Sovereign governments may soon become the next group to adopt digital assets. Central Bank Digital Currencies (CBDCs) could become the latest, and perhaps most substantial tool, used to expand their monetary policies. 

Dozens of governments have signaled their intent to explore and use CBDCs. Christine Lagarde, President of the European Central Bank, has stated that an ECB digital currency could launch within the next four years.

In the wake of the COVID-19 shutdowns, many governments provided financial relief to their citizens. The funds have largely helped people who lost their jobs, but in countries like the U.S., eight months have passed and some people have yet to receive a check. If successfully implemented, CBDCs would enable governments to pivot toward a cashless society as well as provide people and businesses in need of aid direct access to stimulus funds. 

While it seems as though the roll out of CBDCs are part of a natural progression toward the digitization of money, there’s much more beneath the surface. Kraken Intelligence, our team of in-house research analysts, examines why governments are considering them, their faults and what this all means for cryptocurrencies. 

CBDCs may look similar in nature to cryptocurrencies like bitcoin. However, their intent, spirit, and use are very different. Bitcoin, for example, was founded on individual sovereignty, decentralization and inclusivity. In contrast, CBDC’s are centralized, public and available only within the boundaries set by the government.

In this report, you will learn the structure of CBDCs, the possible use cases, risks and benefits, current developments by country and implications of a successfully launched CBDC. More importantly, we outline how they compare to cryptocurrencies and why we think CBDCs and crypto assets can coexist. While they could make payments more efficient, the tradeoff may be consumer financial privacy – unless citizens demand otherwise.