to see them as being a threat to cryptocurrency. Of course, it is a revolutionary step for centralised banks to introduce a digital fiat currency, but being a digital currency doesn’t make it a competitor to crypto. For anyone who believes it does, the point is being missed.

It is not the digitalised nature of asset trading that makes cryptocurrency popular in the first place. It is the fact that crypto coins are digital assets that exist on a decentralised network, unlike the centralised existence of CBDCs, which are exactly the same as ordinary fiat currency other than the fact they are not physical. Users want to be in control of their own finances and investments, with a sense of privacy and the knowledge that their data will not be used against them. This is the revolutionary nature behind crypto. So far, it doesn’t appear that CBDCs will effectively challenge that.

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