Crypto vs CBDCs – Will Only One Victor Emerge?

When it comes to making predictions about the future of finance, only fools rush in where angels fear to tread. Uncertainty reigns supreme. But it appears safe enough to say just one thing – whatever tomorrow has in store for money, the future of finance is certainly digital and online.

The internet has become an integral part of too many parts of the economy, business world and everyday life to continue for much longer without a “native” currency to rival the USD in the offline world.

Banking has stubbornly refused to keep up with the pace of IT development, leaving conventional cross-border transactions looking positively sluggish, prohibitively expensive and outdated compared to crypto-powered solutions.

To its credit, the industry has been trying to remedy this, but many find its glacial pace of progress frustratingly slow.

Cross border payments are slow, expensive, opaque and should be more inclusive. In an important new report, the CPMI identifies 19 building blocks for public and private action. G20 Finance Ministers and Governors to commit to a roadmap next October. https://t.co/21jG8Lp30w

— Benoît Cœuré (@BCoeure) July 13, 2020

Regardless, uncertainty over the identity of the “killer” digital form of money continues to bug investors. Should we listen to people like the Twitter founder and Bitcoin bull Jack Dorsey? He stated in 2018, per CNBC:

“The internet is going to have a native currency so let’s not wait for it to happen. Let’s help it happen. I don’t know if it will be Bitcoin but I hope it will be.”

Bitcoiners and some others tend to see central bank-led projects as a perversion of the crypto dream.

A Central Bank Digital Currency (CBDC) is the opposite of a cryptocurrency.

It is the complete centralization of money, with no intermediary banks or monetary instruments, under the all-seeing state.

— Naval (@naval) May 25, 2021

Central bankers, however, have other ideas.

Some, like China and Russia’s central banks, favor stamping out all forms of crypto-related activity so they can clear a path for their own central bank digital currency (CBDC) projects.

Are they right? Is there only enough room in digital Dodge for one currency? Or could the two co-exist in the brave new world of digital finance?

To centralize or not to centralize?

The few existing CBDCs that are currently out there appear to be functioning in a similar manner to a payment platform like Apple Pay, WeChat Pay or Alipay – particularly China’s digital RMB. For customers, a CBDC appears at first glance to be just another way to use your smartphone (or offline smartcards, piloted at the Winter Olympics) to pay for goods, transport fees and services.

But the crunch comes when customers start thinking about where this money is being stored and who has access to their spending data. While some people are happy for the government to know every single detail of their financial behavior, others see this as a massive and dangerous breach of privacy. Some have even gone so far as to call the digital yuan a tool of espionage.

On paper, a cryptocurrency could be used in precisely the same manner as a CBDC. In fact, in El Salvador, the government is trying to prove this point with its Bitcoin Lightning Network adoption plans. But the big difference with cryptocurrencies is that there is no central issuing body. Are businesses and customers really prepared to deal with a currency where the buck stops…well, nowhere?

This may be a leap of faith for some traditionalists. But for Web 3.0 revolutionaries, decentralization is the very point of digital forms of money.

Just how far crypto advocates are prepared to go down the rabbit hole of decentralization, though, appears to be up for debate.

Decentralized governance is necessary, but coin voting governance in its current form has many acknowledged and unacknowledged dangers. Augmenting or moving beyond coin voting is a key part of the solution:https://t.co/pZQ4sLAbEy

— vitalik.eth (@VitalikButerin) August 16, 2021

Could governments’ drives for “cashless” societies benefit or harm crypto?

Governments detest cash. In the past, banknotes and coins were a necessary evil. But while central bankers like to call crypto tools of money-launderers and criminals, the cleverest crooks would never go anywhere near most cryptocurrencies. Crypto (with the exception of privacy coins) leaves an uneditable, permanent trail on blockchain networks. Cash, on the other hand, is all but untraceable, and is much easier to launder.

Black markets thrive on cash, and crypto-based models, such as the now-defunct Silk Road marketplace, are easy targets for increasingly sophisticated cyber police forces. To truly stay off the radar, cash transactions are king. And that is why so many governments are now pushing relentlessly to adopt “cashless society” protocols.

CBDCs allow governments to actively pursue their dreams of a world without cash. And they are already bearing fruit. Earlier this year, two private Chinese banks (Zhongguancun and NewUp) announced that they would stop offering customers services that make use of banknotes and coins to focus on digital currency – before the e-CNY has even rolled out nationwide.

But while governments and central banks’ ideal scenarios involve CBDC as the only horse in town, there’s just one small problem with that – experts agree that most central bank-run coin projects are years away. And while governments attempt to purge their societies of cash, crypto is already here.

1/ I'd argue that central bank digital currency (CBDC) is one of the most important trends for the future of money and payments over the next decade.

Regardless of anyone's personal views of whether it's good or bad, the reality is that global interest in it is not going away

— Cuy Sheffield (@cuysheffield) July 3, 2020

Some might suggest that consumers afraid of the volatility of crypto and unsure about the privacy concerns of a CBDC might actually play into cash’s hands. But it seems unrealistic to envision cash playing the same role it did in the 20th Century in the Web 3.0 era – that’s not how transactions work in 2022.

Far more likely is the following: Either the advocates of crypto and CBDCs learn to get along or they must fight to the figurative death. It is not impossible to imagine a world where, say Bitcoin, Ethereum or a leading altcoin becomes a store of value, while CBDCs are primarily used in retail and exchange.

CBDCs and Stablecoins signify a new era of financial autonomy. And in future, they will coexist along with standard, run-of-the-mill crypto assets.

— CoinSwitch Kuber (@CoinSwitchKuber) January 12, 2022

Whichever path these parties choose, however, the time to act is now. As the age of Web 3.0 dawns, a financial vacuum is emerging – and failure to capitalize on the opportunity could spell victory for the side with the greatest momentum.