CBDC vs Cryptocurrencies

Why were CBDCs introduced? 

At the advent of cryptocurrencies, global governments realised the underlying potential of blockchain in creating a more accessible payment system. Great minds came together and developed the concept of CBDCs. The goal was to provide central banks with increased transparency into bank activities as blockchain allows, and provides users with heightened security, transferability, convenience, accessibility to financial products and services, and more. Further, such a currency can cut down on the maintenance costs that an entire fiat financial system otherwise needs, and even reduce expenses in terms of cross-border transactions.

Keeping to this principle, this is how the definition of a CBDC goes: it is virtual money backed and issued by a central bank. In turn, the primary differentiator for CBDC vs cryptocurrency is: while the former is a centralised digital currency, the latter is a decentralised digital currency. 

Take a look at this map from cbdctracker.org. In January 2024, a good majority of the world is at least considering Central Bank Digital Currencies, which means the notion of them brings a marriage of regulation and convenience. To sum up, the basic reasons for introducing CBDCs include: 

• Governments and central banks are exploring CBDCs as a more regulated, centralised alternative to cryptocurrencies. 
• CBDCs can improve the efficiency and security of payment systems and enhance financial inclusion, especially for those without traditional bank accounts. 
• CBDCs can improve both the efficiency and speed of interbank settlements, and decrease the number of intermediaries involved. 
• CBDCs can reduce the cost and time involved in money transfers, especially internationally. 
• CBDCs can bring a more efficient mechanism for implementing new monetary policies and stabilising financial systems during crises.
• Such currencies allow for better transparency in monetary flows.

As you can guess, especially in the post-Covid era, the primary drivers behind the development of CBDCs include the growing digitalisation of economies and the decline in cash usage. Adding fuel to the fire is the urge of central banks to maintain control over monetary policy in the face of emerging private crypto assets and digital payment platforms. 

Put two and two together, and you realise that CBDCs offer central banks a way to modernise ageing financial infrastructures and explore new monetary policy options, such as negative interest rates.

A history of CBDCs 

Progressive developments in several countries mark the history of Central Bank Digital Currencies (CBDCs), each at different stages of exploration and implementation. Here’s your cheat-sheet to the history of central bank-issued online money:

• One of the earliest instances of a CBDC-like concept was the Avant smart card from the Bank of Finland in 1993. Although it was discontinued, it represented an early form of digital cash issued by a central bank. 
• The Bahamas launched the world’s first CBDC: Sand Dollar in October 2020. This initiative aimed to serve unbanked and underbanked populations across its many islands. Nigeria followed with the launch of the eNaira in October 2021, becoming the first African country to introduce a CBDC.
• China started piloting its digital yuan in 2019. At this point, it is the largest country using a CBDC, with over 120 open wallets.
• France and Switzerland collaborated on a cross-border CBDC payments trial for wholesale transactions in June 2021.
• The Reserve Bank of India announced a regulatory sandbox in December 2020 to test technologies for cross-border payments and later proposed a digital rupee, which went into a pilot phase in November 2022.
• Jamaica introduced its CBDC, the "Jam-Dex," in July 2022, recognising it as legal tender.
• The Central Bank of Nigeria announced its digital currency plans in May 2021 and launched a pilot scheme for the eNaira in October 2021.
• Norway, after four years of research, announced plans in April 2021 to test a CBDC over the following years.

The takeaway is that as 2024 rolled in, a significant number of countries were in various stages of CBDC development. Out of these, over 60 countries, including major economies like Japan and Brazil, were in an advanced stage.

CBDC vs cryptocurrency: acceptance rate across countries

Here’s how the features of CBDC vs cryptocurrency look pitted against each other:

Now, let’s take a look at how different countries have taken to CBDCs as opposed to their stances on cryptocurrency:

China

China has an ironic scenario going on. Its government had always been unfriendly towards crypto, and even pushed a complete ban on crypto mining and trading in 2021. Paralelly though, China has pushed its CBDC, the digital yuan or the e-CNY, forward. 

China started the pilot as early as 2019, the same year China’s National Development and Reform Commission (NDRC) questioned the desirability of Bitcoin mining due to the energy-intensive hardware required. By June 2023, total transactions in the digital yuan had gone up to 950 million with a value of 1.8 trillion yuan (translating to USD 249.9 billion).

China is a curious case for sure, but also a good reference for how governments tend to view CBDC vs cryptocurrency, based on the extent of control they can exert over the currency.

Another interesting duality about China: the Chainalysis Crypto Adoption Index, which measures countries based on crypto adoption at grassroots level, ranked China at the 11th spot in 2023 despite its complete crypto ban. e-CNY’s widespread adoption may be contributing to this, because CBDCs do in fact give the common man an avenue to explore digital currency, which can get them interested in cryptocurrency in turn. 

African countries

Countries like Nigeria and those in the Eastern Caribbean Currency Union have made significant strides in CBDC development. Nigeria ranked second on grassroots crypto adoption in the Chainalysis Global Crypto Adoption Index 2023. Nigeria’s e-Naira did ease the journey into crypto for the common citizen. The Eastern Caribbean Currency Union also introduced "DCash," a digital currency to facilitate transactions and serve people without bank accounts. 

India and Eurozone countries 

Countries like India and those in the Eurozone are in the development phase of their CBDCs. The Indian government launched the digital rupee at the end of 2022, while the ECB is exploring the creation of a digital euro. Both are markets where crypto trading isn’t discouraged, but not clearly regulated either. 

However, India secured the top spot in the 2023 Chainalysis Global Crypto Adoption Index, reaffirming the role of CBDCs in lowering the entry barrier for the common man into the crypto sector. Once a government expresses its support for CBDC research, it can be interpreted in turn as its recognition of the potential of virtual currencies altogether, putting citizens at ease. 

United States 

The US, while not having a CBDC yet, is studying its potential. In April 2022, President Biden signed an executive order authorising the Federal Reserve to assess the risks and opportunities of a US CBDC. Any CBDC in the US would require Congressional approval though, so it could be several years before a US CBDC is designed and approved.

Worth noting - the US hasn’t yet legalised crypto either, but it’s the heart of the finance world, which makes crypto activity in the country significant. And the US SEC has recently given the go-ahead to a host of Bitcoin ETFs from prominent traditional entities like BlackRock and Fidelity.

Summing up

As the world stands currently, both CBDCs and cryptocurrencies are pretty new, and it remains to be seen which one will stand the test of time. A realistic scenario would be CBDCs slowly replacing paper-based money and co-existing with crypto, just as fiat and crypto co-exist now. 

Another crucial factor to remember would be that crypto is not only an alternative form of currency, it also serves its purpose as an asset class, a store of value, and a medium for users to access brand new products and services in the web3. So in the CBDC vs cryptocurrency debate, there’s little reason for either to snuff out the other.