Bitcoin seems to be the most exciting invention of modern times, and it has changed our concept of money. Today, the crypto sector is gaining more and more attention, and Grapherex can vouch for this as a WEB 3.0 financial ecosystem. Of course, the role of central banks in the modern economy is still huge; however, many experts argue that cryptocurrencies can duplicate or even modernise all the functions that the central bank has.
The launch of Central Bank Digital Currencies, known as CBDC, is the first attempt made by policymakers to address the concept of digital money. Many government organisations across the globe have begun exploring ways to digitalise money and make it more secure. In this article, we’ll discuss the features of central banks and their CBDCs in comparison with the features of open unrestricted cryptocurrencies like Bitcoin.
Functions of a Central Bank
First and foremost, we need to understand how a central bank works. Central banks control the banking and monetary systems of their regions. These can be either in the form of individual countries or currency zones. For example, the Bank of England controls the turnover of the pound, and the European Central Bank (ECB) controls the European monetary system.
In addition to ensuring price stability and controlling cash flows, the central bank determines the rules governing the other national banks. Also, the central bank is a lender to banks and other financial institutions, providing them with liquidity.
Other functions include:
- Setting monetary policies;
- Maintaining statistics;
- Ensuring financial stability;
- Making some payments;
- Issue of banknotes;
- Control of government securities;
- Involvement in international affairs;
- Preservation of foreign exchange reserves;
- Foreign currency transactions.
Crypto vs Banks
Bitcoin has technical characteristics that enhance many fundamental functions of money, while traditional fiat currencies cannot show the same. Bitcoin is a technology that helps users to make payments instantly anywhere in the world where the internet is available. It boasts transparency, anonymity, and accessibility. Let’s dive into the Bitcoin vs banks comparison.
Regulations. Bitcoin does not have a central regulatory authority, but there are network rules, open-source code and many nodes and validators that prohibit malicious transactions. Banking procedures ensure the protection of users through AML/KYC procedures, while Bitcoin owners operate in a transparent and unrestricted network.
Stability. Central banks attempt to achieve financial stability through their policies, while Bitcoin provides a programmable monetary policy.
Infrastructure. A central bank can print money indefinitely, which affects the exchange rate, while Bitcoin miners are rewarded for creating a block on the network according to the algorithm. Block rewards increase the supply of currency on the market, but it takes more effort and a longer time to build each subsequent block, which prevents inflation.
Accessibility. Bitcoin holders do not need bank authorisation, and Bitcoin transfers are unlimited and global. Both are regulated: the activities of central banks depend on payment systems, and Bitcoin complies with the rules of the network, but crypto is much easier to access.
Bitcoin vs CBDCs
Initially, central banks saw cryptocurrency as a suspicious uncontrolled black market, but the hype around crypto forced policymakers to reconsider their position. Many still doubt the reliability of digital assets, but they cannot ignore the opportunities that cryptography opens up.
According to a study by the Bank for International Settlements, 9 out of 10 central banks globally are studying CBDC – Central Bank Digital Currencies. Results of the research showed that national digital currencies have every chance of becoming the basis of monetary systems of the future; however, the regulators highlighted that cryptocurrencies are struggling with their shortcomings and fraud. You can read more about global crypto regulation in our blog.
CBDCs can act as payment and settlement tokens and reduce the dependence of central banks on cash. Retail CBDCs perform the same role for the public as central bank money. This is a legal tender and a means of payment linked to the corresponding fiat currency. Wholesale CBDCs increase settlement efficiency by replacing or co-existing with central bank reserves. They can eliminate intermediaries associated with an expensive debit and credit card system.
The experts at Grapherex claim that CBDCs can really improve financial infrastructure and money transfers and reduce costs and transaction times. But, in fact, the majority of issues have already been addressed by Bitcoin in an even more transparent and efficient way! It seems that banks make people believe that they are accepting a regulated and secure version of cryptocurrency. This is indeed a way to digitise the economy, but the benefits of transparency are lost.