What are CBDCs?: Do they Compete with Bitcoin?

NBX Editorial
Feb 5 · 11 min read

Here, we define what CBDCs are, where they stand in the Nordics, while setting the scene for whether they compete with Bitcoin.

The more that Bitcoin grows, the more important it becomes to truly nail down who its’ competitors are and who they aren’t.

Rising above all others in this respect, due to their sheer media attention and governmental backing are central bank digital currencies or “CDBCs.” To many analysts and pundits of all shapes and sizes, CBDCs are currently considered to be a major, future competitor to Bitcoin. Before taking their opinions at face value, however, it’s important to ask: do the fundamentals of both back up such an assertion?

If you’ve read any of our other, past posts on Bitcoin, then you know that its’ overarching value proposition is its’ viability as digital gold, which is starting to include its’ functionality as a safe haven.

With this in mind, it’s logical to wonder: can CBDCs rival an asset that’s provably scarce, endlessly portable, and decentralized to its’ core?

Read on to find out.

What are CBDCs?

In other words, unlike with Bitcoin, digital scarcity won’t be part of the equation.

How a CBDC Could Work: The Case of Sweden’s E-Krona

All in all, it’s early for Sweden’s CBDC, but even so, certain conclusions can still be drawn about how the e-krona might look when it’s live.

During the same presentation, Segendorf revealed the intended basics of the e-krona’s functionality with the caveat that nearly everything about it may change over time, depending on the results of the Swedish parliament’s inquiry.

Firstly, the e-krona’s development team aims for it to be “accessible 24/7 in real-time.” What this seems to suggest is that even when the banks will be closed, transactions with Sweden’s CBDC will go on, facilitated by something like a dedicated app and its’ corresponding payment rails. Next, Segendorf clarified that the primary usage of the e-krona should be as means of payment between individuals and companies (including the government), such as for paying bills, taxes, etc. With this, he also made clear that it will be “denominated in SEK.” For those of you who may not know, this means that SEK will be used as the e-krona’s reserve currency and consequently, be a key part of its ecosystem.

Following this, Segendorf mentioned that the e-krona is designed to have “off-line functionality” and “partial anonymity,” but didn’t really elaborate on what these features will entail. While the first of them is easy to clarify since it refers to the e-krona system having the ability to facilitate payments without any sort of internet/data connection, the latter is harder to pin down. For now, what can reasonably be concluded is that “partial anonymity” may refer to the idea that certain aspects of user behavior will be tracked and others will not. Exactly which aspects end up being tracked depends on more details being released about the e-krona project over time.

On top of everything, the team reportedly doesn’t plan for the e-krona to have any sort of interest-rate, which leads to the logical argument that it won’t compete with the world’s other stores of value, i.e., bonds, gold, Bitcoin, etc.

While these won’t be the only features of the e-krona and its corresponding payment ecosystem, they do give you a good overview of where the project stands now. Furthermore, through knowing the basics of the e-krona, you also effectively know the basics of most other CBDCs that are already in-progress, since the e-krona team has “an open-dialogue with most other countries who are developing similar projects.”

What about potential risks with the e-krona?

On top of privacy considerations, there is the potential risk of a reverse-bank run when CBDCs launch, which refers to people doing away with cash and moving to CBDCs quickly enough to actually crash the bulk of the global financial system. In the same presentation with Segendorf, Morten Spange, who serves as the Chief Monetary Policy Advisor for Denmark’s Central Bank, suggested that capping CBDCs’ supplies may help to alleviate this concern.

To understand how a cap might work, just picture either less CBDC units being in existence than cash in circulation, or a maximum number of CBDC units that each household could have, thus preventing a massive swap of all cash to CBDCs in theory.

Is Norway developing a CBDC?

As of late last year, when they last published public information on the subject, the Norwegian Central Bank has had the view that they don’t see a need to develop a CBDC as of yet. Instead, they appear to believe that payment apps will continue to outpace cash but cash will stick around as “a backup payment method when payment apps experience any sort of failure.” Over time, you can expect us to keep you updated on the key developments surrounding Norway and CBDCs but for now, they’re continuing to wait and see how other countries’ CBDC projects pan out.

What about the other Nordic Countries?

In that same paper, the authors concluded that “for a digital cash(CBDC) to be a success, there has to be an incentive to adopt it,” concluding that one possible example of an incentive that fits this bill is the fact that CBDCS “eliminate the need for ATMs.”

Is this, however, enough of a push on its own? At face value, no, at least not by itself. As the year progresses and CBDCs move further into the spotlight, it’s reasonable to expect that the IMF, and all others mentioned here will provide further clarity to their stances on CBDCs. Since more than 80% of the worlds’ governments are presently researching the viability of CBDCs, future Norwegian and Danish CBDCs aren’t entirely out of the question.

Are CBDCs meant to compete with Bitcoin?

Per the Bank for International Settlements, the crux of CBDCs’ importance lies in being the next logical iteration of fiat currency, to account for the swiftly accelerating digital age of payments. In a speech published on their website last October, BIS representatives said, “a CBDC would be a kind of digital banknote and, as such, could satisfy more use cases than paper while the issuer, being a central bank, could support liquidity, settlement finality and trust in the value of the currency.” Adding this to everything above yields the conclusion that a CBDC will logically be the same as fiat currency, with the caveats that it will exist in fully-digital form with programmability.

In case you’re not already aware, in this context, programmability refers to the ability to bake-in certain conditions to a digital currency. Imagine, for example, KYC/AML compliance being baked into the money itself, meaning that the ownership of CBDCs could be instantly restricted to those who don’t fall onto any sort of international sanctions list. This sort of feature is made possible by the fact that digital currencies are issued from and hosted on blockchains, which allow almost any sort of conditional code to be attached to them, in theory.

With respect to programmability, however, this is only the tip of the iceberg.

In future content, we’ll dive deeper on why programmable money matters, but for now, you understand one possible similarity between Bitcoin and CBDCs. The exact degree of similarity they end up having depends on what the exact features of each CBDC’s digital ledger(blockchain or blockchain-like system) turn out to be when they launch.

On the other hand, CBDCs will definitively be centralized, but this isn’t a strong enough argument on its own to prove they’re meant to compete with Bitcoin. Having watched Bitcoin’s massive rise, especially over the course of 2020, it’s safe to say that the governmental consensus is that Bitcoin is at least being given room to grow as well as serious consideration as a store of value and safe haven. If there’s one metric to track related to the chance of any sort of future competition with CBDCS, it’s Bitcoin’s market cap. The bigger that gets, the less likely a competition between Bitcoin and CBDCs will be.

As Raoul Pal put it at Real Vision’s Bitcoin in the Real World event this week, “what we’re seeing is a front-running of its market-cap because at $1 trillion, it’s a serious asset.” The institutions that are involved in Bitcoin now are the pioneers and the true wave has yet to come, once Bitcoin hits the market cap that the bulk of the investment space is targeting. What this is will vary, based on each institution’s risk model, but suffice it to say for now that most appear to agree that beating gold’s market cap(roughly $10 trillion) would be a sort of paradigm shift to adoption like we’ve never seen before.

Nailing down when this may or may not occur isn’t possible because as you may already know by now, Bitcoin bucks all trends. In the end, as long as it continues to grow, it will continue to cement its place in the eyes of institutions, governments, and retail investors alike.

Keep in Mind: Most Countries Are Reportedly Holding off on CBDC Development

Last week, the BIS released a report that indicates only 1/5 of the world’s central banks have confirmed that they plan to release CBDCs in the next three years. Though the growing influence of COVID-19 on world affairs has sped up the development of existing CBDC projects, it hasn’t yet pushed the number past this point.

Therefore, for now, even if each and every current CBDC project gets approved and launches, only 20% of the world (or less) will run on them and that calculation doesn’t include the United States, since thus far, they’ve taken a similar position to Denmark’s. This is significant because of the US Dollar’s present status as the world’s reserve currency, which in turn, has made it its most powerful currency thus far. As of now, that amounts to just under $45 billion being held internationally to balance all sorts of payments through all sorts of different currency mediums.

CBDCs and Bitcoin could one day co-exist

How can I keep up to date on developments related to CBDCs?

As the year goes on, we plan to keep you informed about major developments related to CBDCs, especially in the Nordics. With this information in hand, you can feel more confident in the toolset you use to invest both inside and outside of the crypto space, because with everything we do, we aim to give you, our clients and potential clients, the best and most accessible info on each and every factor that may affect your investing(or trading) journey.

Follow this blog and our Twitter to keep up with all of our content and if you’re not an NBXer yet, consider signing up via the link below! Until then, remember that we’re always here to help you. If you have any thoughts or questions about this post as well as others, reach out to us any time here, on Twitter, or on our website!

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Norwegian Block Exchange (NBX) is a pioneering, forward-thinking, and client-oriented Norwegian cryptocurrency exchange, custodian, and payment system. Trade with us on nbx.com, follow us on Twitter or Facebook📲✔️

Disclaimer: Content provided does not constitute financial advice. All research cited in this post is still very much ongoing and could be subject to major changes over time.

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NBX Editorial

Written by

NBX Editorial: The voice of the Norwegian Block Exchange, a pioneering cryptocurrency exchange & payments platform that’s dedicated to the tokenized future.

Norwegian Block Exchange

Norwegian Block Exchange (NBX) is a pioneering, truly Norwegian cryptocurrency exchange, custodian and a payment system. Sign up at https://nbx.com ✔️

NBX Editorial

Written by

NBX Editorial: The voice of the Norwegian Block Exchange, a pioneering cryptocurrency exchange & payments platform that’s dedicated to the tokenized future.

Norwegian Block Exchange

Norwegian Block Exchange (NBX) is a pioneering, truly Norwegian cryptocurrency exchange, custodian and a payment system. Sign up at https://nbx.com ✔️

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