As the world moves towards a more digital and cashless society, governments and central banks are exploring the idea of issuing Central Bank Digital Currencies (CBDCs) to replace physical cash.
However, despite the potential benefits that CBDCs may offer, such as faster transactions and increased financial inclusion, many people are still not convinced that CBDCs are the way to go. Instead, a growing number of individuals are turning to Bitcoin (BTC) as their preferred digital currency.
There are several reasons why people are gravitating towards Bitcoin over CBDCs, and why Bitcoin is a better choice for those seeking a decentralized and secure financial system. But before we go deeper into that, let's see what's the deal with CBDCs.
Keeping Complete Control
A Central Bank Digital Currency (CBDC) is the digital form of a national fiat currency issued and backed by central banks. They are intended to function like traditional currencies, providing a secure and convenient means of making digital payments and storing value.
CBDCs can be issued in different forms, including retail CBDCs and wholesale CBDCs. Retail CBDCs are designed for use by the general public, while wholesale CBDCs are intended for use by financial institutions and other large entities for settlement purposes. The precise form and design of CBDCs can vary depending on the country and the central bank issuing them.
The impetus for a more radical shift comes from China, whose central bank has already begun testing and implementing digital yuan, which it envisions as cash for the future, eventually eliminating the need for paper currency.
However, unlike Bitcoin, which operates on decentralized blockchain networks and is not controlled by any central authority, CBDCs are designed to be centralized and controlled by central banks.
So, while Bitcoin pushes for the ideals of decentralization, a CBDC is designed to keep a very large amount of governance within a government. The efforts to develop CBDCs are motivated, in part, by the national government's desire to replace cryptocurrencies with a form of virtual money that would be designed to fit within existing financial systems and regulations.
And the holder of all cash, and clearer of all transactions, would now be the central bank. No need would exist for digital cash into which it could be converted, as the unit of CBDC is in and of itself a direct liability of the central bank, exactly equal to paper cash, not just converted to it, making paper money unnecessary.
CBDCs Raise Critical Concerns
Given that CBDCs use digital ledger technology, they have the potential to offer many benefits, such as faster and cheaper transactions. However, they are raising many concerns around surveillance and privacy. Centralization is just one of the reasons why people are afraid of using CBDCs.
We can already see several instances where governments have misused their power with regard to giving access to the financial system or limiting fiat usage to certain groups. In many countries, certain groups of people are excluded from accessing financial services due to factors such as lack of identification documents or low income. This results in financial exclusion and makes it difficult for these individuals to participate in the economy.
Besides misusing its power to limit financial system access, governments impose economic sanctions on certain countries or individuals. This results in individuals being cut off from the financial system and being unable to access their funds.
In some countries, the government even imposes currency controls limiting the amount of fiat currency individuals and businesses can withdraw or transfer. This can have a negative impact on economic growth and limit the ability of individuals and businesses to conduct transactions.
More than that, governments have, in many cases, seized funds from individuals or businesses for various reasons, such as for tax evasion or suspected criminal activity. In many cases, this form of government power misuse is done without due process or without proper justification.
With CBDCs in complete control of central banks, it makes sense that people are concerned that centralization could lead to abuse of power, as well as issues with corruption and transparency.
There are also concerns that CBDCs could give the government too much power to monitor and control financial transactions. Because CBDCs are digital, it would be easier for central banks to track and monitor spending than with physical currency. This could potentially lead to a loss of privacy and could be used for surveillance purposes.
On top of it all, they lack anonymity. To make it easier for governments to track and monitor spending, CBDCs are being designed in such a way that they do not allow for anonymous transactions, as such, compromise citizens' privacy.
Bitcoin: A Potentially Better Alternative
Bitcoin is the largest cryptocurrency created in 2008 after the financial crisis, a global economic downturn that led to a loss of confidence in traditional financial institutions and government-backed currencies. The crisis exposed the flaws of the centralized financial system and highlighted the need for a decentralized and secure alternative.
An unknown person or group of people using the pseudonym Satoshi Nakamoto created a decentralized digital currency that operates without a central authority or intermediary.
Being decentralized means Bitcoin is less susceptible to government intervention or censorship, which is a major concern with CBDCs. Also, Bitcoin transactions can be made anonymously, which provides greater privacy and security than CBDCs. While CBDCs could be designed to allow for anonymous transactions, it is unlikely that governments would allow this given their concerns around financial crime and terrorism.
Additionally, Bitcoin is already widely accepted as a form of payment by merchants and individuals worldwide, which means that it has a head start over CBDCs in terms of adoption. While CBDCs may be more convenient for certain transactions within a country, they may not be as well-received globally.
However, Bitcoin is not without flaws, as can be seen in its low transaction per second (TPS) and high cost. But the Lightning Network (LN) has been introduced to address these exact issues. It is a layer-2 protocol that enables faster, cheaper, and more private Bitcoin transactions.
The Lightning Network creates a network of payment channels between users, which are used to conduct off-chain transactions. These payment channels are created by locking a certain amount of Bitcoin into a multi-signature address that both parties can access. Once the channel is established, the two parties can conduct unlimited transactions without broadcasting them to the blockchain.
By allowing for near-instant transactions with negligible fees, as transactions are conducted off-chain, and only the final result is settled on the blockchain, LN makes it possible to conduct micropayments and other transactions that would be impractical or expensive on the Bitcoin blockchain.
Nigerian ‘eNaira' basically a failure at this point
The lack of trust and adoption in CBDCs can already be seen in Nigeria, where the government introduced eNaira in October 2021 to promote financial inclusion and reduce reliance on physical cash. However, despite the persisting issues with paper money, eNaira has failed to gain much uptake so far.
For starters, there is a lack of awareness. Many Nigerians are not aware of the eNaira and how it works. The government has not done enough to promote eNaira and educate people about its benefits and how to use it. This has led to a lack of trust and confidence in digital currency.
Digital fiat currency is not widely accepted by merchants and businesses in Nigeria either. This makes it difficult for people to use it for everyday transactions, which reduces its appeal as a form of digital currency.
But on top of it all, trust issues regarding the CBDC are paramount. There are concerns about the security and privacy of the eNaira, and whether it could be subject to government surveillance or cyber-attacks. This has led to many Nigerians lacking trust in digital currency.
Nigeria has faced significant economic instability in recent years, including high inflation rates and a devaluation of the national currency. This has led many people to prefer holding physical cash or other assets as a store of value rather than the eNaira.
Nigerians Have a Strong Preference for Bitcoin
While CBDC is not popular in Nigeria, Bitcoin clearly has gained traction in this African country. The recent economic cash crisis in Nigeria, in particular, has enhanced Bitcoin's preference for the citizens, where it is largely used as a financial safe haven.
This crisis was caused by the naira redesign in Nov. 2022, political climate, and economic conditions. Currently, the country is facing record-high inflation at ~21% and a cash shortage of the newly redesigned naira notes. But this wasn't all. The central bank (CBN) then announced a policy on weekly cash withdrawal limits, which currently places a weekly withdrawal limit of ₦500,000 (~$667) for individuals.
The CBN's move to a cashless society which includes the introduction of the eNaira CBDC, is drawing criticism for its potential to be used to clamp down on freedoms through intrusive surveillance programs.
Amidst economic struggles, Nigerians have increasingly turned to cryptocurrencies, particularly Bitcoin, to safeguard against inflation and bypass the constraints on naira transactions in online payments. As a result, Nigeria ranked 11th on the Chainalysis 2022 Global Crypto Adoption Index and 17th for P2P exchange trade volume.
The issue of limited access to global financial rails has also long plagued Nigeria, as they are frequently blacklisted due to geopolitical priorities beyond their control. In contrast, bitcoin offers a global option without arbitrary exclusions based on geography or class.
With Africa receiving $49 billion in global remittances, many Nigerians have turned to bitcoin for sending and receiving payments. This popularity led to Sub-saharan Africa recording $100 billion in on-chain cryptocurrency volume in 2022, a 16% increase from the previous year, which is expected to rise even more in 2023 after the recent naira redesign crisis.
According to the World Bank, over 55% of African adults are unbanked as of 2021, relying primarily on cash for transactions and wealth preservation. The naira redesign has further negatively affected the unbanked population.
Through all of these struggles, bitcoin provides an alternative that preserves economic autonomy and grants access to a global monetary network. Integrating bitcoin's Lightning Network in consumer applications has made it easier for Nigerians to transact money locally and globally.
Another Instance: Hong Kong Ignores eCNY, Adopts Crypto
The reluctance towards CBDCs and preference for Bitcoin is not only evident in Nigeria but also in Hong Kong, where the government's efforts to promote the “digital yuan” or e-CNY have not garnered much support.
Only 625 residents obtained the e-CNY hard wallets in the first four days after their release, despite the government's subsidized 20% discount on purchases from local vendors.
Despite this, local authorities still aim to promote the digital yuan as part of their greater political mission to integrate Hong Kong into the Guangdong-Hong Kong-Macao Greater Bay Area.
The slow adoption of e-CNY is also apparent in China, with cumulative transactions crossing only 100 billion yuan ($14 billion) two years after its introduction to the market. In an attempt to boost adoption, cities gave away over 180 million yuan ($26.5 million) worth of the CBDC in subsidies and consumption coupons during the Lunar New Year period in February 2023.
While the CBDC is struggling to gain traction, not only are people tuning to digital assets, but even authorities are working on crypto-friendly regulations, with Hong Kong taking steps to support the development of blockchain and digital currencies.
Hong Kong's Securities and Futures Commission (SFC) has proposed new crypto regulations, including the licensing of crypto-asset service platforms, with input sought on whether retail investors should also be allowed to participate. The government has also allocated HK$50 million (~$6.4 million) for investment in crypto asset development and education.
It is pretty clear that people are not embracing Central Bank Digital Currencies (CBDCs) as readily as some governments had hoped. The reasons for this vary, including concerns around privacy, surveillance, government control, technical issues, and limited adoption.
However, they are increasingly turning to Bitcoin (BTC) as an alternative to traditional currencies and CBDCs. Bitcoin offers a decentralized and open-source alternative to government-controlled currencies, providing users with greater privacy and control over their funds.
As the world becomes more digital and people demand greater financial freedom and privacy, Bitcoin will likely continue to grow in popularity. Governments may try to promote their own digital currencies, but it is unlikely that they will be able to match the trust and adoption that Bitcoin has already achieved.
This shows that the future of money may not lie in CBDCs, but in decentralized digital currencies like Bitcoin that provide users with greater financial sovereignty and control.