Why Central Bank Digital Currencies (CBDCs) will fail.
Central Bank Digital Currencies (CBDCs) are novel financial instruments representing a significant paradigm shift from traditional monetary systems. CBDCs supposedly offer potential benefits such as improved financial inclusion, security, and efficiency.
For this discussion, I will park the arguments for and against CBDCs. Let’s assume that many countries will continue to develop their own because they believe Bitcoin is an existential threat. Let’s also assume that most citizens are ignorant of the debate and will not become concerned until it is too late or live in countries such as China where they cannot prevent a CBDC. Finally, let’s assume those responsible for implementing CBDCs are smart, well-resourced, and determined. So there is a lot of juice.
To understand why they will fail, we must understand Bitcoin’s potential growth trajectory.
It’s useful to draw a parallel to the evolution of the internet. As we journey from the inception of the Internet, focusing on human-human interactions, to integrating the Internet of Things (IoT), we can forecast how AI’s involvement in Bitcoin transactions will vastly surpass human applications, just as machines now dominate web traffic over humans.
1. The Dawn of the Internet: Human-Human Interaction
In its early days, the internet was primarily a tool for humans to communicate with one another. Think of the era of emails, chat rooms, and basic informational websites. Similarly, when Bitcoin was introduced, it was initially an experimental currency exchanged between tech-savvy individuals, akin to the rudimentary communications in the internet's nascent days.
2. Internet’s Evolution: Human-Machine Interaction
As the internet matured, it wasn’t just about sending messages or reading information. It transitioned to transactions, such as online banking, shopping, and more. Websites started using cookies, user accounts, and other mechanisms to track and facilitate human-machine interaction. Similarly, Bitcoin’s application expanded from simple peer-to-peer transfers to integrating into e-commerce platforms, payment gateways, and investment portfolios.
3. Internet’s Current Phase: Machine-Machine Interaction and IoT
Now, the internet isn’t just about human activity. A sizeable portion of web traffic is machines talking to machines. Whether your smart fridge is ordering milk when you’re running low or industrial machines are conducting predictive maintenance, the Internet of Things (IoT) has transformed the landscape. These machine-machine interactions already outnumber human-machine interactions, and growth is exponential.
Drawing from this trajectory, we can project that as AI and machine learning systems become more integrated into our daily operations, they’ll transact with Bitcoin autonomously. Here are a few examples:
AI-powered Customer Support: Customers will enter website queries to determine whether issues are individual or systemic. If systemic, an AI agent liaises with the website on behalf of affected users, reducing the need for support staff. Companies can compensate users with lightning for their feedback, effectively paying them to report problems.
AI-Powered Financial Trading: AI already conducts a significant percentage of stock market trades. As Bitcoin become mainstream, AI-powered trades in this realm will outstrip human-initiated transactions.
Smart Contracts: AI systems will handle contracts autonomously using Lightning for payments, further automating business processes without human intervention.
Decentralized AI Services: As decentralized platforms grow, we will see AI services paid for with Bitcoin directly, where one AI hires another for specific tasks.
Supply Chain & IoT: Just as IoT devices can communicate needs to one another, they will also transact in Bitcoin to facilitate trade in decentralized marketplaces. One such company exploring this is www.cera.io. Customers will pay instantly for real-time secure sensor measurements.
We have established that AI will initiate most financial transactions. AI will prefer Bitcoin. This will cause CBDCs to wither on the vine. Here is why.
The decentralized nature of Bitcoin is more compatible with AI autonomous agents. These agents are inherently decentralized, making decisions independently based on predefined algorithms and conditions. The centralization of CBDCs managed and regulated by central banks, contradicts this principle.
Bitcoin’s globally accepted standard will be another point of attraction for AI. In the international sphere, the multitude of CBDCs, each regulated by their individual nations’ laws and regulations, will present a complex web of compliance issues for AI autonomous agents. On the other hand, Bitcoin operates under a universal protocol that transcends national borders. This global standardization makes Bitcoin more suitable for AI agents involved in cross-border transactions or operating across multiple jurisdictions.
Moreover, the pseudonymous nature of Bitcoin transactions provides a degree of privacy that appeals to AI agents. Although not entirely anonymous, Bitcoin transactions do not directly reveal the identity of the parties involved. This will be desirable for AI agents wishing to protect the privacy of their transactions. In contrast, CBDCs, by their very nature, will be subject to stringent regulations and oversight, making transactions transparent and trackable.
The absence of KYC procedures in Bitcoin transactions is a pivotal reason AI autonomous agents will prefer Bitcoin. KYC is a mandatory process for financial institutions to identify and verify the identity of their clients. Although essential in preventing financial crimes, this process will prove challenging for AI agents. The standard KYC process cannot be applied since these entities are algorithmic and not human. Bitcoin transactions, however, do not require KYC verification, making it easy for AI agents to conduct transactions autonomously.
Bitcoin’s resistance to “debanking” also enhances its appeal. Debanking refers to the process where a bank or financial institution can close a client's accounts, usually without warning, effectively preventing them from using financial services. Since Bitcoin operates on a decentralized, peer-to-peer network, no central authority can “debank” or remove an AI autonomous agent from the network. Once an AI agent possesses a Bitcoin or Lightning wallet, it can continue to make transactions if it has Bitcoin.
In contrast, CBDCs, as instruments under the control of a central bank, will exacerbate debanking. Central banks will have the authority to freeze or close digital wallets associated with AI autonomous agents, especially if these entities pose a risk to the financial system’s stability or infringe upon regulatory requirements. In the UK alone, more than 1,000 humans get debanked daily. AI autonomous agents will learn from this experience.
The speed and scalability of Bitcoin’s network will be more advantageous for AI autonomous agents. Despite ongoing debates about Bitcoin’s scalability, developments such as the Lightning Network are significantly increasing transaction speed and capacity. In contrast, the infrastructure of CBDCs is still largely untested, and the speed and scalability of transactions will depend heavily on the technology adopted by the central banks.
Considering the internet’s evolution and the rise of AI, Bitcoin’s decentralized nature, global standard, and pseudonymity makes it the only viable currency for AI autonomous agents. CBDCs' centralized control and regulatory complexities are unappealing to AI systems operating in an increasingly interconnected and borderless digital realm. As AI’s influence in financial transactions grows exponentially, Bitcoin will surpass traditional and centralized digital currencies in meeting the demands of future machine-driven economies.
Game theory says that the first country to acknowledge this, abandon their ultimately fruitless efforts to impose CBDCs on an unsuspecting public, and prioritize embracing Bitcoin will be the winner.
Inspiration
AI Will Choose Bitcoin as Its Native Currency Predicts Arthur Hayes by Andrew Throuvalas published in Decrypt.
