Have you heard the latest stories with CBDCs (Central Bank Digital Currencies)? China has officially launched and has trialed its digital yuan in some regions. Huawei has even claimed that its Mate40 series smartphone will feature a hardware wallet for the digital yuan. This is big news for those who are waiting for digital currency’s adoption despite the fact that they are anti-thesis of public cryptocurrencies due to their centralized nature.
But whatever your opinion about digital yuan is, we all know this would push competition among countries to reveal their own digital currencies as well as private blockchain mechanism to support these digital currencies. In this article, we will try to peek into the future and see the possible What If scenarios that can play out for CBDCs and their impact on public cryptocurrencies.
Scenario 1: CBDCs Will Have A Bridge Through Public Blockchain
This is perhaps one of the more likely scenarios that could play out. As we all know, most CBDCs are still backed by centralized servers that perhaps try to mimic blockchain technology with multiple servers shared among governmental institutions or banks. But, how do they connect to the outside world? This is one of the most important questions as everything is connected nowadays.
For sure there has to be a way for foreigners and the outside world to be able to interact with digital currencies of certain countries. What they might do is to have a cross-chain capability just like how tokenized Bitcoins work in Ethereum (look at wBTC). This bridge from one country’s private blockchain to another would use a public blockchain due to its neutrality. It’s very possible when you think about it. The only question is, which public blockchain it would be? Stellar? Ethereum? EOS? Or just something new, built by the UN or something? Interesting to see!
Scenario 2: Certain CBDCs To Flourish, Others Will Use The Same Blockchains, and Public Crypto Will Be Limited
This is also a likely scenario despite the fact that I don’t think it will happen. As you know, many government institutions like to sing the same song “blockchain, not bitcoin” which indicates that they welcome the blockchain technology but they put down Bitcoin and other cryptocurrencies. They believe something like stablecoins can be adopted by the governments but not something with speculative value like Bitcoin or Ether.
In this scenario, I believe certain CBDCs (i.e., digital yuan or digital euro) will flourish and might even force their trading partners to use the same wallet app, the same blockchain system, and the same digital currency. For example, right now China has forced some of its trading partners (who happen to be developing countries) to completely bypass the US Dollar and use Yuan for import/export. You can easily see that they probably would do the same to those countries with digital yuan and force them to participate in the same blockchain system.
It will be interesting to see many countries supporting the blockchain mechanism of one country’s CBDC, and issue their own CBDCs inside one same private blockchain system. Interesting but dangerous, really, as it will centralize everything. And I can already foresee in this case public cryptocurrencies would be much more regulated (or even banned), as governments would attempt to seek even larger control and dominance.
Scenario 3: CBDCs Will Help Public Crypto Adoption
For some reasons, I actually believe this is the least possible scenario out of the 3, but it can still happen. Many crypto optimists actually believe this scenario number 3 would be the most realistic future. They think casual users getting exposed to CBDCs will actually help crypto adoption as the same users would start feeling curious about other cryptocurrencies like Bitcoin and others.
But I am not convinced about it. The reason? Because CBDCs would not utilize any public blockchain. And even though there’s a possibility that it will use a public blockchain as a bridge (like scenario 1 above) , its native existence will be contained in its own centralized ecosystem. So, if a digital euro is massively forced on EU citizens, the same EU citizens might not be interested to learn about public cryptocurrencies. Just like exposing your kids to Windows doesn’t make them suddenly interested to learn Ubuntu or other Linux distributions.
However, of course, you don’t need 100% of these CBDC users to be interested to invest or trade BTC. Just a few percent of these new users would still be able to help massive adoption of public cryptocurrencies.