Does the Rise of CBDCs, Digital Crypto, and other Innovations Pose a Threat to the Dollar? [Part 1]

Many countries are actively developing CBDC, as Crypto gaining more and more influential value in the global economy. Does it have enough power to overthrow the Dollar?

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Bitcoin has been championed as a store of value that can be used to hedge against inflation or the debasement of fiat currencies like the dollar. Some have touted it as “digital gold.” Bitcoin and other cryptocurrencies also present themselves as a way to buy goods and services like actual money in a decentralized manner, away from the centralization of the government.

Ethereum, the second most popular cryptocurrency after Bitcoin, has even more uses as it is built to be a decentralized computing network. Many smaller cryptocurrencies are using Ethereum’s network to further disrupt the crypto industry. All transactions are decentralized and public ledger that is verified and recorded on the blockchain. This means that it is not managed by any centralized entity; instead, all investors have identical copies of the public ledgers, letting them see all past transactions. This means government involvement will be limited; more regulations may take place in the future; however, the government will not be involved in the printing, distribution, or control of money, giving the power back to the people.

To regain some sense of control over the digital asset market, the United States and many other nations are developing their own central bank digital currency. This could potentially increase payment efficiency and lower transaction costs. However, CBDCs are the opposite of other cryptocurrencies because it is centralized, issued, and regulated by the government. This could potentially have a more significant impact on USD because CBDCs are backed by the full faith and credit of a centralized government, providing less volatility to its currency. This currency will be used less as an asset for the typical investor but more as a store of value and a medium of exchange between multiple parties as long as it is able to hold its value with as much stability as the U.S. dollar currently holds.

CBDCs and cryptocurrencies like Bitcoin and Ethereum will become increasingly relevant as means of payment and as an alternative asset; however, the consensus is that they are unlikely to displace the US dollar. For Bitcoin to be considered fiat, a viable legal tender, it should, at a minimum, be useful as a medium of exchange (i.e. a means of payment), store of value (i.e. the value of Bitcoin should hold its value over time) and unit of account. Although Bitcoin is increasingly used as a medium of exchange, it is highly debatable whether it will ever function strongly enough as a store of value and unit of account given its highly volatile nature. Stability is needed to be used as a daily currency or even as a tender for international trade. Because Bitcoin and other cryptocurrencies are not backed by any physical assets, we may never see proper stability like we do with the U.S. dollar. On top of that, Bitcoin also faces stiff competition from central banks and countries that would be highly reluctant to forgo their dominant positions as issuers of fiat money. For those reasons, Bitcoin and other cryptocurrencies will most likely never pose a true threat to the dollar.