Its seems to be the big subject at the moment with most central banks talking about the rise of digital currencies. Bitcoin made its rise on the underground of the internet being used for illegal purcheses including drugs and arms. Since the pecarious begining, the rise has been remarkable as the digital money hit the mainstreme. There is a natural fear that digital money could replace fiat currencies amoungst central banks.

Why are central banks scared of digital cash?

The main function of a central bank is to control money supply, set interest rates and manage things like inflation. Looking closer into central banks they also manage the fluctuation of the currency markets, whether they like it or not. If they add to supply via QE or any other mechanism their currency will depriciate. On the other end of the scale, if they raise interest rates their currency could rise. If digital currencies become the future then they would lose this power. The European Central Bank (ECB), Federal Reserve or the Bank of England will have no control of how many Bitcoins are in circulation. (read the latest comments from new ECB President Lagarde)

So to counter this problem some of them are looking to create their own. The Peoples Bank of China and ECB have publicly stated they are working on their own digital currencies. While the Bank of England have also researched the idea, Mark Carney the Governor recently stated maybe a few central banks should come together to create some kind of stablecoin.

Stablecoins like Tether have proposed a different problem in recent times. This is a derivative of the US dollar and it means that people can transfer a digital dollar without ever affecting the real price of the currency. The flow of real money around the world affects the real supply and demand fundamentals but if you start using Tether you send dollars without affecting the value. This poses a real threat to currencies. Why send real dollars around the world for a fee when Tether is cheaper and potentially faster. 

What could happen to Bitcoin?

If central bank digital currencies (CBDC) become a reality then the value of Bitcoin could tank. There would be a whole host of users who could migrate over to the CBDC's. Bitcoin would then become an alternative asset class. Other coins like Monero focus on privacy so people who use digital currecies for anonimity have better options. The point of CBDC is convienice, giving access to the unbanked and also making transactions cheaper.

Bitcoin would therefore become the haven for speculation, more so than now. The use case would have dissapeared and the only people who would use Bitcoin over CBDC's are people who do not trust central banks and governments. Having said that there are many of them and many coins to choose from. 

The origional digital coins will still have a place in the market but their importance will scale back leaving only the die hard traders in the market. Not neciceraly a bad thing.


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