Can CBDC Reduce the Dominance of Crypto?

Can Central Bank Digital Currency reduce the dominance of crypto? Over the years cryptocurrencies have gained immense popularity and its use cases now are much more than simple trading and transfer of funds.

With its useful features like immutable records, relatively faster fund transfer, safety, security, and transparency, it has surely proved its dominance and has even disrupted the current financial system.

Quite a few people even believe that the unique blockchain technology underlying crypto and its functionality has the ability to replace the central banks and take over the economy.

Therefore, it is natural that the governments started to worry about such dominance of crypto and feared that it would put an end to the reign of the central banks, a tool that the governments as well as the entire economy of the country heavily rely on.

In order to prevent it and a topsy-turvy in the financial mechanism, the central banks all over the world started to contemplate on ways to stop the dominance of crypto.

The dominance of crypto is so much that even the former managing director of the IMF or International Monetary Fund, Christine Lagarde, talked publicly about the pros and cons of the idea of creating a digital currency issued and backed by the central banks.

As a result, discussion on the idea of creating their own digital currencies began all over the world.

The Central Bank Digital Currencies or CBDCs have been launched in more than a couple of countries and more are either in the development or research stage and are slated to come up soon.

Can Central Bank Digital Currency Reduce the Dominance of Crypto?

Can Central Bank Digital Currency Reduce the Dominance of Crypto

The worries, possibilities, and conversation about the potential of crypto are long past.

With its popularity, cash is being used less and less all over the world, and in some specific countries, such as Sweden and China, cash has nearly disappeared.

Add to that, the services offered by the commercial banks that were so attractive and useful alternatives before are being offered as efficiently, if not more, by several different digital payment systems all over the world.

Some of these useful and reliable digital payments systems are:

  • Venmo, PayPal, and more in the west
  • WeChat and Alipay in China
  • M-Pesa in Kenya
  • Paytm in India and lots more.

These are all useful fintech innovations but these still function in collusion with the traditional commercial banks to transfer money.

However, none of these digital payment systems depend on blockchain technology or cryptocurrencies.

This means that, the CBDCs, if ever issued, will similarly have nothing to do with the blockchain technology which is so hyped.

Now, the question is whether or not the Central Bank Digital Currency will really be able to reduce the dominance of crypto over time.

Most financial experts and critics support the idea of the central banks issuing their own digital currencies.

They believe that the CBDCs will be the right answer to crypto and will prove to be the best alternative to replace crypto and may even shut it down completely some day.

But, the problem could be the banking system itself that is so crisis prone.

Nevertheless, the crypto enthusiasts and fanatics consider this idea of creating CBDCs as a proof that crypto is so useful and powerful that even the central banks now need to enter the digital currency game and for that they need to use blockchain or crypto.

However, this is all nonsense. As said earlier, the CBDCs may not rely on blockchain or crypto at all.

If anything, the CBDCs will most probably replace the entire digital payment ecosystem irrespective of the fact that they are linked with the traditional bank accounts or crypto or not.

The CBDCs, if issued, will offer some significant benefits that may be lacking in or offered by crypto.

One of the significant benefits of CBDC is that it may allow people to use digital payment systems without needing to use bank accounts.

This means that the central banks would now have a low-cost alternative to cash to support a payment system nationwide, according to the IMF.

In addition to that, the CBDCs would also solve a lot of other problems. Some of the most significant ones are:

  • Create and provide support to a more resilient payments landscape
  • Help in avoiding the risks inherent in any new form of private money creation
  • Increase efficiency and innovation in transaction
  • Increase competition
  • Meet all payment needs of a digital economy in the future
  • Improve accessibility and usability of central-bank money
  • Address the cost of a decline in cash and
  • Enable better and faster cross-border payments.

Central banks are very hopeful about the prospects and usability of the CBDCs because the confluence of technology and evolution of new types of digital money will help in faster adoption of it on a large scale.

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Once these digital currencies supported by the central banks are established, it will encourage the major tech companies to build up excessive market power.

This will surely change the current payments landscape and in turn will also help in improving the functionality of it by a great deal.

In short, the CBDCs will help solve a lot of economic issues of the globe and will also ensure international security, both of which are found lacking in crypto as of now.

Therefore, with all these features, benefits, functionalities and usability, there is nothing in believing that the CBDCs can surely slacken the dominance of crypto as it is seen now, if not replace it completely down the road ahead.

Comparing the Issues

The reserves of the central banks are already held as digital currencies and it is the commercial banks that have access to their balance sheets.

It is for this reason the central banks can mediate interbank payments so efficiently and lend so cost-effectively.

All individuals, businesses and non-bank financial institutions have to rely on these licensed commercial banks to make transactions since they do not have access to such funds.

Not even the digital payment systems mentioned above can function without the help of the banking system.

Therefore, it is clear that all bank deposits are private money that is used to make transactions among the non-bank private entities.

On the other hand, crypto is considered as an alternative to paper money and is decentralized.

This is creating a lot of headaches for the central banks that may lose their control over the economy and money supply if crypto coins such as Bitcoin and stablecoins that maintain a steady value become the standard.

That is why the central banks decided to create a competitor for crypto, which they will control, in the form of the CBDCs.

These central bank-controlled digital currencies usually emulate the price of its physical counterpart.

For example, the value of e-Naira of Nigeria is the same as the value of the physical Naira.

This is where the stark difference between the CBDCs and the crypto lies.

Any crypto coin whose value is not tied with any fiat money such as Bitcoin and Ethereum is prone to wild price swings.

Also, when the individuals are allowed to make payments via central banks, the CBDCs would overturn this agreement by alleviating the requirement for cash.

It may even annul the need to use a digital payment service.

Most importantly, the CBDCs will not have to rely on the distributed ledgers like crypto needs to that are typically trustless and permission-less.

This is a significant issue while dealing with crypto among the users.

The fact that the CBDCs will already have a private, centralized and permissioned non-distributed ledger will offer the necessary safety and security while making payments seamlessly.

This will surely build a lot of trust among the users.

This is because no sane banker would want to leave a safe and sound payment system like this simply for one that is based on the blockchain technology.

Therefore, most people believe that if a CBDC is issued ultimately, it will surely displace the crypto coins for their inherent issues such as:

  • Low or no scalability
  • The cost factor
  • Its vulnerable security aspects and
  • Its decentralized nature.

Now, if you are a hard core crypto enthusiast, you may say that crypto will still stay and be favored by those people who want to remain anonymous while making a payment.

Well, in that case, it can be said that, just like it is with the private banks deposits today, the CBDC transactions that would be made tomorrow will also be made anonymously.

The information of the account holder will be accessible only by the law enforcement official as and when necessary as it is always the case with the private banks.

Okay, let that aside. Do you really think that crypto coins such as Bitcoin are really anonymous?

No, it is not, especially, given the fact that the crypto wallets used by the individuals and organizations typically leave a digital footprint.

This can be tracked by the authorities legitimately if they want to find the source and destination of funds used by terrorists and criminals.

Therefore, you cannot strongly and resolutely say that crypto offers complete privacy, which the CBDCs surely would.

It is for these reasons the CBDCs should be welcomed.

Add to that, a CBDC will prove to be a financial boon when payments will be transferred from private to central banks.

This is because, just like crypto, the CBDC based payment system, which can also be used via cell phones, will give access to a very strong and efficient payment system to those unbanked people all over the world who do not have access to a proper banking system.

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However, the CBDCs too come with some significant issues.

One of the most significant ones among them is that the CBDCs, when issued, will disrupt the existing fractional-reserve system.

This is practically a very useful system that allows the commercial banks to create money by lending them out to people more than the reserve they actually hold as liquid deposits.

Ideally, these deposits are essentially required by all of the commercial banks to make such loans to people as well as to make some investment decisions.

If all these banks move on to CDBCs then the jobs of the traditional banks will be reduced to only being a loanable funds intermediary.

This means that they will need to borrow funds for the long term in order to make long term loans like mortgages.

In other words, moving on to CBDCs would replace the fractional reserve banking system by a narrow banking system which will be typically and mostly overseen by the central banks.

Looking at the flipside of the coin, this may result in a financial revolution, particularly one that will offer more than one benefit to the central banks. Some of the benefits will be:

  • Being able to stop bank runs
  • Being in a much better position to manage credit bubbles
  • Being able to put off maturity mismatches and
  • Being able to control risky credit or lending decisions made by the private banks.

However, there are only a few countries as of now, 5 to be precise according to the last survey report of Atlantic Council, that have already launched their own CBDCs.

Others are still wary about the prospects of CBDCs. One of the primary reasons behind it, the experts believe, could be that they fear that it will mean a drastic disintermediation of the existing private banking sector.

This, they fear, will have a drastic effect in the economy, money management, and even in employment.

With respect to their fear and apprehension, they also have come up with a suitable alternative.

They suggest that the central banks give the commercial banks back the amount of money deposits that are moved into CBDCs.

They also say that, when and if the government is effectively the only provider and depositor of funds of all the banks then the risk of interference of the state when these banks make their lending decisions will be very clear.

When the commercial banks are given back their deposits, it will solve this significant issue, they say.

Therefore, comparing the issues, which both these systems have, it needs to be looked into seriously, and, in that case, the CBDCs stand a better chance to outsmart and outdo crypto and its dominance.

Private Public Relationship Benefits

However, the former managing director of the IMF or International Monetary Fund, Christine Lagarde seems to have a much better solution compared to the above – it is the private-public partnership between the private banks and the central banks.

She said at a Fintech Festival in Singapore that in this system the individuals will be able to hold their regular deposits with the financial institutions but all transactions they wish to make will then be made with digital currencies between the parties or the firms involved.

She added, the operational process of the system will be pretty much the same as it is today with the only difference that transactions will be made in a split second.

This type of private and public relationship with the banks and payment arrangement will offer a lot of other additional benefits as well, according to her, which include and are not limited to:

  • Safety in transfer of funds
  • Cost effectiveness and
  • Nearly anonymous transactions.

Most importantly, the central banks will be able to retain their control and a close supervision in payments.

Well, the financial experts and critics think that this is quite clever a compromise.

However, there are a few purists who still possess the opinion and argue that even such an arrangement will not resolve the issues with the existing fractional reserve banking system completely.

This is because they believe that there will still be some risks lurking in the form of maturity mismatches, bank runs, and credit bubbles.

All these, they suggest, will be fuelled by the money created by the private banks.

Apart from that, they think that there will still be the need for deposit insurance along with other types of support to the lender of the last resort.

These requirements will create a moral risk by itself.

In such situations, there can be a lot of issues which will then be required to be dealt with strict regulation and proper supervision by the banks.

Even then it may not be necessarily sufficient to put off banking crises completely in the future.

However, debates aside, it can be said that in due time the narrow banking system and the loanable funds intermediaries would be able to create a much better financial system that will be more stable than what it is as of now.

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Therefore, the world should remain quite open to the idea of issuing CBDCs since the other alternatives such as the fractional reserve system is prone to crises and crypto comes with perils of autocracy.

Use Cases

The entire world is not against the CBDCs.

There are lots of countries that have been using their own digital currencies already and there are a lot more who are contemplating on the same lines.

They believe that: if you cannot beat crypto, copy them to create a competitor or a substitute.

Therefore, if you are looking for use cases of CBDCs to console yourself and gain some confidence in you, then here are some of the countries that have either successfully launched their digital currencies or are trying to create their own and launch them soon.

These are in no particular order.

The Bahamas:

The digital currency of The Bahamas is called the Sand Dollar.

This currency features in this list because The Bahamas was the first country in the world to go ahead of trials and went on to launch their digital currency in October 2020.

The central bank of The Bahamas typically plans to do away with the use of checks by 2024 in the country.

This is because they believe that the Sand Dollar and the mobile wallet payments are better alternatives than checks for the consumers.


Making their debut with a digital currency e-Naira after three years of rigorous development, Nigeria is the latest country in this list.

As said earlier, the e-Naira has the same value as the physical Naira and the Governor of the Central Bank of Nigeria, Godwin Emefiele said that there are about 500 million of these digital tokens that have already been mined.

However, as of now, e-Naira can only be used by the bank account holders but the international fintech company Bitt that helped Nigeria with the launch of their digital currency is working on allowing other Nigerians who do not have any bank account to use this digital money.


China has always been the centre of attraction, discussion, and debate when it comes to digital currencies.

Whether it is banning crypto transactions from the country or creating their high-profile CBDCs, the central bank of China, the PBOC or the People’s Bank of China has always been in the talks.

However, the central bank of China has been trying to launch their Digital Yaun since 2014 and has been trying to boost its adoption by giving away tens of millions of the currency in provinces like Shanghai, Beijing and others.

Their Digital Yuan is now compatible with WeChat, the trendiest messaging app in China.


Even the island nations such as Antigua and Barbuda, Saint Kitts and Nevis, Grenada, Saint Lucia, Montserrat, and Dominica that operate the Eastern Caribbean Central Bank jointly have also launched their own digital currency, DCash.

This is a digital version of the Eastern Caribbean dollar and was actually developed by the central bank in partnership with Bitt.

This digital currency can be used by all people whether they have a bank account or not.

The best part is that the citizens of these island nations can make fast mobile payments in real time without needing to pay any fees for it.

There are lots of other use cases of the CBDCs that simply add to the fact that these digital currencies will take out the risks and costs that are implied in a traditional financial system.

It will also save billions of dollars spent annually by the central banks for its infrastructure maintenance and operation since people will no longer have to deposit physical cash to different branches of the commercial banks.

Add to that, banks will not be able to overextend the deposits of the customers which will significantly de-risk the entire finance system.

Most importantly, the CBDCs will offer a stiff competition to the cryptocurrencies which will, in turn, reduce its dominance.

The crypto, a few critics believe, may even get replaced by the digital currencies issued and controlled by the central banks.


Here are the nine countries that have created their own central bank digital currency, according to the Atlantic Council, a think tank that is focused on international security and global economic issues.