CBDC vs Crypto Assets: Why is the central bank's digital money dream so difficult?

In recent years, the term “Digital Money” has been used very frequently. However, there aren't many people who truly understand the differences between CBDC (Central Bank Digital Currency) and cryptocurrencies like Bitcoin. Today, let's dig into what these two things are all about.

The surface is the same, but the essence is opposite

It all sounds like “digital money”, but CBDC and crypto assets are like a pair of twin brothers — they look alike, but their worldviews are completely opposite.

What is CBDC? It is the digital version of the Renminbi/US Dollar/Euro directly issued by the Central Bank. It utilizes blockchain technology, but the core logic is central control. The Central Bank can directly regulate the supply of digital currency in the same way it adjusts interest rates. In simple terms, it is like moving the money printing press to your mobile phone.

What about Crypto Assets? Bitcoin, Ethereum and similar things boast complete decentralization. There's no Central Bank to rely on, and no one can create new coins out of thin air. The supply is determined by algorithms, and transactions are verified by nodes in the network.

It sounds cool in theory, but what about reality?

Why does CBDC require central control?

You might ask: Why not let the Central Bank create an account for everyone, just like Alipay wallet?

The answer is: The Central Bank can't handle it.

Imagine if the Central Bank had to record every person's every transaction, verifying and settling 24 hours a day; how many servers would be needed? How many staff members? The cost would skyrocket. So the smart Central Banks design it this way: Central Bank → Commercial Bank → Public, a three-tier architecture. The Central Bank issues digital money to commercial banks, which then distribute it to users. This way, the Central Bank only needs to manage the commercial banks.

Who is really using CBDC globally now?

After all this, who is actually using it?

Currently, only 9 countries/regions in the world have officially issued CBDCs, including Nigeria, the Bahamas, and 7 countries in the Caribbean.

What truly deserves attention is China's Digital Currency. By October last year, the Central Bank's pilot project had completed transactions worth 62 billion yuan, with 140 million people opening digital currency wallets. The author himself is one of them, having used a digital currency wallet through the Bank of China. This progress is unique among major global powers.

In contrast, other major countries are still in the “discussion” phase:

• European Union: Has issued a number of research reports and is still under study.
• United States: Particularly conservative. Requires Congressional approval, and Congress is not very fond of innovation (laughs)
• India: Has repeatedly stated “it will be launched this year”, but so far it is still just talk.
• Russia, Brazil, Iran: also studying, but there are no actual projects.

Why is the crypto market so chaotic?

Since the CBDC is designed so cautiously, why do some people still insist on using crypto assets?

The key issues are trust and risk.

Take Bitcoin as an example, the total circulation is 2.7 million coins (the actual circulating amount is even less), and the distribution is extremely uneven. Research data shows that the concentration index of Bitcoin wealth (Gini coefficient) is as high as 0.9, which means that most of the Bitcoin is held by a small number of people. In contrast, the Gini coefficient in the United States is only 0.41, which has already been criticized for being unequal.

There is also the mess of stablecoins. Do you remember the collapse of UST in the Terra ecosystem? A stablecoin that claimed to be pegged to the US dollar at a 1:1 ratio plummeted to 0.2 dollars. Tether (the largest stablecoin) has also been exposed multiple times for unclear accounting.

These have scared the Central Bank. After all, if a stablecoin collapses, it might only make investors cry, but if systemic risk breaks out, the entire financial system will have to tremble.

Will CBDC Really Change the World?

To be honest, many current CBDC projects are still in the “proof of concept” stage. Interestingly, when central bank officials are asked questions like “Are you using real money for testing?”, “How many days has it run in total?”, “What is the cost?”, most of them respond: I'm not really sure.

In theory, CBDC can achieve cross-border real-time settlement (which currently takes 24 hours) at a lower cost. However, in reality, there are a lot of legal and regulatory issues, and the settlement time cannot be reduced at all.

Put simply, the technology is not the issue, the problem lies in the entanglement of interests and geopolitical factors.

The Most Ironic Part

Many small countries and developing nations are now also beginning to study CBDC, the reason being “financial inclusion”. However, the author is somewhat hesitant:

What can researching CBDC solve in a country where even smartphones are not widespread? Instead, there is a fintech company in Africa that uses SMS to transfer money to those without smartphones, which is what true “financial inclusion” is called.

Iran has an annual inflation of 30%. Can research on CBDC solve this problem? Russia wants to use the digital ruble to circumvent sanctions, but technology cannot change the reality of geopolitics.

CBDC is not a panacea. It can make payments more convenient, but it does not solve inflation, cannot change international politics, and does not alter a country's economic structure. Some Central Banks are too “fashionable”, thinking that not researching CBDC means falling behind the trend. However, innovations that do not solve practical problems ultimately just waste money.

In summary: CBDC is the orthodox approach of the Central Bank, secure and controllable but with limited innovation; Crypto Assets are the dream of disruptors, free and decentralized but chaotic. The future may be a hybrid model - with Central Bank Digital Money taking the majority and Crypto Assets as niche assets. But don't expect CBDC to save inflation or change the world order. It simply moves the wallet from hardware wallets to mobile phones, not that magical.