Where bitcoin fails, central bank digital currencies will succeed
- The restricted use and security risks of bitcoin and other cryptocurrencies make them a poor alternative to traditional currencies, even if they could overcome widespread official disapproval
- Central bank digital currencies, on the other hand, can help speed up transactions, reduce costs and improve security
Advocates of bitcoin and other cryptocurrencies argue that traditional fiat currencies are inherently unstable and that the monetary systems that underpin them are inefficient and corrupt. Yet the argument that bitcoin provides a more stable alternative is not playing out very convincingly in real time.
Against the dollar, bitcoin has traded in the range of US$30,000 to US$64,000 this year. Since its peak in April, its price has almost halved in US dollar terms – hardly a convincing store of value.
Bitcoin and similar assets don’t conform to the characteristics of traditional financial assets or currencies. It is difficult to call bitcoin an asset – it has no fundamental economic value other than a very limited role as a medium of exchange.
There are no cash flows and, unlike gold and other precious metals, there is clearly no physical use. It is hard to see how it conforms to being a currency, either. Its lack of uniform legal backing will ultimately limit its use.