What Is a CBDC? Are They Crypto’s Biggest Threat?

What if the government had its own cryptocurrency? And what if I told you that this eerie prediction is much closer and more real than any of us could have believed?

What I’m referring to here are CBDCs , a realistic but also worrying tool that, if embraced by the public, could be used to tackle the crypto industry head-on. 

Many people have speculated whether CBDCs could replace crypto in the near future. Today, we’ll analyze how they work and whether they pose as big a threat as some have theorized.

What Does CBDC Mean?

CBDC refers to a central bank digital currency, which, just as the name implies, is a nationalized digital currency controlled and issued by a country’s government and central bank. 

This national payment system would be completely digitized, meaning governments could track all transactions and balances made from people’s personal bank accounts in a larger database. 

Why are CBDCs Being Introduced? 

If fiat money has existed for thousands of years, though, why are CBDCs so necessary today?

One reason is that using physical currency, such as banknotes, has become much more rare these days. Most people now decide to purchase and sell goods on the internet with digital payments. 

The other, and more alarming, reason is to try to push back on the expansion and adoption of crypto. After all, CBDCs and crypto work similarly, but they also have a few key differences that make them distinct. 

The Major Differences Between CBDC and Crypto 

As many investors will already be fully aware, cryptocurrency is extremely volatile. Prices can rise and drop on a dime, depending on community participation, hype, and news headlines. 

CBDCs, on the other hand, will always maintain a stable value because they are designed as a country’s national currency. 

A counter-argument to this could be the idea of stablecoins , which are crypto coins pegged to fiat currencies, being a form of CBDC. However, stablecoins are backed by private providers in the crypto ecosystem, while CBDCs are controlled by central banks directly tied to the government. 

Another important difference boils down to regulation. More specifically, most crypto tokens are unregulated, while CBDCs would be under the full control of a government. Therefore, if introduced to a population, they would dictate how they are distributed and shared. 

Why CBDCs are Being Used to Tackle Crypto 

There are several reasons why governments are deciding to use CBDC to combat the crypto industry’s unexpected rise. Though they might not always say outright that this is their intention, you only need to dig a little deeper to see that crypto has played a big role in the emergence of CBDCs. 

Re-Gain Financial Sovereignty

When people buy, trade, and sell crypto on the market, they do so ‘behind the scenes’, where banks can’t monitor or track the investors’ actions or deduce who they are in real life.

The blockchain may record every transaction, but it doesn’t reveal investors’ personal information, keeping it hidden from third parties and intermediaries. 

This removes a certain level of financial system sovereignty from the central banks, but an easy way to regain it would be to introduce a currency similar to crypto that people will be inclined to use instead. 

When Facebook’s stablecoin, Libra, was first announced, for example, it sent panic among regulators and the central banks that this would become the platform’s go-to currency for millions of users. However, this sort of issue would be largely avoided if people were already using CBDCs instead, as stablecoins would seem more or less useless in practice.

Another simpler explanation is that central banks are beginning to feel outdated in the digital age, especially with the emergence of blockchains and distributed ledger technology. As a result, many feel the need to catch up to appeal to the masses once again, with central bank money being seen as the potential remedy. 

Lowering Risks

Many governments will claim that their primary reason for deploying a CBDC is to help members of the population avoid the risks of the crypto market. 

Of course, most investors will already be aware that cryptocurrency can be very volatile. Therefore, one must understand the token value and financial market trends to navigate the ecosystem safely. 

Not only that, but the crypto industry has unfortunately become a breeding ground for scammers who can steal people’s funds if they get the information they’re looking for. CBDCs are being advertised as a kind of antidote to these issues despite harboring their risks, which we will get to later. 

Lack of Regulation 

The lack of regulation in crypto essentially keeps the government’s hands away from having direct control of this form of digital currency. 

However, while several attempts have been made to enforce legislation, as seen in the long-running SEC vs. Ripple (XRP) case, CBDCs would achieve this in a slightly different way. 

Rather than pushing regulation onto crypto, CBDCs would simply appear as the more attractive alternative, which happens to be regulated automatically. This would grant the banks greater control over how they work, their distribution, and the people holding them in their digital wallets. 

Environmental Concerns 

This primarily relates to Proof-of-Work ;  a method of verifying transactions on a blockchain. Though this model is outdated and has been replaced by many developers, it still exists in a few popular networks, primarily Bitcoin (BTC) .

The issue with Proof of Work is that it uses a significant amount of electricity, the same amount or even more than entire countries’ yearly usage. 

Even though there has been an ongoing trend of moving from PoW to the much cleaner Proof of Stake , governments could simply cite PoW as justification for ushering in CBDCs to contribute to a cleaner environment. 

This wouldn’t be exactly fair, given that much work has been done in the crypto industry in the last few years to find greener alternatives, but it’s an easy way to criticize crypto for those with a lack of knowledge in the industry. 

Will CBDCs Actually Replace Cryptocurrency?

According to Nouriel Roubini, writing for the Guardian, “If a CBDC were issued, it would immediately displace cryptocurrencies.” But how true is such a bold statement?

Whether CBDCs negate crypto depends on general public adoption and whether the people being offered CBDCs view them as a legitimate form of national currency or little more than an optional form of funds. 

For example, CBDCs might be launched but never become mainstream, meaning people could only use them for specific activities like paying taxes rather than as their go-to payment service.

Additionally, because CBDCs would give banks and governments heightened control over user information and records, it could lead people to actually be more favorable to crypto as a more private alternative. 

The other scenario would occur if people embrace CBDCs with open arms and make them a regular part of their everyday lives. 

This may lead these people, especially those with no experience in crypto, to be skeptical of it and to identify its limitations now that they have CBDCs to fall back on. 

According to the 2023 World Economic Forum , CBDCs are designed to be “The most significant technological advancement in the history of money”, so if banks and governments can present them this way, there’s the potential that it could deal a huge blow to crypto. 

Of course, due to CBDCs’ infancy, it’s difficult to gauge which of the two scenarios would be more likely since deducing how likely people would be to accept them is no easy task. 

What’s important to preface, though, is that while CBDCs are proposed to be a less risky version of crypto, they also possess unique risks and drawbacks that governments often fail to mention that outweigh the potential benefits. 

Risks of CBDCs

These problems may not immediately appear upon CBDCs being introduced to a country, but they can develop over time to spread worry and anxiety among those who use them. 

• Centralised Storage: Similar to a centralized exchange, CBDCs would all be linked to a central entity, meaning if a cyberattack were to occur, hundreds of thousands of people’s funds would be at risk. The crypto industry has had time to try to protect against such attacks through cybersecurity research, while CBDCs would be an early creation that would probably, therefore, lack the necessary safety precautions. 
• Lack of Personal Privacy: The beauty of using crypto is that it doesn’t reveal an investor’s personal information or details, but this wouldn’t be the case with CBDCs. CBDS are stored on large digital databases, giving banks a full view of users’ spending habits and current balances. This would rid the element of financial privacy at cryptocurrency’s core. 
• Freezing Funds: Since CBDCs will always be digital and centralized by the banks, they can freeze people’s funds if the government demands it. For example, authoritarian governments can use this during civil unrest or protests to demoralize their population. Since there would be no cash, people would be forced to follow what the banks tell them to do in such a scenario.
• Social Credit Score: A social credit score, as is currently in place in China, is where each member of the population is given a score based on their behavior and contribution to society. A high score correlates to greater freedom, while a lower score leads to greater control of the individual. It’s often viewed as a harsh and inhumane system, which CBDCs could easily lead to. As Natalie Smolenski of the Bitcoin Policy Institute makes clear, while this kind of surveillance may not be baked into CBDCs initially, adding them later on would be “Trivial” . 

Have any Countries Introduced CBDCs?

Though we have been talking about CBDCs thus far as something that may become a reality shortly, a few countries have already started using them, though not many.

As of 2024, the Bahamas, Jamaica, and Nigeria have all embraced CBDCs as a form of national currency alongside fiat. 

Alternatively, there’s a much bigger list of countries that are currently using CBDC ‘pilot programs’ to experiment with their potential. These include Brazil, Russia, India, China, and South Africa. 

During the Biden administration in America, there were constantly lingering worries about an American CBDC being issued. The intention for an American CBDC was seemingly confirmed in a public document in which Biden’s administration, after extensively criticizing crypto, proposed the idea of a “A U.S CBDC—a digital form of the U.S dollar.” 

A similar report was released in the UK around the same time, which also proposed the idea of a CBDC, right after praising crypto and specifically its lack of regulation. 

It does need to be prefaced, though, that the more time passes, the more people are becoming aware of the dangers of CBDC, which could severely stunt its adoption. Joe Rogan , along with many other social commentators, has openly criticized their implementation.

On the Flipside

• There hasn’t been any real immediate demand for CBDCs from the public; it’s more of an idea that sprouted from the minds of banks and governments.
• This could indicate a potential pushback against their introduction in certain countries.

Why This Matters

The implementation of CBDCs seems more likely with every passing day, and as crypto investors, we need to be fully aware of how it can affect us and how big of a threat this digital currency presents to the industry. 

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