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Central bank digital currencies (CBDCs) and Bitcoin could scarcely be more different. One is permissioned, the other permissionless; one centralized, the other decentralized; one is censorable, the other censorship-resistant. Despite their dissimilarities, CBDCs might just be the best driver yet for Bitcoin adoption.

Also read: Mobile Gifting Platform Swych Announces Cryptocurrency Support

CBDCs Are the Best Thing That Could Have Happened to Bitcoin

When JP Morgan unveiled its eponymous stablecoin on Feb. 14, the sound of sniggering could be heard throughout the cryptosphere. Aside from the irony given CEO Jamie Dimon’s previous Bitcoin bashing, there was the notion, advanced by benighted mainstream media, that Jpmcoin, which runs on a permissioned ledger and settles transactions between JP Morgan banks only, presented a threat to Bitcoin.

“JPMorgan Just Killed the Bitcoin Dream” screamed one headline, prompting further sniggers from the crypto community. CBDCs and cryptocurrencies exist on parallel tracks that do not cross. The former serves as a type of stable digital currency that is issued and wholly controlled by banks. CBDCs share some characteristics of cryptocurrencies in facilitating fast and low-cost cross-border transfers, but the similarities end there.

The greatest threat these instruments present is not to cryptocurrencies such as Bitcoin, but rather to slow and inefficient settlement systems such as Swift. Last year, the former chair of the United States Federal Deposit Insurance Corporation, Sheila Bair, said CBDCs could have “severely negative consequences” for the “bank-dominated payments system.” CBDCs, including stablecoins such as Jpmcoin, may deleteriously affect the incumbent financial system as well as Ripple’s native cryptocurrency, but their impact on Bitcoin is likely to be positive.

Central Bank Digital Currencies Are a Trojan Horse for Bitcoin

How CBDCs Are Bullish for Bitcoin

The emergence of central bank digital currencies serves to legitimize and normalize digital currencies as the future of money. Within this broad context, any attention they receive helps to put further distance between Bitcoin and the tired “drugs, speculation, and tax evasion” narratives. Should CBDCs gain traction, however, people will quickly discover that they offer few improvements over the current financial system and come bearing several distinct disadvantages.

Digital currencies transferred via permissioned ledgers or pseudo-blockchains facilitate real-time tracking of customer spending at all times. Anyone deemed to be persona non grata, or even suspected of transacting with people deemed undesirables, is liable to have their funds frozen and account suspended. These provisions are already in place with the legacy financial system, but CBDCs will amplify the powers available to governments and regulators, with sophisticated forensics tools providing unprecedented insights into the spending habits and social behaviors of citizens.

In a world of CBDCs, there will be no place to hide and no freedom to transact without being authorized by the powers that be. It’s easy to imagine a dystopian future, based on China’s social credit system, in which citizens are billed for their healthcare and screened for employment based on their purchase history and social circle. The rise of central bank digital currencies will also bring benefits, of course, such as lowering the cost and time involved with wiring money abroad. Given the notoriously siloed nature of financial houses, however, it would be optimistic to expect CBDCs to operate globally. Just like Jpmcoin, it is likely that there will be little to no interoperability with CBDCs, preventing these digital currencies from even realizing their limited potential.

As a rising tide raises all ships, increased adoption of digital currencies benefits Bitcoin. When users of central bank digital currencies tire of their limited functionality, lack of privacy, and susceptibility to censorship, they’ll come searching for an alternative means of sending money cheaply, quickly and permissonlessly and they’ll find Bitcoin. CBDCs make for poor digital currencies but are a great Trojan horse for Bitcoin.

Do you think CBDCs will benefit or threaten Bitcoin? Let us know in the comments section below.

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