The recent gains made in the crypto market in general and Bitcoin have made one thing quite obvious; digital currencies have a future and they could soon become the preferred way for conducting commerce. This year, the electric car manufacturing firm, Tesla announced in March that it would start accepting payments in Bitcoin. But, as it happened, this breakthrough was nothing less than a false dawn. A few weeks after the decision by Tesla, the company’s chief executive Elon Musk, made a complete u-turn and announced that they were no longer accepting the digital currency because they were concerned about the harmful impact of Bitcoin mining on the environment.
However, it was never disclosed how many people had actually bought a Tesla by paying for it in Bitcoin. It is mostly because of these challenges associated with using Bitcoin as a payment method that has driven central banks to try to fill this void by contemplating the idea of digital currencies, which would eliminate the downside of extreme volatility in price. Over the years, there has been a great deal of expansion in the crypto market and it is no longer just about Bitcoin and the other cryptocurrencies that have been introduced since.
Blockchain technology has now drawn the interest of governments and they are trying to leverage it for transforming the economy. As Bitcoin and other cryptocurrencies are decentralized, one of their biggest limitations is that they are extremely difficult to regulate. Furthermore, the volatility of cryptocurrencies and the anonymity offered by blockchain-based value transfers only adds to the challenges from the perspective of the governments. Luckily, one of the ways through which blockchain technology can be leveraged by governments is via ‘private’ permissioned blockchains that have digital fiat built on them.
The proof-of-work (PoW) framework of Bitcoin is another one of its limitations. This mechanism is a great threat to the environment because of the high levels of energy consumption. The devastating effects of Bitcoin on the environment could be solved by switching to renewable energy resources, but this hasn’t happened yet. As digital fiat currencies are not going to be launched as public blockchains and some may not use blockchains at all, they will not have a mining mechanism. Hence, there will be no need to worry about energy consumption issues and it is one of the ways digital fiat will be superior to Bitcoin.
Also referred to as Central Bank Digital Currency (CBDC), digital fiat refers to a digital currency developed, managed and controlled by the government. As their value will be pegged to non-digital fiat currencies, these tokens will be more attractive to users because they will provide greater protection to investors than cryptocurrencies since the volatility factor will be eliminated. CBDCs are no longer just pilots and experiments because they are now becoming a reality. Many countries are working to create their own CBDCs and some have even entered the final phases of development. This indicates that digital fiat may be launched very soon and this could be a threat for Bitcoin.