By Roshan Aslam
The world today wherever you go is talking about digital currency, its features, benefits, the different kinds that are available for investment for customers, etc. There are many schools of thought that say one kind is better than another or one coin will fetch more returns than the next. In the middle of all this, the government is trying to figure out regulations to monitor and regulate the exploding investment into the mining, trading and transacting using cryptocurrency while also making people aware of the potential pitfalls of investing in digital currency. In short, there is a plethora of information available for investors which sometimes only tends to confuse the issue even more.
Governments across the world know that that there are in for a battle when it comes to people turning more towards cryptocurrencies instead of the age-old and secure legal tender that countries have used since being founded. However, as the world becomes more tech-savvy and digital, digital currencies with their inherent features can no longer be a second choice. As the saying goes, if you can’t beat them, join them. This is exactly what central banks globally have decided to do with the launch of Central Bank Digital Currencies (CBDC).
In June 2023, India too announced the launch of the pilot of its very own CBDC, the ‘Digital Rupee’ joining other nations like the US, Australia, and China. The Government positioned the Digital Rupee as a transformative catalyst that will lead to more financial inclusion and safety for citizens when conducting transactions. Like all cryptocurrencies, CBDCs are founded and function on the bedrock of blockchain technology and use decentralized and encrypted checks and balance to record transactions and protect investors from fraud and cyberthefts. The Government of India is positioning CBDCs as means to promote financial inclusion by bringing more people into the new-age digital economy. This leaves investors in a conundrum confused whether they should invest in cryptocurrencies that are offering significantly more returns albeit fraught with as high a risk or should they opt for the safe route and invest in CBDCs?
While on the surface, it may seem that the logical and safer option is to invest in CBDCs but it may not be the best option. Lets look a little deeper into some key differences and the answer will become clearer. Cryptocurrencies of any kind especially Bitcoin are decentralized in nature and lack the censorship that comes with government controlled CBDCs. The value of a Bitcoin is determined by market trends and basic economic principles of demand and limited supply cap of only 21 million coins globally. CBDCs on the other hand are dependent on the policies of the central monetary authorities of countries resulting in them being controlled by a single entity. This also makes CBDCs vulnerable to inflationary conditions as the supply is not fixed and can be increased as per the discretion of the Central Bank.
A key discussion point however revolves around safety and security while transacting using Bitcoin or CBDCs. While transacting in Bitcoin, investors enjoy greater privacy than in the case of CBDCs as the transactions are pseudonymous. In the case of CBDCs, investors are subject to compliance measures and need permissions to engage in transactions which takes away the control and freedom of investors. Bitcoin and other cryptocurrencies are a lightning quick, efficient and cheaper way of conducting financial transactions whereas CBDCs due to being controlled and subjected to bureaucratic processes are much slower and a lot more complex in nature. This may become contrary to its primary objective and drive potential investors towards Bitcoin.
The advantages of Bitcoin are there for all to see and can in no way be refuted. However, there are investors who prefer the control and transparency that are linked to CBDCs over that of the anonymity of the Bitcoin. With more than 130 countries exploring pilots in various advanced stages of development, testing or launch of their own CBDCs, it is plain to see that Governments across the world have taken the rapid explosion of Bitcoin and other cryptos very seriously to prevent the instability of the central currencies or legal tender of their economies. Less than a month ago, blockchain analytics platform Chainalysis released its 2023 Global Crypto Adoption Index report which showed India ranking first in terms of grassroots cryptocurrency adoption.
Despite all the attempts of the Government of India, its challenging tax and regulatory regime, India’s rate of adoption of Bitcoin and other cryptocurrencies had skyrocketed. The raw estimated crypto value received in the year between July 2022 and June 2023 in India alone stood at $250 billion. Both Bitcoin and CBDCs are digital currencies however investing in Bitcoin over CBDCs reveals more pros than cons due to its inherent features of decentralization, privacy, financial inclusion and innovation. This has convinced investors to believe Bitcoin and other cryptocurrencies are a more powerful alternative to CBDCs and traditional currencies.
The debate on Bitcoin against CBDCs is not one that is about to abate any time soon. However, the way things stand today, Bitcoin and cryptocurrencies are supported by a global network of traders and miners whereas CBDCs are still nothing more than pilots and are still nothing more than an idea or concept that is undergoing various levels of research and development. Therefore, it is critical for investors looking to invest their hard earned money into digital currency of any kind to stay on top of this rapidly changing world and monitor the impact of both Bitcoin and CBDCs on their personal investment strategies.
The author is co-founder and CEO, GoSats
