Cryptocurrencies are a reaction to government regulation of fiat currency or money. For example, with Bitcoin’s decentralized blockchain technology, there’s no central entity in charge of financial transactions that’s able to regulate its use, stabilize its value, and influence its continuing development. CBDCs are government issued and, therefore, will work with centralized blockchain technology, in which only a few entities such as central banks can access or alter the blockchain. These central entities will have the power to decide who has access to the blockchain and to what extent.
Cryptocurrencies are sometimes created with limits, which also helps add to the perceived value, essentially tying it to the fact that supply is limited. For example, the inventor of Bitcoin, Satoshi Nakamoto, capped the number of Bitcoins at 21 million, meaning there will only ever be 21 million Bitcoins in existence. However, each country has its own central bank, which can decide to add or remove money to or from the country’s supply depending on demand, economic conditions, and other factors. Central banks are likely to take a similar approach with CBDCs.
With the power of central banks behind them, CBDCs could have immense reach. However, the ultimate role of CBDCs remains unclear, and whether and how they dampen current market fervor for decentralized cryptocurrencies remains to be seen. While innovation in fintech is exciting, and seems to promise greater access to financial transactions for historically underserved populations, there may still be a long way to go for us to envision a world with multiple CBDCs working seamlessly together.
