Are Central Banks Treating Bitcoin as a Threat to CBDCs?
The relationship between Bitcoin and central bank digital currencies represents one of the most complex and evolving dynamics in modern finance. To understand whether central banks view Bitcoin as a genuine threat to CBDCs, we need to examine the fundamental differences between these two forms of digital money, the strategic positioning of central banks, and the actual market dynamics that are unfolding in real time.
Bitcoin emerged in 2009 as a decentralized digital currency that operates without any central authority. It was designed to function as a peer-to-peer electronic cash system, allowing transactions to occur directly between parties without intermediaries. Central bank digital currencies, by contrast, are digital versions of national fiat currencies issued and controlled by central banks themselves. These are fundamentally different concepts, even though both exist in digital form.
The question of whether central banks view Bitcoin as a threat to CBDCs requires us to look at what central banks are actually saying and doing, rather than making assumptions. The evidence suggests a more nuanced picture than a simple threat-response dynamic.
Central banks worldwide are currently at various stages of CBDC development. Nearly all central banks are now preparing for the potential of issuing digital currencies that would be exchangeable for physical cash. Three countries have already implemented CBDCs, marking a significant milestone in the evolution of monetary systems. This widespread movement toward CBDCs reflects genuine interest from monetary authorities in modernizing payment infrastructure and maintaining their role in the financial system.
However, the emergence of cryptocurrencies and stablecoins has created a competitive landscape that central banks cannot ignore. The global value of cryptocurrencies stood at approximately 4.1 trillion dollars, with Bitcoin representing over half of that total value. This represents roughly 2 percent of the total global money supply when measured using the broad M3 definition that includes physical currency, bank deposits, and liquid assets. While this percentage may seem modest, the rapid growth and adoption of digital assets have captured the attention of monetary authorities worldwide.
The Deutsche Bank Research Institute has suggested that within the next five years, Bitcoin might become a regular component of central bank currency reserves. This projection indicates that some financial institutions are taking Bitcoin seriously as a potential store of value, even if they do not view it as a direct competitor to CBDCs in terms of everyday payment functionality.
The distinction between Bitcoin and stablecoins is important when considering the CBDC threat question. Stablecoins are digital assets designed to maintain a stable value by being pegged to fiat currencies or other assets. They have become core infrastructure in the digital asset ecosystem, facilitating liquidity provisioning, collateralization, and on-chain settlement across decentralized applications. Platforms such as USDT and USDC have become increasingly important in crypto-to-crypto trading, decentralized finance protocols, cross-border settlements, and remittance payments.
Central banks appear to view stablecoins as a more direct competitive threat than Bitcoin itself. This is because stablecoins actually function as payment mechanisms and mediums of exchange, which is precisely what CBDCs are designed to do. Bitcoin, by contrast, is highly volatile and is primarily used as a store of value or speculative asset rather than as a practical medium of exchange for everyday transactions.
The research examining how central bank digital currency rhetoric affects the stablecoin market reveals something important about central bank strategy. Market participants respond to CBDC-related announcements not merely by anticipating a shift in payment preferences, but by reassessing the long-term viability and regulatory permissibility of stablecoins themselves. This suggests that central banks are using their CBDC initiatives as a way to signal their commitment to digital payment innovation while simultaneously creating uncertainty about the future of private digital currencies.
Central banks are not treating Bitcoin as a direct threat to CBDCs in the way they might treat stablecoins. Instead, they appear to be focused on ensuring that CBDCs become the dominant form of digital currency for everyday payments and settlements. The CBDC models being developed by central banks reflect this strategic priority.
There are four main CBDC models currently being explored. Wholesale CBDCs for domestic use focus on revolutionizing domestic payment systems and interbank settlements among financial institutions. Retail CBDCs for domestic use are intended for the general public and offer notable benefits from a consumer standpoint, though they pose considerable challenges in terms of feasibility and potential disruption to existing banking systems. Retail CBDCs for cross-border use could offer advantages for international transactions, but face obstacles related to foreign exchange management, consumer protection, and regulatory compliance. Finally, wholesale cross-border CBDCs are emerging as the most balanced option in terms of desirability, viability, and feasibility, and have become a top priority for many central banks.
This shift toward wholesale cross-border CBDCs marks a transition from years of theoretical study to the actual process of productization. Central banks are prioritizing practical, implementable solutions that address real pain points in the financial system rather than attempting to create universal digital currencies that would directly compete with Bitcoin or other cryptocurrencies.
The benefits that central banks envision for CBDCs include fast and cheap payments, particularly for cross-border transactions, greater inclusion of unbanked people in the financial system, and a risk-free payment system backed by the explicit authority of the central bank. Unlike an account at a commercial bank, CBDCs would be essentially risk-free as they are underwritten by the central bank and would not require deposit insurance. This represents a fundamental advantage over Bitcoin, which carries significant counterparty and volatility risks.
However, central banks also recognize substantial challenges in implementing CBDCs. Privacy concerns arise because physical cash is anonymous, while transferring those transactions onto a digital ledger would strip away that anonymity. Cybersecurity is another critical issue, as CBDCs would need to be resilient to cyberattacks and have extremely strong redundancies in place to protect consumers and businesses.
Monetary policy implementation presents another challenge. CBDCs would create a new liability on the central bank’s balance sheet. End-users could rapidly shift away from their banks into digital currency, causing a drain of bank reserves in the financial system. This could interfere with the Federal Reserve’s ability to effectively conduct monetary policy. Additionally, if the central bank directly operates CBDCs by providing digital wallets to users, there could be destabilizing impacts to the banking system.
These challenges suggest that central banks are approaching CBDC development with considerable caution and sophistication. They are not rushing to create CBDCs as a defensive response to Bitcoin, but rather carefully designing systems that serve specific purposes within the existing financial infrastructure.
The broader context of monetary economics is also relevant here. We are living in what many consider to be the most fascinating period for monetary economics since the Great Moderation of the mid-1980s. Cryptocurrencies, stablecoins, and the looming presence of digital innovation and Big Tech are questioning the very foundations of the monetary order. While central bank money an