Analysis: Is CBDC a threat or help to Bitcoin? Three scenarios tell you

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The introduction of central bank digital currency (CBDC) seems inevitable, but will this move harm or consolidate Bitcoin’s role in the digital world?

Since Facebook announced the creation of the Libra digital payment currency, central banks of various countries have been trying to build a national digital currency to respond. Currently, Libra faces regulatory issues. However, the Bank for International Settlements report shows that more than 80% of the world’s central banks are developing central bank digital currencies.

The idea and use of CBDC are completely different from Bitcoin. The crypto community has been speculating about its possible consequences for Bitcoin. Will CBDC weaken Bitcoin’s role in the network, or lay the foundation for its grand debut?

Scenario 1: CBDC is not conducive to the development of Bitcoin

CBDC will replace paper money and cash that people use every day in digital form. There are still many unknown factors in its development path, such as which country or region will become the first launcher, which technology will it adopt, and whether CBDC will be used for retail payments? But the answer will eventually be revealed one by one.

However, most people worry that the introduction of CBDC will give the government absolute control to track, approve or suspend all future payment transactions. The government claims that CBCD can reduce or even eliminate illegal activities such as money laundering, but this just proves reasonable guesses about potential ongoing surveillance.

On the other hand, there are concerns within the crypto community that the launch of CBDC will harm the digital currency industry and Bitcoin. Binance CEO Changpeng Zhao recently predicted that a well-designed CBDC may “pose a threat” to Bitcoin. He emphasized that most CBDCs will be very centralized and will not provide the same degree of freedom as Bitcoin. Therefore, while further promoting CBDC, governments tend to reduce decentralized models like Bitcoin.

The Bitcoin white paper describes it as an “electronic peer-to-peer cash system.” However, competition with CBDC backed by the world’s superpowers may indeed weaken its role. If CBDC can achieve faster and cheaper transactions, it will be particularly detrimental to Bitcoin.

In addition, the fluctuation of CBDC value is lower than that of cryptocurrencies such as Bitcoin. People tend to choose CBDC because they do not lose any monetary value when sending or receiving and when the transaction is completed.

Scenario 2: CBDC will help Bitcoin’s payment function

There is a saying that the emergence of CBDC can only play a role in widening the gate of Bitcoin. Grayscale, a cryptocurrency asset management company, recently believed that the launch of CBDC “may strengthen the role of Bitcoin in the global digital economy.”

Part of the reason is that CBDC has become a driving force for people to become familiar with digital payment infrastructure. Without CBDC, there would be no such opportunity. Then, through self-education, people will be able to discover significant differences between Bitcoin and government digital currencies.

Bitcoin is special. The reason is not because of its digital nature, but because it is a scarce, uncompromising, non-political currency that anyone can use.

Scenario 3: CBDC will consolidate Bitcoin’s position as a store of value

Assuming that as soon as the scenario becomes reality, Bitcoin no longer acts as an electronic peer-to-peer cash system, that does not necessarily mean that Bitcoin has no value to society. Bitcoin may not be used to transfer funds from one address to another, but serves as a store of value.

After all, Bitcoin has similarities with the most widely accepted store of value asset (gold), such as scarcity. Recently, the price movements of these two assets have also been similar. The new crown epidemic will only accelerate the correlation between the two.

Even Jerome Powell, Chairman of the Federal Reserve Board of the United States, compared the two and pointed out that both are forms of speculation in store of value. In addition, Fidelity Digital Asset, a cryptocurrency subsidiary of Fidelity Investments, named Bitcoin an “inspiring store of value” in a report this year.

Therefore, even if Bitcoin cannot be used as an online payment tool due to the emergence of CBDC, its unique properties may empower its more critical role in today’s digital world.

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