Will central bank digital currencies (CBDCs) threaten cryptocurrency?

During the World Economic Forum (WEF) in Davos last week, a number of panels featuring some key influential figures looked to address the growing trend of central bank digital currencies (CBDC).

Not only that, but Joseph Lubin, ConsenSys founder and one of the most important players in Ethereum, showcased a whitepaper entitled “Central Banks and the Future of Money” which presents a practical approach to developing central bank digital currencies.

The whitepaper provides guidance on how a CBDC could be designed and built on the Ethereum blockchain.

But what impact will CBDCs have on the overall cryptocurrency space? Do they represent a threat or are they an opportunity for Bitcoin and major altcoins to gain more traction and adoption?

Let’s take a look below.

Central bank digital currencies on the rise

The Bank of International Settlements (BIS) released a report a few days ago stating CBDCs are undergoing serious consideration by a great deal of central banks (CBs) around the world. The researchers concluded that:

“Globally, emerging market economies are moving from conceptual research to intensive practical development, driven by stronger motivations than those of advanced economy central banks. Central banks representing a fifth of the world’s population say they are likely to issue the first CBDCs in the next few years.”

It seems one of the most heated topics of 2020 will be the development of CDBCs as crypto enthusiasts fear their impact on cryptocurrencies.

On one hand, CBDCs could help spread digital cash to the unbanked, but they may also pose a threat to peer-to-peer, permissionless, and decentralised cryptocurrencies such as Bitcoin and Ethereum.

For one, with the spread of digital cash backed by the government, physical cash will most likely disappear. In addition, users will need permission to use central bank digital currencies, so privacy will surely be affected.

Another issue is the impact CBDCs will have on fiat-to-cryptocurrency gateway coins.

Could central banks simply block the use of cryptocurrencies?

Do CBDCs pose a threat?

As an example of a potential issue that could arise with the use of CBDCs, let’s take a look at China’s credit score system.

I’ve discussed a similar issue here. Essentially, if enough points are subtracted off your credit score using the digital review system, you may lose the ability to trade with other individuals or travel to other locations.

Individuals in China are therefore intertwined with their credit score. This means that one unlucky move or word and you may find yourself blocked from interacting with your community.

How easy would it be for governments worldwide to adopt similar measures by implementing CBDCs?

It’s pretty straightforward in my opinion. As such, I’d argue that CBDCs are indeed a threat – not only to cryptocurrencies, but to individuals’ sovereignty as well.

CBDCs and crypto

One way to combat this of course is to hedge with cryptocurrencies. That way, if a centralised third party does decide it wants to control your funds, you at least won’t be completely cut off.

In my humble opinion, hedging against any government is (mostly) a smart move, especially in countries facing extreme hyperinflation.

Bitcoin, Ethereum, and other top altcoins may help you secure and store value in the long term.

If there’s one thing CBDCs aren’t it’s cryptocurrency. As such, I believe it makes sense to possess unrelated assets in case there’s a storm.

Safe trades!