What is Bitcoin?

Bitcoin is a decentralised digital asset that operates on a peer-to-peer network. It was created in 2009 by an individual or group under the pseudonym Satoshi Nakamoto with the aim of providing an alternative to traditional financial systems. Bitcoin is built on a decentralised protocol that allows for the transfer of value without the need for intermediaries such as banks. The Bitcoin network is maintained by miners who use computational power to validate transactions, ensuring the integrity and security of the system.

Bitcoin is designed to be scarce, with a total supply capped at 21 million. This scarcity, combined with its decentralisation, makes Bitcoin a unique asset that is not subject to central control or inflationary pressures typically associated with fiat currencies. Bitcoin has gained popularity as a store of value, often referred to as "digital gold," and has become an attractive option for those seeking to preserve wealth outside of the traditional financial system. We have written an article to explore this in more detail. 

What are CBDCs?

Central Bank Digital Currencies (CBDCs) are digital versions of a country’s national currency, issued and regulated by a central authority, typically a country's central bank. Unlike Bitcoin, which operates independently of any central authority, CBDCs are fully controlled and managed by governments. The primary goal of CBDCs is to modernise the financial system, improve payment efficiency, and provide a digital alternative to cash.

CBDCs aim to offer many of the benefits of digital payments while maintaining the stability and trust that central banks provide in traditional currencies. Governments around the world are exploring the potential for CBDCs to reduce transaction costs, improve cross-border payments, and enhance financial inclusion. However, the key difference between CBDCs and Bitcoin lies in the centralised control that underpins CBDCs. Central banks have the ability to monitor, control, and even reverse transactions in a CBDC system.

Key Differences Between Bitcoin and CBDCs

1. Centralisation vs Decentralisation

The most fundamental difference between Bitcoin and CBDCs is centralisation. Bitcoin operates on a decentralised network where no single entity controls the protocol or the issuance of the asset. This decentralisation is a core feature of Bitcoin, designed to prevent any one party, such as a government or financial institution, from having undue influence over the system. In contrast, CBDCs are issued and controlled by central banks, meaning that the monetary policy and the supply of the digital currency are directly managed by the government.

2. Control and Privacy

Bitcoin transactions are pseudonymous, offering a degree of privacy to users. While transactions are recorded on the public blockchain, they do not necessarily reveal the identities of the parties involved. This privacy aspect is a key selling point for those who value financial autonomy and wish to protect their personal information from centralised authorities.

CBDCs, on the other hand, are designed to be fully traceable. Central banks have the ability to track all transactions made with a CBDC, which could offer greater control over monetary policy and reduce illicit activities such as money laundering or fraud. However, this raises significant concerns about privacy and surveillance. Critics argue that the widespread use of CBDCs could give governments unprecedented access to individuals' financial lives, leading to potential overreach and a loss of personal freedom.

3. Monetary Policy

Bitcoin operates outside of traditional monetary systems, and its supply is fixed. This means that no central authority can alter the total supply of Bitcoin or engage in inflationary policies such as quantitative easing. Bitcoin’s fixed supply has led many to view it as a hedge against inflation, particularly in times of economic uncertainty.

CBDCs, in contrast, are fully integrated into a country's monetary system. Central banks can adjust the supply of CBDCs in response to economic conditions, just as they do with traditional fiat currencies. This flexibility allows governments to implement monetary policies designed to stimulate or cool down the economy. However, critics of CBDCs argue that central banks could misuse this power, leading to inflation, currency devaluation, or excessive control over citizens’ financial activities.

4. Global Adoption and Accessibility

Bitcoin is a global asset, accessible to anyone with an internet connection. It transcends national borders and is not subject to the same restrictions as traditional financial systems. This makes Bitcoin an attractive option for individuals in countries with unstable currencies or restrictive financial systems, as it offers a means of storing and transferring value outside of the control of local governments.

CBDCs, by their nature, are tied to the specific country that issues them. While some central banks are exploring the possibility of international interoperability between different CBDCs, the vast majority of CBDCs will likely remain confined to their respective national economies. This could limit the global reach of CBDCs compared to Bitcoin, which operates independently of any centralised authority.

5. Use Cases

Bitcoin’s primary use cases are as a store of value and a means of transferring value across borders. Bitcoin offers users an alternative to traditional banking systems, enabling them to send and receive value without relying on intermediaries. Additionally, many view Bitcoin as a store of value, especially in environments where fiat currencies are subject to inflation.

CBDCs, by contrast, are primarily designed to enhance the existing financial system. They could facilitate faster, cheaper payments, improve financial inclusion, and make it easier for governments to implement monetary policies. However, since CBDCs are centralised, they may not offer the same level of financial autonomy or protection against inflation that Bitcoin provides.

Philosophical View on CBDCs vs. Bitcoin

The philosophical divide between Bitcoin and CBDCs lies at the heart of the broader debate about freedom, control, and trust in the financial system. Bitcoin, as a decentralised digital asset, embodies the principles of individual sovereignty, autonomy, and financial freedom. It operates independently of any central authority, giving users full control over their assets without the interference of governments or banks. For many, Bitcoin represents a fundamental shift in how money should function - a move away from centralised power towards a more open, trustless system that empowers individuals.

In principle, it is like saying, “I, the individual, reserve the right to manage my finances with a transparent form of money, governed by a predictable issuance schedule that protects my savings, so I can manage my finances as I see fit.”

In contrast, CBDCs are rooted in the idea of centralised control. Supporters argue that they can bring stability, security, and efficiency to national economies by modernising payment systems and improving monetary policy. However, critics view CBDCs as a tool for governments to exert more control over citizens’ financial lives, eroding privacy and autonomy. The introduction of a CBDC could potentially lead to greater surveillance, with authorities able to monitor every transaction and adjust monetary policy at will. This centralised nature raises philosophical concerns about the balance between security and freedom, autonomy and control, making the debate between Bitcoin and CBDCs not just a financial one, but a deeply philosophical one about the kind of society we want to live in.

In principle, it is like saying, “We, the government, reserve the right to control the money supply in ways that serve the needs of the state and its citizens, so we can manage monetary policy as we see fit.” 

Worldwide Developments of CBDCs

The adoption of Central Bank Digital Currencies (CBDCs) is often influenced by the political environment in which they are introduced. Authoritarian and totalitarian governments tend to favour CBDCs as a means of consolidating control over the economy and monitoring financial transactions, aligning with broader political goals of centralised authority and oversight. These systems provide governments with the tools to track and manage citizens' financial activities, reinforcing state power. For example, China has aggressively pursued the development of its digital yuan, positioning it as a tool for enhancing state surveillance and control. 

On the other hand, liberal governments, which prioritise citizens' rights to privacy and property, are generally more sceptical of CBDCs. They view the potential for increased surveillance and the erosion of financial autonomy as dystopian, raising concerns about the risks of centralised control over the monetary system. U.S. President Donald Trump has been vocal in his opposition to CBDCs, expressing concerns about the potential for governmental overreach and the erosion of financial autonomy. Several European countries, including Switzerland, have also been cautious, with some opting to explore digital currencies in limited forms rather than fully embracing them. 

These differing political philosophies shape the global response to CBDCs, highlighting the tension between state control and individual freedoms in the ongoing debate about the future of money. Governments concerned about increased surveillance warn of the dangers of centralised control over the monetary system.

Conclusion

While Bitcoin and CBDCs both represent digital forms of money, they differ fundamentally in their structure, philosophy, and potential impact on the financial system. Bitcoin’s decentralised, transparent, and scarce nature offers individuals more control over their financial assets, free from centralised interference. On the other hand, CBDCs offer governments a tool to maintain control over monetary policy, at the cost of privacy and financial autonomy. Moreover, CBDCs allow governments to continue exercising control over the money supply and inflation, as they can create and distribute digital currency without the limitations imposed by physical currency, potentially enabling more direct manipulation of economic conditions. This continued ability to "print" currency in a digital form, much like traditional fiat, can lead to concerns over inflationary pressures and the erosion of purchasing power for individuals.