Can CBDC undermine the decentralization?

Prashant  |  Dec 14, 2019

Central Bank Issued Digital Currency (CBDC) seems to be the trend entering into the 22nd century. As per a survey conducted by the Bank for International Settlements more than 70% of the Central Banks around the globe are in favour of launching a digitized version of their national fiat. China may become the first country to launch their CBDC, but many other nations have expressed similar desire in the wake of Bitcoin's popularity. Recently, Sweden announced that it would bring in Accenture to help it develop its E-Krona digital currency.

The rising interest of central banks towards digitizing fiat has divided the crypto community whether it is a great move for larger adoption or is it just to avoid real decentralized currencies like Bitcoin to make its way into their financial system. It is no secret that despite Bitcoin proving its worth and many countries even regulating crypto trading does not want these decentralized currencies to become a legal tender in their financial ecosystem.

Financial experts believe no government would give up their monetary sovereignty and control of issuing money. Larry D. Wall, executive director, Center for Financial Innovation and Stability explained that decentralized currencies can never substitute government-issued fiat as they serve a different principle. While decentralized currencies like Bitcoin can become a form of investment or store of value, but cannot replace fiat currency.

CBDCs are neither decentralized nor based on DLT

While digitized fiat might bear some properties from the decentralized currencies like instant transaction and better remittance. However, the first criteria of cryptocurrencies are they need to be decentralized with no central control. This is the reason only Bitcoin and Ethereum are considered as truly decentralized currency while the remaining altcoins are considered as a security. These digitized fiats do not really use blockchain or DLT but a more centralized version of it.

Take Chinese CBDC for example, the governor of the People's Bank of China mentioned that their national digital currency will partially use blockchain as truely decentralized currencies are not scalable. Similarly, Venezuelan Petro launched by the government in light of hyperinflation making its national fiat worthless. The government claimed it will be backed by their oil and diamond reserves. When experts examined the Petro they came to a conclusion that it was nowhere near a cryptocurrency.

Governments around the globe like things under their control and monetary sovereignty is key to that, thus there is no way they would compromise on that. Alex Tapscott, co-founder of the Blockchain Research Institute rightly explained why governments would never allow a decentralized currency to become a legal tender or make a decentralized national currency, he said,

The question is not whether we need digital fiat currencies or not, but rather whether governments will fight to keep control over their monetary sovereignty and take steps to safeguard those powers. The answer is unequivocal, yes.

What would be the fate of decentralized currencies

Satoshi Nakamoto invented Bitcoin to give financial freedom to the individual and control over their finances. It has managed to rise from a value of zero to an all-time high of near $20k despite major financial institution accusing it of being an Internet bubble. Any form of money centralized or decentralized gains its value from public trust and acceptance, and Bitcoin has managed to garner that even from those who called it a Ponzi scheme once.

Bitcoin and many other decentralized cryptocurrencies will remain a parallel monetary ecosystem as it has managed to do so in the times of great opposition as well. Anyhow a majority of investors be it a small-time or institutional grade see Bitcoin and altcoin more as a form of investment and digital store of value rather than a daily use currency. Institutional investors are investing in it to diversify their investment portfolio and minimize the risk.

While governments around the globe might not allow for decentralized cryptocurrencies to become a legal tender many countries do understand the value that blockchain technology brings to the table. This is the reason countries like Japan, Malta, South Korea and many others are finding various industries where decentralization can be implemented and have regulated the use of cryptocurrencies as well

Conclusion

CBDCs might be the current trend in most of the countries, and these countries may never allow Bitcoin or any other cryptocurrency to become a legal tender, but that would not undermine the value of Bitcoin. Bitcoin would continue to act as a digital store of value and a lucrative investment option.

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