Bitcoin’s risks present opportunities for CBDCs

The news: Bitcoin won’t work as a payments network because it’s inefficient and bad for the environment, Sam Bankman-Fried, co-founder and CEO of crypto exchange FTX, told the Financial Times.

Bankman-Fried said the energy-intensive proof-of-work (PoW) process used to mine many cryptocurrencies isn’t capable of scaling to handle the millions of transactions needed to make cryptos an effective payment method. He also noted that a functional crypto payments network would require technological innovations.

Key context: Bitcoin and other PoW cryptos have been highly criticized for their environmental impact—Bitcoin mining consumes more energy than Norway, according to the Cambridge Bitcoin Electricity Consumption Index.

While efforts like proof-of-stake—meant to be a less energy-intensive mining process—are gaining steam in the wider crypto space, that doesn’t address cryptos’ extreme price volatility. Bitcoin’s price soared past $65,000 in November 2021—only to crash below $30,000 as of writing.

Price volatility is a major reason Bitcoin has yet to take off as a meaningful payment method.

• El Salvador, which made Bitcoin legal tender last September, is at risk of a multibillion-dollar national default after pumping hundreds of millions of dollars into Bitcoin before the currency’s price collapsed.
• The government’s Chivo Bitcoin wallet app has “almost no new adopters,” and less than 5% of sales have been paid in Bitcoin through Chivo, most of which have been to large firms, per a US National Bureau of Economic Research survey.

Despite its risks, Bitcoin is still popular among consumers, though mostly for investment purposes: 75% of US crypto owners will hold Bitcoin in 2022, per Insider Intelligence forecasts.

What this means: The risks involved with Bitcoin and other cryptocurrencies can open the door to increased central bank digital currency (CBDC) research and development.

• CBDCs offer many of the same advantages as traditional cryptocurrencies, like fast payment speeds and lower transaction costs, without the risks. And because CBDCs are issued by the state, their values can’t deviate from their corollary fiat currencies.
• While countries like China and India have ramped up efforts to launch CBDCs, the US is still in the early stages. President Biden signed an executive order calling for research into CBDCs in March, but Treasury Secretary Janet Yellen said in April that the US is years, not months, away from issuing a CBDC.

Related content: Check out the “US Crypto Payments” report to learn more about the risks and opportunities involved with crypto transactions—and what this means for banks and payment networks.