The launch of a Central Bank Digital Currency (CBDC) in Europe seems to be getting closer. In China, there are plans to officially launch the digital yuan, the e-CNY, sometime next year. The European Central Bank aims to complete the research phase of a digital euro in October 2023. Will Bitcoin still be necessary with the arrival of digital coins issued by central banks?

CBDCs should lead to higher financial inclusion and reduction of systemic risks, Queen Maxima explained in a speech at the IMF event ” CBDC and financial Inclusion: Risk and Rewards “. In addition, according to Maxima, a CBDC can combine the best of both worlds: cheap and fast ” cross-border payments ” in combination with high security, liquidity and robustness.

ECB

Last week, the President of the European Central Bank, Christine Lagarde, gave a speech on the progress made in creating the digital euro. Lagarde explains that there are currently three developments that could potentially disrupt the current payment system:

• More and more payments are being made digitally. As a result, cash can lose its role as a monetary anchor. According to the ECB, this has major consequences for confidence in the economy and the euro

• In the absence of a monetary anchor, people will look for an alternative form of money, Lagarde explains. As an example, she gives bitcoin and other cryptocurrencies that, according to her, cannot function as a medium of exchange due to their volatility. In addition, Bitcoin operates independently of the ECB or other agencies. If the use of bitcoin as a means of payment or savings increases, central banks will lose control and power over the money.

• Big Tech has entered the payments market and could therefore dominate the (foreign) payments market. The growing use of services increases dependence on such companies. According to the ECB, the autonomy of Europe could be endangered as a result. After all, many Big Tech companies are located outside the European Union and are therefore subject to different regulations. Examples of such companies are Venmo and Paypal.

For these three reasons, according to Lagarde, it is essential for the ECB to prepare for the next step in the digitization of the economy.

A less frequently mentioned reason is that a CBDC makes it easier for the ECB to make looser and more personal monetary policy.

A CBDC, like bitcoin, is programmable money. For example, you can assign an expiration date to money to encourage spending, program social benefits and create consumption coupons.

A CBDC enables government agencies and private sector players to program money, create smart contracts, and enable targeted policy functions. Managing Director IMF-World Bank Bo Li

Criticism

Not everyone is in favor of the digital euro. For example, CBDCs would give central banks even more power and endanger the privacy of citizens. After all, using a CBDC requires citizens to trust one central party to properly handle users’ money and personal data.

There is a fear that central banks and governments will soon be able to decide what people can and cannot spend money on.

Incidentally, not all bankers are a fan of the entire development of CBDCs. For example, the president of the Federal Reserve in Minneapolis, Neel Kashkari, does not see the point of it and has not yet received an answer to the question of exactly what problem a CBDC would solve.

I see why China wants a CBDC. If you want to monitor all citizens’ transactions, this can indeed be done more easily with a CBDC than when users use alternatives such as Venmo or Paypal. Introducing negative interest rates and levying direct taxes are easier with a CBDC. Why would the American people want that? Neel Kashkari, President of the Minneapolis Federal Reserve

Differences Bitcoin and CBDC

Although both coins work completely digitally, they differ greatly from each other. For example, Bitcoin has no owner, CEO, president or board. The rules of Bitcoin are immutable. Where the supply of the digital euro is not fixed and new coins can easily be created, Bitcoin has a maximum supply of 21 million. This number did not appear out of the blue, but is relatively easy to calculate with the following mathematical sum:

The 32 above the sigma represents the number of times the block reward is halved. The 210,000 represents the number of blocks between the halvings. Finally, the 50 gives the number of bitcoins spent per block and the 2 to the power of i the cumulative number of all halvings so far.

The result of this sum is rounded off at 21 million.

Privacy

In addition, the use of a CBDC requires an identity and trust in the central bank. Bitcoin is an open monetary network that anyone can join regardless of nationality, race, age, wealth or place of residence. Bitcoin is politically neutral money.

An internet connection and a smartphone is all it takes to join the decentralized network and gain access to sending and receiving value all over the world, without intermediaries.

In conclusion, Bitcoin and CBDCs are fundamentally different from each other and do not really compete with each other. One does not exclude the other, but a CBDC is far from making Bitcoin obsolete.

Financial inclusiveness within a township in South Africa demonstrates the power and accessibility of bitcoin.