Government-Backed Currencies | Can Crypto Assets And CBDC Co-Exist?

The results will surprise you. We are on the verge of one of the largest transformational phases in history. The digital finance space has begun to leverage decentralized blockchain technology to both modernize financial markets and answer the rapid growth of the cryptocurrency community. Influential players looking to capitalize on this growth consist of some of the largest financial institutions globally and central banks.

Tokenization no longer resides with if it will occur, but when. CBDC, as a result, has been surging in popularity, offering a generalized, centralized digital asset, bound to central bank money. Globally, Hong Kong, China, Thailand, the EU, U.K., U.S, and more are exploring a potential implementation for a tokenized currency.

PROB, Probit Exchange’s native token, has certainly benefited from this enhanced growth and growing positive sentiment towards digital assets, recently taking off into the stratosphere. PROB increased by over 225% in 2020 with new ATHs expected in 2021, month after month. The growing interest from central banks in digital currencies, in some aspects, serves to justify the validity of the crypto space as a whole. They aren’t just attempting to get into the space, but they are expediting the process.

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Top-Down Adoption

CBDCs will be the first occurrence of top-down adoption of DLT from governing bodies and will likely drive significant DLT infrastructure innovation and development eventually impacting other verticals like supply chain management, healthcare, and cybersecurity.

You are probably wondering if CBCDs and decentralized crypto-assets can exist in harmony? Good question.

CBDCs represent a significant departure from the decentralized protocols that have driven the adoption and growth of some of the most impactful cryptocurrencies; some hypothesize their conception and rapid saturation could cripple crypto and reward central governments a terrifying amount of control — a dystopian narrative for cypherpunks.

Hundreds of billions of new-found tax revenue in a paperless society, where the omniscient issuer knows, the whos, the where, and how much of every balance within their ecosystem. The federal reserve certainly wouldn’t be opposed to big data conveniently structured in a permissioned blockchain, KYC’d enforced with strict AML requirements, and smart contracts.

The irony… the exact system that was meant to lead the world to greener pastures could have provoked our financial prison. I don’t mean to be a “Debbie Downer,” this is only one school of thought, with other points of view painting a rosier picture for the digital asset space.

Banks Globally Investing In CBDC

CBDCs and cryptocurrencies are often viewed as synonymous, thus envisioning a future where both exist, an obvious impossibility. CBDCs are the government’s attempt to stifle decentralized crypto asset growth, right? The reality is that CBDCs are attempting to evolve payment infrastructure while Bitcoin is money 2.0, the next step in the evolution of currency.

Since Bitcoin’s conception, numerous digital assets have entered the market, each with unique value propositions claiming to remedy different aspects of our financial system. One such development is stable coins including USDT, DAI, USDC, and PAX, which maintain value through a link to an underlying asset, such as fiat currency.

Stablecoins have been received well globally as they can function outside the confines of our current financial system, be utilized for cross-border payments, and do not fluctuate like BTC following an Elon Musk tweet. Facebook attempted to ride the stablecoin wave launching the “Libra,” which was an abysmal marketing effort and has since been scaled back.

Nonetheless, Facebook’s announcements of the Libra in 2019, among other large firms discussing a possible currency, grabbed the government’s attention. Facebook has over 2.7 billion users, after all, that’s a lot of potential power.

While stablecoins can be created by institutions, CBDCs are issued by central banks. CBDCs are intended to be digital variants of currency and offer a wealth of potential pros for central banks. Streamlining benefits and compensation delivery from the government and automating KYC and AML controls through a permissioned digital ledger, are a few of many.

A survey by the Bank of International Settlements in January 2020, noted 80 percent of banks in advanced economies were working on a CBDC with 40 percent already moving from the conceptual research stage to experimentation. Alarming? How will these developments affect our beloved decentralized crypto assets?

CBDCs And Bitcoin Are Not Synonymous

Interest in the development and wide-spread implementation of CBDCs may be accentuating Bitcoin’s future role in a digitized economy. The fact that central banks are investing resources into building their own CBDC, strengthens the case for independent digital currencies, like Bitcoin, even if wide-spread CBDC development never comes to fruition.

One of the hurdles cryptoasset adoption has had since its conception, is understanding the ins and outs of crypto functionality, digital bearer assets, and what is classified as “good money.” Institutions are being forced to adopt digital currency and have been educating their user base on these fundamentals, exposing the flaws of the current financial system and ultimately the benefits of a digitized one. It’s also important to remember that the defining attribute of Bitcoin is scarcity, not only the fact that it is digital.

If a central bank managed to successfully implement a digital currency with wide-spread user adoption, it would sustain its value in a similar environment of monetary inflation to what is currently in place. Central banks could dictate monetary policy and have it realized even easier than before, issue new currency, and adjust effective rates on personal assets effortlessly. CBDCs would inflate its issuer’s ability to access and oversee transactions and would be a difficult pill to swallow for a prospective user. This could impinge on goals to attract a sizable active user base, which could elicit less liquidity and user freedoms, without actually providing any monetary policy assurance.

CBDCs Are Not Perfect | Where Do We Stand?

Bitcoin was supposedly created so people did not have to trust central banks to adjust monetary policy or utilize unnecessary intermediaries to transfer money. Public trust in governments is low, and Bitcoin and other cryptocurrency protocols among other incentive mechanisms that produce a secure, reliable, and efficient money transfer experience are still an overwhelming favorite.

CBDCs are a popular subject of discussion and will develop as they mature. China has been utilizing lottery airdrop events as a way to attract users to adopt government digital currency. Freebies are effective as an initial draw but will this produce ample user-retention?

CBDCs can potentially streamline payments but will prove to further intertwine politics and finance, may bump heads with traditional embedded financial systems, and could simply not gain traction. If successfully launched, we don’t view this as a horrible outcome for Bitcoin and smaller digital currencies. Fiat migrating to the digital realm would further illuminate the positive characteristics of Bitcoin — it’s immutable supply, apolitical state, and financial inclusion it brings.