The invention of Bitcoin disrupted the status quo and forced central banks to pay attention to cryptocurrencies. Central bank digital currency (CBDC) is a term used to describe a central bank-issued currency that incorporates elements of cryptocurrencies. Governments consider CBDCs because they believe it promotes financial inclusion, increases payment efficiencies, and gives them more control over citizens. However, CBDCs are not a threat to Bitcoin. In fact, they may even accelerate its adoption.
In the United States, the Federal Reserve creates dollars, which consist of physical cash and reserve balances held by banks. Digital dollars in consumer bank accounts represent claims to dollars held by banks at the Federal Reserve. CBDCs differ from digital dollars because they are actual dollars produced by the Fed.
There are two models for implementing CBDCs: wholesale and retail. Under the wholesale model, CBDCs would be accessible only to banks and financial institutions, while the retail model would allow consumers to use CBDCs as digital cash.
The retail model would upend the current banking system, while the wholesale model would maintain the status quo. The Biden-Harris administration is exploring the feasibility of a retail CBDC system in the US, signaling a growing political appetite for it.
CBDCs face problems such as potentially crowding out traditional banks’ lending role and raising concerns about privacy. They give governments exclusive control over citizens’ bank accounts and allow for surveillance and programmability of monetary policy.
Despite these issues, CBDCs do not offer significant advantages over existing digital money systems like commercial bank deposits. Bitcoin still offers unique monetary qualities and censorship resistance that attract consumers.
In conclusion, CBDCs are not a breakthrough in monetary technology like Bitcoin. They represent a mild technological upgrade to fiat money and raise concerns about privacy and government control. Bitcoin remains a better alternative and is unlikely to be replaced by CBDCs.
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