CBDCs vs. Bitcoin: Why Banning Bitcoin Is a Losing Battle

As central bank digital currencies (CBDCs) are being debated around the globe, the question arises: Can a country introduce a CBDC while allowing Bitcoin to remain a legitimate asset? 

The answer is not as straightforward as it may seem. At the heart of the matter lies the fundamental differences between CBDCs and decentralized cryptocurrencies like Bitcoin. Their coexistence depends on regulatory frameworks, economic strategy, and a nation’s approach to financial sovereignty.

Understanding CBDCs and Bitcoin

CBDCs are government-backed digital currencies issued by central banks. Unlike Bitcoin, which operates on a decentralized network, CBDCs are centralized and designed to mirror the value of fiat currencies while offering the benefits of digital transactions. This allows governments to maintain control over monetary policy and, in theory, enable faster, cheaper, and more secure payments. CBDCs also provide central banks with enhanced analytics capabilities for transactions, potentially increasing their ability to combat money laundering, tax evasion, and other illicit activities.

Bitcoin, on the other hand, exists outside of governmental control. It is decentralized, permissionless, and operates on a peer-to-peer network. It is therefore often referred to as "digital gold." Its value fluctuates based on market supply and demand, and it is not subject to centralized oversight like fiat or CBDCs.

The Potential Conflict: Control and Decentralization

The introduction of a CBDC presents a potential conflict for governments considering whether to allow Bitcoin to coexist. CBDCs give central banks increased control over monetary policy and financial flows. Bitcoin, however, operates outside these systems, offering an alternative that could undermine the effectiveness of government-controlled currencies. 

For governments focused on maintaining financial monopoly, the unrestricted use of Bitcoin may be seen as a threat. It provides citizens with an option to store and transfer wealth without state oversight or intervention, which could weaken the government’s ability to control the money supply, especially during economic crises.

Additionally, Bitcoin’s pseudonymous nature and potential for facilitating cross-border transactions challenge government efforts to monitor and regulate capital flows. If a government implements a CBDC to enhance control over its financial system, Bitcoin’s presence as a parallel asset could be seen as a counterproductive influence that allows individuals to bypass these controls.

Bitcoin, Like Tor, VPNs, and Encryption: Here to Stay

However, it is crucial to acknowledge that Bitcoin, much like other technologies such as Tor, VPNs, and strong encryption, exists regardless of regulation. These inventions were not designed with government oversight in mind, and they continue to persist and evolve independently of regulatory environments. Just as individuals can use encrypted communication or VPNs to protect their privacy, they can use Bitcoin as a means of transacting outside of traditional financial systems. No matter the regulatory stance, these technologies remain accessible and widely available.

Attempting to ban or suppress Bitcoin, much like trying to outlaw encryption or anonymization tools, would likely be ineffective. History shows that technologies designed for privacy, security, or decentralized communication tend to endure, even when governments attempt to restrict them. Bitcoin’s decentralized architecture ensures that it can continue to operate, regardless of a single nation’s policies. This resilience underscores why outright bans are neither practical nor in the long-term interest of society.

The Case for Coexistence: Finding Balance

Given the inevitability of Bitcoin’s continued existence, it becomes essential for governments and societies to strike the right balance. Governments must recognize that Bitcoin will persist whether they choose to regulate it or not, making it vital to focus on how it should be integrated into the financial system in a way that minimizes risks while maximizing benefits.

The challenge lies in defining where the line between permissible and non-permissible use of Bitcoin should be drawn. Just as societies have had to agree on the legal limits of privacy technologies like encryption, they will need to find consensus on how Bitcoin should be used. For example, governments may impose regulations to ensure that Bitcoin is not used for criminal activities like money laundering, while still allowing its use as a legitimate store of value or investment vehicle. This nuanced approach recognizes the technological realities while addressing societal concerns.

The two assets — CBDCs and Bitcoin — can serve fundamentally different purposes. A CBDC is a national currency designed for day-to-day transactions and the efficient functioning of a digital economy. Bitcoin, meanwhile, is increasingly viewed as a store of value — a digital alternative to gold.

From this perspective, CBDCs could serve as the backbone of a government’s financial system, facilitating payments, enabling financial inclusion, and supporting economic stability. Bitcoin, meanwhile, could exist as a legitimate asset class for investors looking for diversification, much like commodities or foreign exchange.

In countries that permit Bitcoin’s coexistence with CBDCs, it would likely require the regulation of Bitcoin as a commodity. Such a framework could include anti-money laundering (AML) and know-your-customer (KYC) requirements for exchanges, reporting standards for tax purposes, and safeguards against systemic risks posed by Bitcoin’s price volatility. With appropriate regulations, Bitcoin could exist as an alternative financial asset, while the CBDC functions as the primary medium of exchange.

Geopolitical Landscape: Varying Approaches

Different countries are likely to adopt varying approaches to the coexistence of CBDCs and Bitcoin, influenced by their unique economic priorities and political environments. Nations with more authoritarian governance models may choose to limit or even ban Bitcoin, seeing it as an obstacle to maintaining control over their financial systems. These governments may also perceive Bitcoin as a vehicle for circumventing capital controls or facilitating illicit activity, thereby undermining the effectiveness of their CBDC initiatives.

In contrast, more open, market-driven economies may embrace a model of coexistence. Countries like the UAE, which are exploring both CBDCs and supportive regulation for cryptocurrencies, may find a balance by allowing Bitcoin to exist as a financial asset while carefully regulating its integration into the broader financial system. By doing so, they can appeal to the growing demand for digital currencies while maintaining control over their own monetary policies.

The Legal Implications

From a legal perspective, the coexistence of a CBDC and Bitcoin requires clear delineation of their roles. The laws governing financial transactions, taxation, and consumer protection would need to account for the distinctions between a CBDC — essentially an extension of the fiat system — and Bitcoin, which operates on a decentralized model.

There are also questions about the enforcement of these regulations. Bitcoin’s global and borderless nature makes it difficult to fully regulate within the confines of a single country. Governments can regulate how Bitcoin interacts with their financial systems (e.g., exchanges, wallets, and banking integrations), but controlling peer-to-peer transactions remains a challenge. Nevertheless, the existence of frameworks for crypto asset custody and regulation in jurisdictions such as the UAE and Singapore shows that coexistence is not only possible but also already taking shape in certain parts of the world.

Both the DIFC (Dubai International Financial Centre) and ADGM (Abu Dhabi Global Market) have established comprehensive legal and regulatory frameworks that facilitate the integration of Bitcoin into the financial landscape. DIFC’s regulatory body, the Dubai Financial Services Authority (DFSA), has developed a framework for regulating digital assets, including cryptocurrencies like Bitcoin, under its Investment Tokens regime, ensuring proper oversight, custody, and anti-money laundering (AML) compliance. 

ADGM, through the Financial Services Regulatory Authority (FSRA), has also taken a proactive approach, providing detailed guidelines for crypto asset activities under its Virtual Assets Framework. This framework addresses key aspects such as licensing for exchanges, custody, and compliance with AML and counter-terrorist financing (CTF) requirements, thereby creating a structured pathway for Bitcoin to operate within a regulated environment while being integrated into traditional finance.

Conclusion: The Path Forward

A country can indeed introduce a CBDC and still permit Bitcoin to exist as a legitimate asset. However, this requires crafting a legal and economic framework that allows for both to function in harmony, without undermining the goals of either. As Bitcoin, much like encryption, will continue to exist regardless of a government's approach, it is in the interest of society to find the right balance between regulation and freedom of use. 

The key lies in a societal agreement on where to draw the line between permissible and non-permissible use. Governments that recognize the distinct roles of CBDCs and Bitcoin — and create regulations to allow both to thrive — could find themselves at the forefront of the digital financial revolution.

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Disclaimer: The content of this article is for informational purposes only and does not constitute legal advice. The opinions expressed are the author’s own and do not represent the views of any organization the author may be associated with. Please consult a qualified legal professional for advice tailored to your individual circumstances before making any decisions based on this article.