Ever since the inception of human history, people have developed numerous methods of exchanging value to fulfill needs which they could not cover on their own. The barter economy which was a main characteristic of earlier societies, meant that goods were swapped directly based on mutual needs. However, currencies were created as economies grew more complex. Ranging from precious metals like gold and silver to symbolic coins and paper money, these forms have always had the common goal of making transactions as easy, convenient, and efficient as possible.
During the past century, innovations in technology constantly reshaped how payments were conducted:
- In 1918, the U.S. Federal Reserve utilized telegraph wire to mark one of the first electronic transfers.
- The standardization of secure payments between banks internationally was rendered a reality thanks to the creation of the SWIFT network in 1973.
- By the 1980s and 1990s, online banking and debit cards were connected directly to individual holder’s accounts making digital payments feasible.
In every recent case, a central agent such as a government or bank entity has played a crucial role in regulating, supervising, backing and ensuring trust in these systems.
However, in a turn of events, this paradigm has been challenged since 2009 with the emergence of Bitcoin. This cryptocurrency combines a set of appealing features: a peer-to-peer electronic cash system with the disintermediation of banks, advanced security through cryptography and a decentralized blockchain structure. Thus, it promises transparency, safety, sovereignty and independence from central authorities.
Since the introduction of Bitcoin via a whitepaper signed by the still unknown figure named Satoshi Nakamoto, numerous cryptocurrencies have gained popularity, ignited by technological idealism and speculative frenzies. For example, Bitcoin’s historically high prices at $20000 and $68000, in December 2017 and November 2021 respectively dominated the news headlines and indicated that millionaires can be made overnight. Yet the crypto world has also been stunned by scandals and disappointments. The Luna crash in May 2022 from approximately $119 to virtually zero ($0.0001) resulted in a $40 billion wipe out. The collapse of FTX in November 2022 exposed systemic fraud and undermined confidence in the entire crypto industry.
Overall, despite periodic bull runs, there is strong evidence signaling that cryptocurrencies are unlikely to be adopted at a mainstream level. Firstly, they can be considered as speculative assets due to their high volatility and abrupt price fluctuations. This violates two fundamental requirements for a nationwide type of currency: stability and reliability. For instance, in a span of 7 months (November 2021 to June 2022) Bitcoin’s value more than halved from just over $57000 to around $24000.
Regulation and security concerns cast additional doubts. Insufficient ID verification processes are thought to enable money laundering, tax evasion and scams, while incidents like the Coincheck hack in 2018 when hackers stole roughly 523–560 million NEM tokens prove that successful cyberattacks are possible. Moreover, the theoretical risk of a 51 percent attack (whoever controls more than 50% of the computational power in a network and essentially controls the whole network) raises serious questions about long term fallback solutions when bad actors join forces.
Another dimension of difficulty is added when environmental and scalability worries are taken into account. The constant need to verify transactions and information through mining can result in the consumption of significant levels of electricity. For example, Bitcoin mining alone uses more energy than Denmark on an annual basis.
Amid speculation and predictions about the longevity and viability of crypto, central banks are looking to create their own form of digital currency (Central Bank Digital Currency – CBDC). Unlike crypto, they are backed by established governments and institutions, which are known to the public and can be held accountable. Simultaneously, since central banks primarily control the monetary policy they have the technical expertise and experience to control the supply of digital coins and therefore minimize volatility.
Based on recent reports conducted by central banks around the globe, CBDCs can also be used in conjunction with cash and other digital payments allowing easy integration in the current banking system and ensuring trust. By further providing offline payment options, financial inclusion is strengthened and the consequences of cyber attacks are limited.
Countries are already developing CBDCs. Most notably, China banned cryptocurrencies in 2021 while promoting the rollout of the digital yuan. The European Central Bank and the FED are actively seeking feedback from major stakeholders with the provision of reports and key findings to the public. But apart from the development of a digital euro and dollar, nations from Nigeria to the Bahamas have launched their own projects. These efforts depict not only a response to the shortcomings of crypto but also a strategic approach to modernize money while preserving regulatory oversight.
In the long run, I believe cryptocurrencies have set an extraordinary foundation for designing, developing and implementing digital currency but will at best survive as a niche form of investment for risk-tolerant investors. Despite the promising blockchain technology underlying them and the revolutionary proposals of how a decentralized, transparent, peer-to-peer economy can be created, the environmental, scalability and cybersecurity concerns outweigh the benefits. The real revolution in money may not come from Bitcoin or Ethereum but from central banks themselves.
References
Atlantic Council. (2025). Central Bank Digital Currency Tracker. https://www.atlanticcouncil.org/cbdctracker/
Briola, A., Vidal-Tomás, D., Wang, Y., & Aste, T. (2022). Anatomy of a stablecoin’s failure: The Terra-Luna case. arXiv. https://arxiv.org/abs/2207.13914
Chamanara, S., Ghaffarizadeh, S. A., & Madani, K. (2023). The environmental footprint of Bitcoin mining across the globe: Call for urgent action. Earth’s Future, 11, e2023EF003871. https://doi.org/10.1029/2023EF003871
IMF. (2024). Central Bank Digital Currency Adoption (FTN063). https://www.imf.org/-/media/Files/Publications/FTN063/2024/English/FTNEA2024005.ashx
Investopedia. (n.d.). Bitcoin’s price history. https://www.investopedia.com/articles/forex/121815/bitcoins-price-history.asp
Kohli, V., Chakravarty, S., Chamola, V., Singh, K. S., Sangwan, K., & Zeadally, S. (2022). An analysis of energy consumption and carbon footprints of cryptocurrencies and possible solutions. arXiv. https://arxiv.org/abs/2203.03717
Penser. (n.d.). CBDC projects across the globe. https://www.penser.co.uk/cryptocurrencies/cbdc-projects-across-the-globe/
Reuters. (2024, September 17). Central bank digital currency momentum growing, study shows. https://www.reuters.com/markets/currencies/central-bank-digital-currency-momentum-growing-study-shows-2024-09-17/
Statmuse. (n.d.). Bitcoin value graph November 2021. https://www.statmuse.com/money/ask/bitcoin-value-graph-november-2021
Great write-up! It is indeed interesting how Cryptocurrencies have had so much potential to replace traditional banking systems for so long, and yet it seems the scandals and it’s inherent volatility always manage to outweigh their purpose. I will say, although I agree CBDC has a lot of potential to compete with cryptocurrencies, I do not believe they will fully replace crypto for two reasons: they lack Decentralisation (being one of the main premises of Cryptocurrencies), and regarding the stability, there already exist “stablecoins” that are pegged to traditional currencies (for example USDC is pegged to the dollar). That said, I also agree that CBDC could outgrow cryptocurrencies, but not in a replacement way.