As Central Banks Pursue Digital Currencies, Bitcoin Stands to Benefit

Many of the world's foremost central banks are signaling that the monetary world is about to undergo a dramatic overhaul. At the core of this: central bank digital currencies (CBDCs), government-sanctioned digital assets that will theoretically allow an expansion of monetary policy and encroachment on privacy. 

Analysts say that a world where this system is widely implemented will aid growth in the adoption of Bitcoin. If governments are given more flexibility over the monetary system, holding bitcoin gives one the ability to "opt out."

The International Monetary Fund held a seminar on Monday morning, convening some of the world's monetary leaders to discuss CBDCs. 

Jerome Powell, chairman of the Federal Reserve, said that the U.S. is still exploring the benefits and risks to a CBDC. He did note that there would be many benefits, though, such as faster and cheaper payments, the ability to bank the unbanked, and to more easily adjust monetary policy. 

The head of the Bank for International Settlements (BIS), Agustin Carstens, also touted the benefits of CBDCs. The BIS is known as the "central bank for central banks."

Carstens said that the implementation of central bank digital currencies would allow the issuer to control and track the use of the currency. This control could theoretically be enabled on both on a monetary and crime front. 

This seminar came hot on the heels of a call by IMF Chairwoman Kristalina Georgieva for a "new Bretton Woods moment." Bretton Woods was the 1944 agreement that set the world monetary standard, pegging top currencies to the U.S. dollar, which in turn was tied to gold reserves. 

Georgieva's letter lacked any specific measures, but the use of the terms "digitization" and the allusion to the Bretton Woods meeting of 1944 suggested to some that CBDCs are around the corner.

If movement from the central banks of China, the European Union, Spain, and other countries are anything to go by, this is likely the case. 

This Is Good for Bitcoin

Raoul Pal, CEO of Real Vision and a former Goldman Sachs hedge fund chief, says that the push toward CBDCs is decisively bullish for Bitcoin.

He highlighted the power that a nationally-installed digital currency will give to monetary authorities and tax authorities:

"They allow the [central banks] to circumvent the banking and fiscal system and give or take money (tax or transfer payments) directly. That completely changes monetary vs fiscal policy forever. CB's will now be able to manage fiscal policy, outside of government balance sheets." 

Pal added that CBDCs would also allow economies to move away from a reliance on the U.S. dollar, which has been the undisputed standard for decades. If this results in a decline in the U.S. dollar, Bitcoin will likely rally as the world's assets are denominated in USD. 

However central bank digital currencies play out, the inevitable the Real Vision CEO sees is "further debasement of the ENTIRE fiat currency system." 

"Fiat globally will be worth less versus hard assets. And that means that gold and in particular #Bitcoin will become THE way to circumvent the system of ever lower value. It also create incentive systems for other nations to opt into a hard currency system to attract capital." 

Bitcoin's 21 million supply cap and its disinflationary supply schedule will allow it to appreciate over fiat currencies over time. Whereas fiat is debased, Bitcoin becomes increasingly scarce. 

That's not to say that Bitcoin is infallible. Pal expects central banks to "suppress" the asset "much like [they] suppress gold," but he doesn't expect this to work as Bitcoin's intrinsic value grows and as infrastructure around the space strengthens. 

Whether inspired by today's seminar or by coincidence, Bitcoin itself has surged in recent hours, jumping from $11,500 to $11,800.