The advantages of Bitcoin over CBDCs: A comparative analysis

We hear more talks around CBDCs... Are they really better than Bitcoin? Or there is something behind the curtains? Find out.

The flagship cryptocurrency Bitcoin was created over a decade ago and while there have been numerous innovations in the industry since then, BTC’s value is still superior to that of every other cryptocurrency.

Aside from many altcoin projects, that are trying to solve different problems using blockchain technology (some are successful, some are reinventing the hot water), recently a new term has evolved in the crypto space – central bank digital currencies (CBDC). These CBDCs are digital currencies issued by central banks that are meant to circulate alongside physical notes and coins, effectively making them digital versions of a country’s fiat currency.

CBDCs take advantage of blockchain technology or other types of ledgers and keep everything centralized. Some consider not even using distributed ledgers over potential efficiency losses associated with the technology, while users rely on them.

Bitcoin’s creation came in response to a financial crisis started by flaws associated with fiat currencies. CBDCs, being a digital version of these fiat currencies, keep those flaws while trying to improve some aspects of their predecessors.

Why BTC beats CBDCs?

As a digital version of fiat currencies, CBDCs will have the supply the central banks behind them determine they should have, meaning they are as susceptible to inflation as traditional fiat currencies. Bitcoin, on the other hand, is limited to 21 million coins and cannot be debased. The only way to change this limit would be for every network participant to agree to do so.

CBDCs are, as mentioned above, based on centralized platforms which are single points of failure. Bitcoin enforces rules even without rulers and does not have a single point of failure: when China cracked down on it, it barely budged.

The monetary policy behind CBDCs is opaque and determined by central banks, who often mismanage the economy through variable rules. Bitcoin’s monetary policy, on the other hand, is determined by math and set by the protocol, which once again can only be changed if every network participant agrees.

Policymakers determine who can and cannot use CBDCs, just like they determine who can and cannot use fiat currencies. Anyone with an internet connection can create a Bitcoin wallet and offer goods and services in exchange for BTC. The network is open and can be freely used.

Bitcoin vs. CBDCs on ownership

A major flaw associated with fiat currencies that remains in CBDCs is the risk of seizure. Policymakers can take advantage of their centralized control over a currency to seize funds and block parties from accessing their financial system.

This allows central banks to censor transactions for entities who may not be doing anything wrong, other than acting against the best interest of the central bank itself, for example. Bitcoin, on the other hand, cannot be seized nor can the blockchain be controlled to freeze someone’s funds.

Transactions on the Bitcoin blockchain are pseudonymous and only appear on a public ledger through a public wallet address with no individually identifiable information linked to identities. CBDCs, on the other hand, force financial surveillance over people, which can be used to create social credit systems.

Crypto academic Andreas Antonopoulos explained how CBDCs and fiat currencies can be abused as systems of control, and how BTC counters that system.

As CBDCs can be used as a system of control, the central banks behind them can exert their influence and control over specific entities to restrict their access, levy taxes on them, or reserve their transactions when they wish to do so.

Bitcoin is censorship-resistant and trustless, as no entity can alter the state of the blockchain on its own. Dissidents, as a result, do not have to fear financial prosecution if they are using the Bitcoin network, as transactions cannot be edited or reversed, nor can they be censored.

Governments are slowly losing their power in controlling the masses, and the first cryptocurrency ever invented enables that. It is normal for them to try to restore that power by every possible means, one of which is centralized currency, that by many respective opinions doesn’t bring anything new nor better, compared to Bitcoin. In the end, it is on regular users to decide what to use: open, truly decentralized, permission less network and its currency, or their fake copies.

If you want to explore more about why Bitcoin is better, check this article.