The world’s governments are not happy with crypto. Seeing as how its permissionless, trustless and decentralized nature is anathema to the highly regulated traditional financial sector, most state authorities have dismissed cryptocurrencies as not being either commodities or currencies, since they have no intrinsic value and aren’t backed by collateral (with the exception of stablecoins).

But with the evolution of DeFi (decentralized finance) and the growing mass adoption of crypto the world over, many governments are recognizing the potential, and risks, of this new digital money.

The proliferation of cryptocurrencies has had a slight negative effect on fiat currencies due to the transfer of value from the latter to the former. Worried by the risk crypto poses to their economies, a few countries have straight up banned their citizens from dealing in non-fiat money.

On the other hand, a few countries whose economies are spiralling under the the burdens of debt and inflation have turned to crypto as their saviour. One of them is El Salvador, which made headlines last year when it became the first country to accept Bitcoin as legal tender.

A third group of countries, however, have been exploring a foray into the world of crypto through the introduction Central Bank Digital Currencies or CBDCs.

CBDCs are legal tender issued by a central bank in digital form.

A CBDC is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. It should be noted that most of the countries researching CBDCS aren’t crypto proponents (a lot of them are actively hindering crypto adoption); they have merely recognized the potential of having digital currencies that can be used to quickly settle payments without intermediaries.

Nigeria and several Caribbean countries have already launched CBDCs, China, South Korea and a few others are in the pilot stage. Numerous others, including Brazil, India, Australia and Japan are in the development phase of their CBDC issuance plan.

It’s not hard to see why. A well-implemented digital currency would enable faster, safer and cheaper payments, both within the country’s borders and without. It would grant households and businesses access to money that is mostly free of high credit or liquidity risks, thus bolstering innovation and fostering financial inclusion. There are inherent risks in a digital form of fiat currency, but we’ll get to that in a little while.

The fact that many countries are either launching or planning to launch CBDCs is causing apprehension in the crypto world. There is a fear that the proliferation of CBDCs will empower regulatory authorities and reduce the demand for legit crypto currencies like BTC and ETH.* *It takes a rather long leap of logic to come to this conclusion.

Consider how for a moment useful the dollar-pegged stablecoins are. People use USDC and USDT to avoid losses during market fluctuations, to trade between tokens on non-compatible blockchains, and to invest in liquidity pools.

Would it matter if this stablecoin is issued by a private entity or a public one?

As long as the issuer is guaranteeing that the money has worth, it’s not really an issue. Take USDC for example. Sure, they’re a private entity, but since they’re registered in the US, they’re subject to the country’s rules and regulations.

When the US Treasury sanctioned Tornado Cash, an open-source smart contract on Ethereum, USDC’s parent firm Circle was quick to freeze all USDC on the contract and stopped linked addresses from using their stablecoin. Despite being a private firm, they followed the government’s instructions quickly and to the T, just as how a state-backed digital currency would.

Also, the countries that want to restrict or ban crypto are already doing it, even if they are exploring the launch of their own CBDC. Take India, for example. Its central bank, the Reserve Bank of India, has only recently begun researching and exploring the idea of launching a digital rupee.

For a long while though, India has made it annoyingly difficult for retail investors and companies to get into the crypto space thanks to their convoluted financial rules and blatant refusal to clarify regulations around cryptocurrencies. Despite this, the nation ranks among the top countries by crypto adoption with over 27 million users. However, this accounts for only around 2% of the population, which brings us to the next point.

People are divided on crypto. The ones who have invested in them are either staunch proponents or dabblers, and the ones who haven’t are either uninterested or strongly against crypto as a concept.

The people who see crypto and DeFi as a shady realm full of scams where hackers are just waiting to rob you blind can’t be reasoned with. And that’s fine, to each their own. But for those who have stayed away from crypto because they can’t understand it, CBDCs will be very effective in introducing them to the concept of digital money. From there, it’s only a matter of time before they give crypto a try, simply because traditional finance today is in shambles, and it’s only getting worse.

Financial traditionalists love portraying DeFi as a house of cards delicately balanced on a high wire. But is it any different from traditional, centralized finance? We’re currently witnessing ridiculous worldwide inflation that’s causing strong currencies like the British Pound and the Euro to sink. Cost of living is on the rise, wages are stagnant, entire countries are going bankrupt, people are seeing banks freezing their savings, and global markets are in general chaos.

It is clear then that the current financial system is neither sustainable nor inclusive, seeing as how only the rich seem to escape market downturns unscathed. That’s where crypto comes in. DeFi is a new way of doing old things better. It does not discriminate based on net worth or nationality and it does not hide its dealings behind impenetrable walls. This is the main draw of crypto, not the promise of 100xing shitcoins to buy yellow Lambos.

It is not crypto that faces the biggest threat from CBDCs, but the traditional financial sector and economy at large. The World Bank issued a warning about the risks CBDCs pose to financial stability, stating that:

The introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity… and can have implications for the legal and regulatory framework.

These complications will arise in part due to the fact that CBDCs do away with the need for intermediaries in financial transactions, thus greatly reducing the role private banks play in the financial sector. Additionally, if most people decide to hold CBDC instead of depositing their money in bank accounts, it would make traditional loans far more expensive and have a strong adverse effect on the economy.

There is also the risk of inflation, since governments will be able to flood the market with new money far more easily when it’s digital and not cash. It will be a difficult task to incorporate CBDCs into current monetary policies, which will require a re-writing of the framework.

Also, the fact that most, if not all, CBDCs will run on centralized databases poses a massive security risk. A central repository containing swathes of personal and financial information is at a high risk of being hacked, both from unscrupulous individuals and from other nations who would like to destabilize the country in question.

There’s no doubt that CBDCs pose a threat to crypto, but their threat to economies is greater. And with growing global discontent with traditional financial models, CBDCs might just be the first step needed to transform the majority of people from crypto naysayers to native users.

The benefits of crypto are similar to those offered by cold, hard cash: anonymity and permissionlessness. Unless CBDCs function exactly like cash, which they won’t, people will eventually realize the worth of crypto, and the decentralized finance sector will undoubtedly grow.

The world’s governments are not happy with crypto. Seeing as how its permissionless, trustless and decentralized nature is anathema to the highly regulated traditional financial sector, most state authorities have dismissed cryptocurrencies as not being either commodities or currencies, since they have no intrinsic value and aren’t backed by collateral (with the exception of stablecoins).

But with the evolution of DeFi (decentralized finance) and the growing mass adoption of crypto the world over, many governments are recognizing the potential, and risks, of this new digital money.

The proliferation of cryptocurrencies has had a slight negative effect on fiat currencies due to the transfer of value from the latter to the former. Worried by the risk crypto poses to their economies, a few countries have straight up banned their citizens from dealing in non-fiat money.

On the other hand, a few countries whose economies are spiralling under the the burdens of debt and inflation have turned to crypto as their saviour. One of them is El Salvador, which made headlines last year when it became the first country to accept Bitcoin as legal tender.

A third group of countries, however, have been exploring a foray into the world of crypto through the introduction Central Bank Digital Currencies or CBDCs.

CBDCs are legal tender issued by a central bank in digital form.

A CBDC is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. It should be noted that most of the countries researching CBDCS aren’t crypto proponents (a lot of them are actively hindering crypto adoption); they have merely recognized the potential of having digital currencies that can be used to quickly settle payments without intermediaries.

Nigeria and several Caribbean countries have already launched CBDCs, China, South Korea and a few others are in the pilot stage. Numerous others, including Brazil, India, Australia and Japan are in the development phase of their CBDC issuance plan.

It’s not hard to see why. A well-implemented digital currency would enable faster, safer and cheaper payments, both within the country’s borders and without. It would grant households and businesses access to money that is mostly free of high credit or liquidity risks, thus bolstering innovation and fostering financial inclusion. There are inherent risks in a digital form of fiat currency, but we’ll get to that in a little while.

The fact that many countries are either launching or planning to launch CBDCs is causing apprehension in the crypto world. There is a fear that the proliferation of CBDCs will empower regulatory authorities and reduce the demand for legit crypto currencies like BTC and ETH.* *It takes a rather long leap of logic to come to this conclusion.

Consider how for a moment useful the dollar-pegged stablecoins are. People use USDC and USDT to avoid losses during market fluctuations, to trade between tokens on non-compatible blockchains, and to invest in liquidity pools.

Would it matter if this stablecoin is issued by a private entity or a public one?

As long as the issuer is guaranteeing that the money has worth, it’s not really an issue. Take USDC for example. Sure, they’re a private entity, but since they’re registered in the US, they’re subject to the country’s rules and regulations.

When the US Treasury sanctioned Tornado Cash, an open-source smart contract on Ethereum, USDC’s parent firm Circle was quick to freeze all USDC on the contract and stopped linked addresses from using their stablecoin. Despite being a private firm, they followed the government’s instructions quickly and to the T, just as how a state-backed digital currency would.

Also, the countries that want to restrict or ban crypto are already doing it, even if they are exploring the launch of their own CBDC. Take India, for example. Its central bank, the Reserve Bank of India, has only recently begun researching and exploring the idea of launching a digital rupee.

For a long while though, India has made it annoyingly difficult for retail investors and companies to get into the crypto space thanks to their convoluted financial rules and blatant refusal to clarify regulations around cryptocurrencies. Despite this, the nation ranks among the top countries by crypto adoption with over 27 million users. However, this accounts for only around 2% of the population, which brings us to the next point.

People are divided on crypto. The ones who have invested in them are either staunch proponents or dabblers, and the ones who haven’t are either uninterested or strongly against crypto as a concept.

The people who see crypto and DeFi as a shady realm full of scams where hackers are just waiting to rob you blind can’t be reasoned with. And that’s fine, to each their own. But for those who have stayed away from crypto because they can’t understand it, CBDCs will be very effective in introducing them to the concept of digital money. From there, it’s only a matter of time before they give crypto a try, simply because traditional finance today is in shambles, and it’s only getting worse.

Financial traditionalists love portraying DeFi as a house of cards delicately balanced on a high wire. But is it any different from traditional, centralized finance? We’re currently witnessing ridiculous worldwide inflation that’s causing strong currencies like the British Pound and the Euro to sink. Cost of living is on the rise, wages are stagnant, entire countries are going bankrupt, people are seeing banks freezing their savings, and global markets are in general chaos.

It is clear then that the current financial system is neither sustainable nor inclusive, seeing as how only the rich seem to escape market downturns unscathed. That’s where crypto comes in. DeFi is a new way of doing old things better. It does not discriminate based on net worth or nationality and it does not hide its dealings behind impenetrable walls. This is the main draw of crypto, not the promise of 100xing shitcoins to buy yellow Lambos.

It is not crypto that faces the biggest threat from CBDCs, but the traditional financial sector and economy at large. The World Bank issued a warning about the risks CBDCs pose to financial stability, stating that:

The introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity… and can have implications for the legal and regulatory framework.

These complications will arise in part due to the fact that CBDCs do away with the need for intermediaries in financial transactions, thus greatly reducing the role private banks play in the financial sector. Additionally, if most people decide to hold CBDC instead of depositing their money in bank accounts, it would make traditional loans far more expensive and have a strong adverse effect on the economy.

There is also the risk of inflation, since governments will be able to flood the market with new money far more easily when it’s digital and not cash. It will be a difficult task to incorporate CBDCs into current monetary policies, which will require a re-writing of the framework.

Also, the fact that most, if not all, CBDCs will run on centralized databases poses a massive security risk. A central repository containing swathes of personal and financial information is at a high risk of being hacked, both from unscrupulous individuals and from other nations who would like to destabilize the country in question.

There’s no doubt that CBDCs pose a threat to crypto, but their threat to economies is greater. And with growing global discontent with traditional financial models, CBDCs might just be the first step needed to transform the majority of people from crypto naysayers to native users.

The benefits of crypto are similar to those offered by cold, hard cash: anonymity and permissionlessness. Unless CBDCs function exactly like cash, which they won’t, people will eventually realize the worth of crypto, and the decentralized finance sector will undoubtedly grow.