CZ FAQ 3: CBDC (Central Bank Digital Currencies)

This article is a part of the “CZ’s FAQs” series. Opinions expressed here are personal opinions and do not represent Binance’s official position. It is not financial advice. And could be totally wrong. 

People ask me about Central Bank Digital Currencies (CBDCs) quite often nowadays. Will they replace Bitcoin? What’s the impact? And so on. Here is my view on it as I think ahead about 2022 and beyond. Overall, I believe CBDCs are very positive for the crypto industry, but with a few caveats. Let me start with the benefits I see of CBDC and what they can bring to the crypto industry.

Benefits of CBDCs

Validation

Central banks issuing blockchain digital currencies is a strong validation of blockchain technology. As recently as 2 years ago, we heard newcomers worry that the technology may be a fad. Now with central banks adopting it, we don’t hear those concerns anymore.

Education

Today, central banks and governments are educating the masses about blockchain technology and cryptocurrencies. And guess what, you can’t learn about blockchain without learning about Bitcoin. And when you learn about Bitcoin, you learn about the valuable fundamental properties of money - scarcity, freedom to transact, and low fees.

Adoption

Adoption of CBDCs may be more rapid, as Governments can force shops and merchants to accept digital currencies. This in turn drives adoptions of wallets and the start of using cryptocurrencies for many.

Integration

And, finally, If or when CBDCs open up their permission to allow crypto exchanges to integrate it, that will be a very good fiat on-ramp. If their permission scheme is open, then it may replace many of the stablecoins in existence today.

However…. Yes, you knew it was coming. I have some concerns.

Fundamental Properties

I believe most initial versions of CBDCs will be different in their fundamental properties to “native crypto” currencies like Bitcoin, Ethereum, and BNB.

Unlimited Supply

Most CBDCs will have an unlimited supply. That is, central banks can and probably will mint more of it at will. With that quantitative easing, comes inflation, etc. I assume you know the impact of that. I won’t go into that in this article.

Bitcoin, BNB, and other cryptocurrencies usually have a limited supply. BNB even has a decreasing supply built-in, with multiple auto-burn mechanisms.

Permission

Most CBDCs will be permissioned, meaning that you need to ask for permission to use your money. If you are just buying coffee, that’s probably fine. But for meaningful transactions, such as investing your after-tax money in a project you like in a different country, you will likely be required to go through a lengthy approval process, and may even be flat out denied depending on where you are or other reasons.

The permissioned nature of CBDCs may also make it take longer to get them integrated into crypto exchanges, thus making it less interoperable with native crypto. As of this writing, I know of no CBDCs that are possible to be integrated by crypto exchanges. And, as you know, Bitcoin is permissionless. 

Fees

I expect most CBDCs will have high fees, especially if you are transacting across borders, or doing other transactions that are typically associated with high transaction fees when using fiat. Given the permissioned nature of CBDCs, you will likely need to spend significantly more time while using CBDCs for cross-border transactions, including your own time and opportunity costs. Most cryptocurrencies will have much lower fees for similar transactions in comparison.

There are some other fundamental properties of money, you can read about it in many Bitcoin tutorials. I won’t repeat them all here.

Crashing Bitcoin? no.

Many ask me, “will CBDCs replace Bitcoin?” For the differences mentioned above, I think that’s unlikely to happen. Although, it is not inconceivable that a Central Bank may issue a permissionless, limited supply coin with low fees. If that happens, people in that country may indeed have less need for Bitcoin. But as we all know, a good percentage of Bitcoin holders these days don’t necessarily view Bitcoin as a currency alternative anyway. So perhaps this comparison between Bitcoin and CBDCs isn’t worth making at all.

Risks

It’s also conceivable that governments may “ban Bitcoin” in order to promote their own CBDC. Clarification on “ban Bitcoin”. So far, I know of no country that made owning Bitcoin illegal. So, there is no “ban Bitcoin” anywhere. Some countries have indeed banned crypto exchanges from operating in their countries. This will likely slow down their citizens to adopt this new technology and the FinTech innovations that are associated with it. (See benefits of issuing a coin, hopefully in the next article in this series.)

Conclusion: One more option

Regardless of the strengths and weaknesses of CBDC’s, I still believe in the infinite potential of crypto, and having an additional option is usually better than not. Overall, the more crypto choices we have, the better. However, as Governments and regulators look to create their own CBDCs, I caution them against their very walled-garden nature. 

Freedom of money is the inherent principle of crypto and blockchain. Trying to place restrictions and barriers that I’ve outlined above may stifle innovation and technology development, which I believe are vital for both national economies and the global crypto and blockchain infrastructure. 

This article was edited on July 27, 2022.