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THE CENTRAL BANK DIGITAL CURRENCIES: RISE AND COMING DECLINE Digital currencies are rapidly gaining ground around the world; but Bitcoin is willing to keep the incentives higher.

THE CENTRAL BANK

Digital currencies are rapidly gaining ground around the world; but Bitcoin is willing to keep the incentives higher.

The popularity of Bitcoin has sparked a rush for digital currency dominance, which is expected to intensify with the emergence of central bank digital currencies (CBDCs). In a 2021 central bank survey, 86% of respondents said they actively research the potential of central bank digital currencies. The question is how will central bank currencies coexist with borderless cryptocurrencies like Bitcoin?

This article is a three-part study of CBDCs in the context of currency developments. Readers will find that CBDCs will play an important role in standardizing currency as a digital concept. The paper describes several factors that will contribute to the rise of CBDCs in the coming years, as well as the design limitations of CBDCs that will reduce the demand for bitcoin.

Part 1: Humans and Change – We recreate old things before we reinvent new things.

Part 2: How CBDCs Adapt to Changing Types of Money – How CBDCs Compare to Bitcoin, in the Context of Fiat Money, Representative Money, and Commodity Money.

Part 3: CBDCs Challenges: Digitalisation Instead of Innovation – How Likely CBDCs Will Be Implemented and the Four Design Limits That Will Reduce Bitcoin Demand

PART 1: HUMANS AND CHANGE

The first version of the super tech after it looks like the old thing that has been replaced

THE FIRST VERSION OF CARS WERE HORSES AND CARRIAGES

THE FIRST VERSION OF CARS WERE HORSES AND CARRIAGES

BUT TRANSPORTATION WAS REIMAGINED WHIT AUTOMOBILES

THE FIRST VERSION OF MOVIES WERE PICTURES IN MOTOIN

THE FIRST VERSION OF MOVIES WERE PICTURES IN MOTOIN

BUT CINEMA WAS REIMAGINED WITH VIDEOS

THE FIRST VERSION OF DIGITAL CURRENCIES MONEY QRE STABLECOINS AND CBDCs

THE FIRST VERSION OF DIGITAL CURRENCIES MONEY QRE STABLECOINS AND CBDCs


BUT ELECTRONIC MONEY IS REIMAGINED WITH BITCOIN

History shows that humans rarely make the direct leap to revolutionary new technologies.

The cycle of human change often begins with the introduction of a half-improved version of the old before new borders are invented. The old ⇒ semi-new ⇒ new model is evident in many areas:

Transport: Horses ⇒ Horses on wheels ⇒ Cars
Visual images: Images ⇒ Animations ⇒ Videography
Money: fiat currency ⇒ Digital fiat currency ⇒ Bitcoin and crypto-currencies

Fiat money under any other name is still fiat money, attacked by the country’s borders. Digital currency, on the other hand, is transnational in nature. CBDC and steel money operate in a hybrid state as they are an online version of offline currencies.

Going from physical money to CBDC and steel alloys is like going from photographs to moving pictures – a new but half-improved version of the old product. History shows us that half-upgrading is usually a novelty. These versions are usually replaced by innovations that can imagine the future rather than recreate the past.

PART 2: HOW CBDCS fits into the evolution of different types of currency

To better understand how money develops, it is important to understand the three different types of money: commodity money, representative money, and fiat money.

Commodity: An asset that has an intrinsic value based on market demand (eg gold and silver).
Currency representative: an asset that has no intrinsic value but offers the right to another asset (for example, checks and gold certificates).
Fiat currency: a currency that has intrinsic value because the government says so (for example, today national currencies are examples of fiat money).

To better understand how money develops, it is important to understand the three different types of money: commodity money, representative money, and fiat money.

The two main types of money are commodity money and fiat money, and a hybrid state is more representative money. Before the 20th century, gold and silver were the largest forms of world money: it was the era of commodity silver. At the beginning of the 20th century (gold standard), banknotes were popular, although they were still pegged to gold. Since 1971, our banknotes no longer need to be tied to anything else. This led to an evolution from commodity money to representative money and then to fiat money.

We are now living in the opposite direction, moving from fiat money to digital analog currency. The representative currency of the 20th century consisted of banknotes indexed to gold, and the representative currency of the 21st century consisted of digital currencies indexed for fiat money. One hundred years ago, banknotes solved the problem of gold shareability and portability. Today, digital fiat currency solves the problem of shareability and portability of banknotes. The next step in this cycle is a digital currency with intrinsic value in itself – commodity money.

CBDCs are likely to be designed with features that digitize existing monetary architecture with central banks at the center. On the other hand, digital currency like bitcoin offers a completely different concept of money, which middle men completely forget.

PART 3: CBDCS CHALLENGES – DIGITIZATION INSTEAD OF INNOVATION

The first challenge with CBDCs is to explain why we need a central bank digital currency in the first place. Why digitize on a newer system that keeps all the old middlemen in place? There are short-term reasons, such as efficient payments and settlements, however, innovations in the private sector (like the Lightning Network) have already made it easier to transfer money, without the need for CBDCs.

As a digital representation of a landlocked currency, CBDCs will always be subject to the governance of offline nation states. While CBDCs will offer greater divisibility and programmability than paper money, their economic and social endeavors are likely to be thwarted by the elephant in the coin – how do they compare to bitcoin?

Four main themes are expected to emerge as constraints on central bank digital currencies in the coming years:

Store-of-value issues: Fiat, under another name, is still fiat. When the central banks of countries like Argentina launch a digital peso, it will still be subject to inflation and degradation. CBDCs will standardize the concept of a digital medium of exchange, but the uncertainty of the central bank’s monetary policies will give way to a digital store of value with great certainty. Whenever a CBDC engages in a major monetary policy debate, it is likely to become a stark contrast to the default monetary policy and the scarce supply of bitcoins.


Privacy and Oversight Issues: Although money has no memory, CBDC transactions will invariably leave a financial footprint that state governments can trace. The need for digital money to protect privacy will grow in popularity, especially in countries where minorities can be punished for their ideological beliefs or sexual desires. We will probably see a black market for cash as well as demand for digital currencies such as Monero and Decred that can guarantee immunity without centralization. oversight from the parties.


Sanctions and censorship issues: When authoritarian regimes can monitor dissident people, they can also censor their financial activity. CBDCs will strengthen the sanctioning powers of individuals, which in turn will create a demand for an uncensored financial network.

Just as SWIFT operates today as a messaging network, the demand for a neutral and tamper-proof financial network will entice people to resist the censorship of the Bitcoin settlement network.
No currency exchange fees – In a physical monetary world, countries can enforce their own borders for currencies. But once all the money is digitized, the costs of currency exchange are likely to drop.

Businesses will no longer have to worry about bringing today’s money to their local bank and merchants will be able to accept the best form of electronic money, not just local currency. Online money will not worry about offline limits, allowing consumers to choose the best forms of money, which will go beyond their local currencies.


Once digital currencies are distributed by most governments, the competition from currencies is likely to become fierce. Some nation states may attempt to ban the use of bitcoins and altcoins, while others will link their national currencies to patriotic appeals.

The patriotic motto of the day: “Buy local.”

Tomorrow’s patriotic motto: “Buy with local currency.”

CBDCs will almost certainly be promoted through “helicopter money,” where governments can offload welfare in local currency only. Legal tender laws will enforce CBDC as a medium of exchange, although individuals can choose to keep their savings in a higher store of value.

The lasting impact of CBDCs will be to standardize the concept of money as a native digital product and its design limitations will create the demand for an unauthorized and inflation-proof store of digital value. The main competitor to satisfy this demand is bitcoin.

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