CBDC and cryptocurrencies: who will survive in the world of digital money?

Central Bank Digital Currencies: A New Era of Controlled Money

Central banks around the world are increasingly exploring the possibilities of creating their own digital currencies. CBDCs represent a government response to the revolution of digital assets. Essentially, they are virtual versions of the national currency issued and managed by the country’s central bank.

The key feature of CBDCs is their ability to improve the efficiency of financial transactions while reducing costs associated with the production, storage, and circulation of physical money. Unlike cash, CBDCs operate entirely in the digital space, opening new horizons for monetary policy.

How It Works: Technology Behind the Scenes

CBDCs function similarly to digital assets, using a tokenized version of the national currency. But do central banks use blockchain? The answer is not straightforward: some countries do choose blockchain technology, while others prefer distributed ledgers (DLT), which operate on similar principles but are not traditional blockchains.

This technological flexibility allows each country to select the optimal path according to its security and scalability requirements.

From Cash to Digital: Transforming the Financial System

CBDCs embody the transition to a modern financial infrastructure. They offer a digital alternative to traditional money and banking systems, speeding up settlements and increasing transaction reliability. The main advantage is reducing dependence on physical currency and strengthening central banks’ control over monetary flows.

Faster Payments and Lower Costs

Central bank digital currencies can transfer the characteristics of traditional money into a digital format. They enable faster, safer, and more cost-effective transactions. However, limitations should be considered: in regions with insufficient digital infrastructure, CBDCs may be unavailable, and traditional cash will remain in demand.

Financial Accessibility for All

CBDCs provide access to digital financial services for individuals and companies lacking access to traditional banking products. This is especially relevant for regions with limited financial institutions. Such expanded access promotes greater inclusion of participants into the formal economy.

Transformation of Payment Infrastructure

Digital currencies allow for quick, reliable, and economical settlements, bypassing intermediaries — payment processors and banks. This potentially reduces fees and accelerates transaction processing between participants.

CBDC for Central Banks: New Control Tools

Digital currencies give central banks expanded capabilities to manage monetary policy. They can directly influence the money supply, interest rates, and inflation, providing more precise control over economic stability.

Implementing CBDCs redefines the role of traditional banks as financial intermediaries. Digital infrastructure significantly reduces costs and processing times for interbank operations, payments, and transfers, but may also lead to increased regulatory oversight and government control.

CBDC vs. Cryptocurrencies: What Are the Differences?

Although CBDCs and cryptocurrencies are both digital tools, their fundamental characteristics differ radically. The degree of centralization, regulatory framework, user privacy, and technologies used create two entirely different paradigms of finance. These differences determine their purpose, areas of application, and place in the global financial ecosystem.

Centralized Authority vs. Decentralization

Government-issued digital currencies are issued and fully regulated by central banks, which have complete control over their creation, volume, and administration. Central banks use CBDCs to stabilize the monetary system and achieve macroeconomic goals within existing financial structures.

Cryptocurrencies, on the other hand, operate on decentralized networks without a single governing body. Blockchain technology allows participants to make direct payments without intermediaries. However, in practice, some aspects of the crypto ecosystem become centralized — for example, through concentration on major trading platforms for buying and storing assets.

Although CBDCs are inherently centralized, they may include privacy protection elements, providing users with a certain level of confidentiality and control over their transactions.

Price Stability: Reliability vs. Volatility

CBDCs pegged to the national currency maintain a stable value. This makes them suitable for everyday transactions and savings accumulation. Citizens and companies can confidently make payments without fearing sharp fluctuations in value.

Cryptocurrencies, especially major ones like Bitcoin (current price $88.90K, 24h change +1.53%) and Ethereum (price $2.98K, 24h change +1.75%), are known for significant fluctuations driven by market demand and speculative activity. Over the past year, Bitcoin has fallen by -10.48%, while Ethereum has decreased by -14.68%. This volatility creates investment opportunities for speculators but also makes using cryptocurrencies in daily operations risky and unpredictable.

Privacy: Balancing Transparency and Anonymity

The level of privacy in CBDCs depends on the chosen implementation model. Some systems prioritize transaction confidentiality, while others incorporate audit mechanisms to meet regulatory requirements and prevent illegal activities.

Cryptocurrencies are often positioned as pseudonymous tools. However, blockchain analysis has shown that apparent anonymity can be compromised through specialized analytical techniques that can identify user identities.

Purpose and Application

CBDCs are primarily created by government agencies to achieve national economic and regulatory objectives: increasing financial service accessibility, optimizing cross-border payments, and strengthening currency sovereignty.

Cryptocurrencies were developed as an alternative to traditional financial systems, initially aimed at decentralization and independence from government control.

Comparison Table: CBDC vs. Cryptocurrencies

CBDC and Stablecoins: Who Is Stronger?

Stablecoins, like CBDCs, are forms of digital currency but are issued by private companies rather than governments. An example is PYUSD from PayPal, aimed at supporting blockchain-based initiatives.

Stablecoins are designed to minimize volatility by maintaining reserves and offer investors a safer way to earn income, especially during bear markets when prices fall.

Global CBDC Race: Who Is Ahead?

Over five years, the number of countries exploring CBDCs has grown from 35 (May 2020) to 130 worldwide, according to Atlantic Council data. Nineteen G20 nations are already in advanced stages of developing their digital currencies.

Leaders in Adoption

Bahamas pioneered with the launch of Sand Dollar in October 2020 — the world’s first national CBDC. It helped address operational issues in the Bahamas, especially after natural disasters like Hurricane Dorian in 2019. Sand Dollar remains one of the most developed national digital currencies.

China made history by launching e-CNY (digital yuan) across the country during the 2022 Winter Olympics in Beijing. This allowed China to become the first major economy to implement a full-scale CBDC. China actively promotes the digital yuan internationally, aiming to expand its use beyond the country.

Brazil named its project DREX. The central bank began pilot testing the digital real, expecting full deployment by the end of 2024. The system is based on DLT technology and is intended for wholesale interbank settlements.

India launched a pilot RBI project in the retail sector in October 2022. The national rollout was planned for the end of 2023. By June 2023, over 1.3 million users had downloaded CBDC wallets, and about 300,000 merchants started accepting digital currency payments.

Australia is conducting tests via eAUD, a joint project of Commonwealth Bank and ANZ Banking Group. The pilot program is organized by the Reserve Bank of Australia to evaluate CBDC use cases.

Can CBDC Replace Cryptocurrencies?

The theory of replacing decentralized cryptocurrencies faces a fundamental obstacle — their conceptual differences. CBDCs are focused on regulation and control of financial transactions, whereas cryptocurrencies are valued precisely for their decentralization and lack of a central governing body.

These two systems pursue opposite goals. Most likely, they will coexist in parallel, each addressing different needs within the financial ecosystem.

Will CBDCs Replace Ordinary Money?

Massive displacement of cash by CBDCs is unlikely in the near future. Factors hindering full replacement include low digital literacy in some populations, privacy concerns, cyberattack risks, and technical barriers in regions with underdeveloped infrastructure.

Cash will remain an important element of the financial system alongside the rollout of CBDCs.

The Future of Money: A Symphony of Digital Systems

The topic of CBDCs generates great interest in the modern financial world. In the coming years, government digital currencies are unlikely to fully displace cash or cryptocurrencies. Instead, an integrated system will emerge where each form of money performs its function.

Cryptocurrencies offer decentralization and investment opportunities, traditional money provides stability, and CBDCs and stablecoins create a transitional bridge between centralized control and digital convenience. All these systems will together drive global financial development.

An exciting future awaits, where various forms of money — CBDC, stablecoins, cryptocurrencies, and fiat currencies — will compete and complement each other, shaping a new face of the world’s financial architecture.

No matter how they evolve, one thing is certain: money will become increasingly digital, yet remain diverse and adaptable to different user needs.