Forking paths: the future of finance in the age of CBDCs and bitcoin

Francesca Crachilova is a Junior Fellow of the Centre for Digital Assets and Democracy. Her work focusses on the benefits of Bitcoin with an emphasis on our spearhead campaign, “Bitcoin for Liberty” which includes contrasting BTC with other digital assets.  In the article below, she discusses the potential freedoms and pitfalls of Central Bank Digital Currencies and Bitcoin.

Francesca was a key contributor at our inaugural event in October 2023 where she discussed the prize-winning essay she wrote at 13 – “A Digital Democracy” – on leveraging blockchain in modern voting systems.  As well as winning a number of prizes in maths, Francesca is also recognized as one of the top debaters in the UK and stands out as one of the youngest members ever to join the prestigious Team England Debate. At just 16, she made history as the youngest champion to win both the Oxford and Cambridge University debate competitions.  Francesca’s interests include quantum computing, neuromorphic artificial intelligence, photonics-based communication technologies and philosophy.

The era of technology and digital currencies marks a pivotal fork in the road for the future of finance. At this critical crossroads, two divergent pathways are becoming increasingly apparent. On one hand, Central Bank Digital Currencies (CBDCs) perpetuate a centuries old trajectory toward centralised control, embedding governments and central banks even more deeply into the heart of economic governance. CBDCs offer the allure of precision economic management, enabling granular control over monetary policy, cross-border transactions, and financial compliance. However, this path raises significant concerns about surveillance, erosion of privacy, and the potential overreach of state power.

On the other hand, cryptocurrencies such as Bitcoin embody an alternative, fundamentally challenging the structures of traditional finance. By leveraging decentralisation, these assets empower individuals with unprecedented financial autonomy, operating outside any state’s ability to abuse monetary policy in pursuit of its own idiosyncratic political or economic objectives. Cryptocurrencies can resist inflationary pressures, bypass geopolitical constraints, and enable censorship-resistant transactions, creating a supra-national, credibly-neutral financial system, free from interference or oppressive influences of any given sovereign or corporate players.

CENTRAL BANK DIGITAL CURRENCIES

Central Bank Digital Currencies can be seen as an evolution of traditional fiat currencies, serving as a digital abstraction of the monetary systems already in place rather than a radically new innovation like Bitcoin. Unlike cryptocurrencies which operate independently of central authorities, CBDCs are state-issued and fully backed by central banks, functioning as a digital counterpart to cash. They are designed to integrate seamlessly into the existing monetary framework, maintaining the roles of fiat currencies as units of account, mediums of exchange, and stores of value. They preserve the centralized oversight that underpins traditional economic governance, distinguishing them from decentralized assets like Bitcoin, which exist outside government control and aim to establish a credibly-neutral financial system. In an era of mounting economic uncertainty and global crises, CBDCs equip governments with precision tools to rapidly and effectively stabilize economies and support recovery efforts overcoming the inefficiencies of traditional fiscal interventions.

The COVID-19 pandemic laid bare the profound inefficiencies inherent in traditional economic responses to global crises, exposing the inability of existing fiscal tools to deliver rapid and targeted interventions at scale. The delays and misallocations in distributing economic relief highlighted the urgent need for mechanisms capable of exerting precise control over the flow of funds to stimulate demand effectively. CBDCs by design, address many of these shortcomings through their programmable nature, enabling unprecedented granularity in economic management. Unlike conventional monetary instruments, which depend on voluntary compliance and consumer behavior, CBDCs allow governments to embed directives into the currency itself, ensuring funds are spent as intended and within specified timeframes.  

One significant innovation facilitated by CBDCs is the ability to issue expiring stimulus payments, a feature that mitigates the inefficiencies of traditional fiscal tools such as direct cash transfers or tax rebates. These conventional measures, while impactful in theory, are commonly subject to delays and inefficiencies stemming from recipient behaviors – individuals often choose to save stimulus funds or pay down debt rather than channeling them directly into consumption, thereby diluting the intended immediate impact on aggregate demand. Programmable CBDCs circumvent this issue by embedding expiration dates within the stimulus payments, compelling recipients to spend the funds within a predefined period.

China’s digital yuan pilot programs tested this initiative directly. During the 2020 regional trials in Shenzhen, the Chinese government distributed 10 million yuan (approximately $1.5 million) in digital yuan vouchers to 50,000 citizens via a lottery system. These vouchers, valued at 200 yuan each, were restricted to over 3,000 designated merchants and programmed to expire after two weeks. More than 90% of recipients utilised their vouchers within the two-week expiration period, and participants spent an additional 1.5 million yuan of their own funds alongside the government-issued vouchers, indicating that the initiative successfully spurred additional consumer spending beyond the distributed stimulus. Moreover, the programmability of CBDCs extends beyond expiration dates, enabling central banks to impose sector-specific spending restrictions to direct consumption toward areas of strategic importance. This feature holds particular relevance during crises like the COVID-19 pandemic, where certain industries—such as tourism, hospitality, and retail—experienced disproportionate economic shocks. Governments that issued broad fiscal support during the pandemic, such as direct payments or subsidies, faced challenges in ensuring that these funds were deployed effectively to stimulate the most affected sectors. CBDCs, however, allow policymakers to impose spending parameters that channel funds toward specific merchant categories or geographic areas, ensuring that economic interventions achieve targeted and optimal outcomes. From a theoretical perspective, this level of control gives way to a restructuring in fiscal and monetary policy synergy. Traditional fiscal policies often suffer from lag effects and behavioural unpredictability, while monetary policies lack the ability to directly influence spending decisions at the individual level. Programmable CBDCs bridge this gap by combining the precision of fiscal policy with the immediacy and scale of monetary policy interventions. For instance, during a recession, governments could issue CBDC-based stimulus payments with dual objectives: incentivising consumption in struggling sectors while disincentivising behaviours that contribute to economic inefficiencies, such as excessive debt repayment.

Programmability in the hands of a government, however, can choke democracy and basic economic freedoms.

Nic Carter, prominent thinker in the cryptocurrency space, remarked that if physical cash were introduced in today’s regulatory environment, its anonymity and resistance to centralised oversight would likely render it illegal under modern financial norms, where traceability and control are increasingly prioritised. This critique underscores a broader tension between traditional currency systems and the evolving regulatory landscape, particularly as central banks seek to expand their monetary policy toolkit. Central to this discussion is the Zero Lower Bound (ZLB) constraint on nominal interest rates – a critical limitation that has challenged central banks during periods of economic stagnation. In conventional monetary systems, physical cash provides an effective escape mechanism against deeply negative interest rates. When central banks lower rates below zero, individuals and institutions can withdraw cash from banks to avoid the erosion of their wealth through negative yields. This dynamic limits the effectiveness of monetary policy in stimulating spending and investment during downturns and also restricts the extent to which central banks can impose penalising rates to incentivise liquidity circulation. A fully digital currency environment, particularly one dominated by CBDCs, has the potential to circumvent this limitation entirely. Unlike physical cash, CBDCs are programmable and operate within a centralised ledger, allowing central banks to impose deeply negative interest rates directly on digital holdings. This capability fundamentally alters the incentives for economic agents, as holding cash-like assets outside the banking system would no longer provide refuge from negative yields. Instead, businesses and consumers would be compelled to either spend or invest their funds, accelerating economic activity during recessions or periods of stagnation. Historical precedents demonstrate the challenges posed by the ZLB. During the global financial crisis of 2008 and the COVID-19 pandemic, central banks across the Eurozone, Japan, and other advanced economies adopted negative interest rate policies in an effort to stimulate growth. The European Central Bank reduced its deposit facility rate to -0.5% during the disinflationary bond bubble of the late 2010s. However, the persistence of physical cash limited the efficacy of these measures, as individuals could opt out of the formal financial system and hold cash, thereby undermining the intended policy effects.

This can be viewed in the context of free market agility contrasting with the heavy hand of the state.

The IMF has extensively explored the potential of CBDCs to overcome the ZLB constraint. In its 2019 report on cashless economies, the IMF proposed a dual monetary system where physical cash and digital currency coexist, allowing central banks to maintain nominal interest rates on cash at zero while implementing deeply negative rates on CBDCs. Over time, the IMF argued, transitioning to a fully cashless system could grant central banks greater flexibility to manage economic cycles, providing a more robust response mechanism to recessions. By eliminating the ability to hoard cash as a zero-yield asset, CBDCs would strengthen the potency and legitimacy of monetary policy, effectively removing a long-standing barrier to economic intervention.

Furthermore, widespread CBDC adoption could transform international financial systems by addressing inefficiencies inherent in legacy mechanisms like SWIFT – used to securely transmit standardised transaction information, facilitating international payments. While foundational to global commerce for decades, SWIFT is often criticised for being slow, costly, and opaque, as well as for their susceptibility to geopolitical influence – for example, its exclusion of Russian banks in 2022 following sanctions imposed by Western nations in response to Russia’s invasion of Ukraine. This action effectively isolated Russia from much of the global financial system. The SWIFT system reinforces the global hegemony of the United States by underpinning the dominance of the US dollar in international trade and finance as SWIFT transactions often settle through US correspondent banks, they fall under US jurisdiction, enabling the United States to unilaterally impose financial sanctions and exert political pressure on other nations. This dynamic was evident in the exclusion of Iranian banks from SWIFT in 2012 and 2018, following US led sanctions, effectively cutting Iran off from global trade and solidifying the US’s role as a gatekeeper of the international financial system. CBDCs offer an alternative that enables direct, near-instantaneous cross-border payments with reduced reliance on intermediaries, but only where governments allow this action. The mBridge initiative is a collaborative platform piloted by central banks in China, Thailand, the UAE, and Hong Kong, which bypassed the need for correspondent banking networks traditionally dominated by Western financial systems, eliminating the ability for any country to act as a systemic bottleneck. Transactions that took days via the technologically archaic SWIFT system, largely unchanged from its first deployment in 1977, could be conducted in mere seconds via mBridge. CBDCs could not only address the inefficiencies of outdated systems but also promise to recalibrate the balance of power in global finance. Smaller economies, often marginalised in the current framework, could gain more equitable access to international markets, while nations under sanctions or political pressure may find avenues for financial resilience. Under the current system, these nations are often marginalised due to the cost, complexity, and political dependencies of SWIFT-dominated networks. By enabling direct and programmable cross-border payments, CBDCs allow these economies to bypass traditional barriers, and gain direct access to global markets with ease.

The above raises the question of whether it would be better to put such developments in the hands of industry, with sensible regulatory guard rails, rather than allow a government to have such extensive control.

Be fully aware.  CBDCs carry the very real risk of ushering in a draconian era of state surveillance and control. If someone were to access the full history of your transactions, they could gain deep insights into your personal life, habits, and be able to track your location. And programmability can allow a government to stop your spending and cut you off from your own assets. Unlike bearer assets such as cash, which allow for anonymous transactions, digital systems with centralised ledgers like CBDCs expose the entire state of financial activity to observation by a single entity. This trend aligns with a broader shift toward greater surveillance, as evidenced by the expanding scope of financial monitoring laws like the US Bank Secrecy Act (BSA). Enacted in 1970, the BSA requires financial institutions to report transactions above $10,000, a threshold that has remained unchanged despite decades of inflation – when enacted equivalent to a year’s salary, but now perhaps the price of a second hand car – effectively increasing the proportion of transactions subject to scrutiny. CBDCs further entrench this Orwellian surveillance culture, enabling real-time tracking and programmable restrictions on money usage.

Given this, it is highly unrealistic that they could be implemented without severe pushback. Nigeria’s introduction of the eNaira in October 2021 was met with substantial public scepticism and low adoption rates. By December 2022, over a year after its launch, only 0.5% of Nigerians had adopted the eNaira despite aggressive promotion by the Central Bank of Nigeria. To counter this reluctance, the Nigerian government took increasingly coercive measures to force adoption. In late 2022, the government capped daily ATM cash withdrawals at just 20,000 Naira (approximately $45) and introduced steep fees for exceeding these limits. The CBN also severely restricted the availability of physical cash, with cash in circulation reduced by over 80% at one point, effectively mandating reliance on digital payments, including the eNaira. These policies were particularly disruptive in an economy where 85% of currency is held outside the banking system and approximately 40% of the adult population lacks access to formal banking – sparking mass riots and protests across the country.

Putting such high degrees of control into the hands of the government is particularly worrying when analysing the trend that has seen global freedom decline since 2005. According to the Freedom House’s global freedom index, countries have been dropping in “freedom score” rather than rising for the last 17 consecutive years. The Economist Intelligence Unit’s Democracy Index 2023 supports these findings. The average global score declined from 5.29 in 2022 to 5.23 in 2023, indicating a regression in democratic standards, and approximately 39.4% of the world’s population lives under authoritarian regimes, while only 7.8% experience full democracy. If the 80s, 90s, and early 2000s were characterised by freedom and openness, such as the economic liberalisation of China and collapse of USSR, the late 2000s onwards are defined by a contraction of economic liberalisation, heightened surveillance, and reduction in personal liberty. As China begins to cement itself as the global leader of surveillance system export, it is not hard to imagine that the integration of CBDCs with machine learning systems and vast datasets collected through surveillance can create a powerful tool for state control. Security cameras could recognise faces of protestors in crowds and have their funds automatically frozen, silencing opposition without due process. And as CBDCs centralise financial power and enable granular control over individuals, they risk sharpening and increasing to the number of the instruments of authoritarianism.

Over the past 50 years, only 0.001% of the French population has been killed in terror attacks, yet “terror prevention” is frequently invoked as a rationale for expanding state surveillance and implementing increasingly intrusive financial controls. This rhetoric, often disconnected from empirical risk assessment, exploits public fears to justify disproportionate policy measures. Christine Lagarde, President of the European Central Bank, cited the use of anonymous prepaid credit cards in a decade-old terror attack to support arguments for restricting cash transactions to a maximum of €10,000. Moreover, she proposed extending these controls to even small transactions of €300, framing such measures as essential to counteract terrorism financing. Her focus on statistically negligible risks obfuscates the broader implications of such policies.

The reliance on isolated incidents to rationalise sweeping reforms reflects a classic strategy of governance: leveraging rare but emotionally charged events to enact policies with far-reaching consequences and presenting them in binary terms. By framing these measures as necessary for public safety, despite terrorism-related deaths accounting for an infinitesimal fraction of the population over decades, governments can circumvent robust public debate and deflect scrutiny of the potential for abuse. The risk lies not only in the erosion of individual freedoms but also in the normalisation of surveillance as an acceptable trade-off for perceived security. This creates a slippery slope where mechanisms introduced to combat extremism can be repurposed for broader social control, especially in contexts where authoritarian tendencies are on the rise.

This architecture of control aligns with a broader trend toward the erosion of privacy and autonomy in financial systems. The concept of “pre-emptive control” – where accounts are frozen or spending restricted based on mere suspicion – becomes feasible in a CBDC-dominated system, further concentrating power in the hands of state actors.

CRYPTOCURRENCIES AND BITCOIN

The digital opposite of CBDCs, the Bitcoin, was designed as a borderless, decentralised, censorship-resistant, and portable digital asset, and its characteristics have led to its colloquial designation as “digital gold” due to its mathematically capped supply. Central to Bitcoin’s appeal is its algorithmically capped supply of 21 million coins, which inherently limits inflation and provides a hedge against the monetary debasement often associated with fiat currencies and weak governance, mirroring the finite volume of gold and its high stock-to-flow ratio. Bitcoin validates and secures transactions on a decentralised consensus network maintained by a distributed ledger known as the blockchain, eliminating reliance on central authorities such as banks or governments and empowers individuals to have full self-custody over their assets.

Unlike historical monetary systems such the bimetallic and gold standard eras, where the underlying assets often required significant delays to settle transactions, Bitcoin enables near-instant settlement through its decentralised blockchain network. Its inherent divisibility and the speed of settlement and transaction being almost instantaneous eliminates the need for the kind of unit abstraction which historically has allowed rulers and governments to manipulate currency values over time for political or economic gain. For example, the decision to peg currencies to the US dollar—a choice deeply intertwined with political interests – creates artificial dollar scarcity by tying the value of local currencies to the dollar’s supply and demand dynamics. This scarcity disproportionately benefits creditors, who see the value of their dollar-denominated assets increase, while burdening debtors, whose repayment obligations become more expensive in local currency terms. Bitcoin, by contrast, functions as an autonomous unit of account, free from such distortions.

Subsequently, Bitcoin’s design minimises reliance on financial intermediaries, reducing their concentration of wealth and influence. When citizens fled the USSR, they were restricted to carrying just $100 in cash, forced to abandon their savings and financial security due to stringent currency controls and state-imposed restrictions on wealth mobility. During times of crisis, individuals are often rendered vulnerable to the whims of government policies. In stark contrast to the centralised nature of CBDCs, Bitcoin and other cryptocurrencies operate without a central authority, instead operating on a decentralised consensus network to validate and secure transactions. Bitcoin’s fixed supply of 21 million coins introduces a deflationary mechanism that resists inflation and government-induced debasement: central banks can expand fiat currencies indefinitely as they routinely increase money supply during economic downturns to stimulate growth, leading to mass inflation in poorly managed economies.

Venezuela’s economic collapse provides a highly notable example of Bitcoin’s utility as a hedge against hyperinflation – by 2019, annual inflation rates in Venezuela exceeded 10,000%, rendering the bolívar nearly worthless. In response, Venezuelans increasingly adopted Bitcoin to store and transfer wealth. Platforms like LocalBitcoins saw a surge in peer-to-peer Bitcoin trading as citizens used it to bypass restrictive capital controls and preserve purchasing power, despite the desperate government crackdowns on crypto in an attempt to stop citizens from fleeing their collapsing ledger. The ability to store value in an asset that cannot be debased cannot be overstated, particularly for those in authoritarian regimes and mercantilist countries who are trapped in endless vicious poverty cycles. Bitcoin’s uniquely predictable monetary policy makes it particularly appealing in economies with weak governance.  By holding Bitcoin, individuals can safeguard their wealth from erratic central bank policies or political instability, and provide a means to hedge against sovereign risk.

The speed at which currency can be devalued underscores the fragility of traditional financial systems. In March 2024, Egypt faced a severe economic crisis characterised by a foreign currency shortage and soaring inflation, which had reached 36% in February. To address these challenges, the Egyptian government negotiated an increase in its bailout loan from the IMF, raising it from $3 billion to $8 billion. A key condition of this agreement was the implementation of a flexible exchange rate regime. Consequently, the Central Bank of Egypt floated the Egyptian pound, leading to a significant devaluation of the currency and thousands of citizens’ savings turning worthless overnight. Citizens had no meaningful way to have hedged against this risk.

Bitcoin’s design offers unparalleled portability and sovereignty, allowing individuals to securely transfer unlimited value globally using only a private key which can be memorised or stored securely. As the most liquid and decentralised cryptocurrency, Bitcoin has become one of the top 10 most saleable assets globally, with faster settlement times than dollars and a lower supply growth rate than gold.

This combination of liquidity, reliability, and independence from state control makes Bitcoin particularly appealing for safeguarding wealth. In countries such as China with restrictive financial regimes, Bitcoin offers a vital alternative for individuals seeking to safeguard their wealth and bypass government-imposed capital controls. Unlike traditional assets that can be easily monitored, taxed, or confiscated, Bitcoin’s borderless and censorship-resistant nature allows for discreet, censorship-resistant and secure value transfer across jurisdictions. For instance, carrying $1,000 or more in physical cash or assets across international borders requires compliance with disclosure laws, and wire transfers are often subject to border controls, restrictions, or governmental interference, often making such transfers cumbersome and risky. Bitcoin revolutionises this process by enabling individuals to access their wealth anywhere in the world with just a 12-word seed phrase. Both wealthy individuals and those living in reduced circumstances who are concerned about the devaluation of domestic currencies or the risk of asset seizure, are increasingly turning to Bitcoin to preserve their wealth outside state-controlled systems.

In restrictive economies, the financialisation of utility assets – such as homes – often emerges as a common strategy for preserving wealth. Wealthy investors purchase multiple properties, not for their utility, but as a hedge against monetary instability or political uncertainty. This practice distorts housing markets by driving up property prices and reducing accessibility for the middle and working classes.  Cities like Vancouver, Sydney, and Singapore have seen housing affordability crisis exacerbated by particularly Chinese foreign capital inflows seeking safety in real estate, leaving many properties vacant for most of the year. In Vancouver, studies have shown that approximately 66% of sampled single-detached houses were purchased by individuals with non-Anglicised Chinese names. Similarly, in Sydney, Chinese investors have been identified as the largest group of foreign buyers, with reports indicating that they accounted for $24.3 billion in Australian real estate purchases in the 2014-15 period, more than triple the amount from US buyers – who were the second-largest group. Bitcoin offers a more efficient and less disruptive alternative. As a purely digital asset, it eliminates the need to tie wealth to utility-based assets like housing .  Its liquidity, divisibility, and ease of transfer allows individuals to preserve and move significant amounts of value without inflating local asset prices or distorting markets critical to societal well-being.

While the preservation of wealth by the affluent often dominates discussions around financial security, the risks extend far beyond the wealthy. For everyday individuals, particularly those in oppressive or volatile regimes, the inability to safeguard even modest savings can be devastating. Under Taliban rule, many individuals – especially women like Laleh Farzan, a pioneering computer scientist—faced targeted oppression. Despite facing organised Taliban raids on her home, multiple robberies, and the sinking of her boat with all her possessions on it, she was able to retain her Bitcoin holdings by simply remembering her 12 word seed phrase. In 2016, Farzan managed to relocate her family to Europe using her digital savings which sat peacefully and undisturbed on the network.

It is important to note that the idea of separating money and state is not about eliminating government, but rather about creating a balanced relationship between individuals and the state and increasing the accountability of a state to its citizens. A decentralised network like Bitcoin fosters financial autonomy, compelling governments to operate more transparently and adhere to their own laws, as individuals gain alternatives to state-controlled systems that are hard to clamp down on. Technologies that make it harder to freeze money are not designed to undermine legitimate legal processes but to ensure governments follow due process. Unlike custodial financial systems, where accounts can be frozen pre-emptively before guilt or innocence is determined or people and businesses can be de-banked at whim, self-custodial systems like Bitcoin require governments to formally charge individuals before exerting any control over their assets. This dynamic is particularly critical in countering financial censorship, which is often used against protesters and opposition groups in authoritarian regimes and has, at times, surfaced in democratic societies during wars or crises. By enabling individuals to opt out of corrupt or oppressive financial systems and build peer-to-peer networks, Bitcoin offers a “peaceful revolution,” empowering people to hold their governments accountable while preserving their financial sovereignty.

BTC PAYMENT SOLUTIONS

Bitcoin’s versatility allows it to be used for payments as well as a store of value where payment solutions exist.  While its foundational design prioritises security, decentralisation and immutability, these same design principles impose limitations on suitability for frequent microtransactions and thus scalability. The Bitcoin blockchain processes transactions on a first-come, first-served basis, constrained by a block size of 1 megabyte and a block interval of approximately 10 minutes. This results in a throughput of roughly 7 transactions per second, which is significantly lower than legacy payment networks like Visa that can handle thousands per second. Furthermore, during periods of high network demand, transaction fees can surge dramatically, rendering small-value transactions economically unfeasible.

These challenges stem from Bitcoin’s reliance on a proof-of-work (PoW) consensus mechanism, which inherently limits its capacity to process transactions efficiently on-chain. For example, attempting to use Bitcoin for micropayments, such as buying a cup of coffee, becomes impractical when fees exceed the transaction value itself. This scalability bottleneck restricts Bitcoin’s adoption as a medium of exchange for everyday commerce, necessitating innovative solutions that can address these inefficiencies while maintaining the network’s core attributes.

The Lightning Network represents a Layer-2 solution that enhances Bitcoin’s transactional efficiency without compromising its security or decentralisation. By creating off-chain payment channels, the Lightning Network allows users to transact directly with one another without broadcasting each transaction to the base layer. This significantly reduces the burden on Bitcoin’s blockchain, freeing it to serve as a settlement layer for high-value or infrequent transactions.

Through the Lightning Network, transactions can achieve near-instantaneous settlement at negligible costs, overcoming the constraints of on-chain fees and latency. Payment channels function by locking a certain amount of Bitcoin in multi-signature wallets, which act as escrow accounts. Once the channel is established, users can execute an unlimited number of transactions off-chain, with only the opening and closing balances ultimately recorded on the Bitcoin blockchain. This design significantly enhances throughput, enabling Bitcoin to support millions of transactions per second. The Lightning Network repositions Bitcoin as a viable solution for microtransactions, making small-value payments economically and logistically feasible. For instance, users can pay for goods and services like coffee, online subscriptions, or digital content without incurring the high fees associated with Bitcoin’s base layer. This capability extends Bitcoin’s utility into sectors where microtransactions are essential, such as pay-as-you-go services and real-time streaming payments. Various applications include paying per second of video watched, bandwidth consumed, or electricity used, unlocking entirely new business models that depend on low-cost, high-frequency payments. The Lightning Network’s potential extends into the realm of remittances, a critical lifeline for many developing economies. Traditional remittance channels, often facilitated by intermediaries like Western Union, are notorious for their high fees and delays which disproportionately burden the very individuals who can least afford them. By enabling near-instantaneous, low-cost peer-to-peer transfers, the Lightning Network offers a seamless alternative for cross-border payments – workers can send funds back to their families without the inefficiencies and exorbitant fees of legacy systems, ensuring more of their money reaches its intended recipients.

The Lightning Network also addresses financial inclusion challenges, particularly in regions underserved by traditional banking systems. By reducing transaction costs and enabling peer-to-peer payments, it provides unbanked populations with access to the global economy without relying on centralised intermediaries. This democratisation of financial infrastructure aligns with Bitcoin’s ethos of decentralisation and self-sovereignty, positioning the Lightning Network as a tool for economic empowerment in developing economies. The Lightning Network’s current evolution could catalyse Bitcoin’s transition from a predominantly speculative asset to a practical medium of exchange, bridging the gap between Bitcoin’s deflationary design and its potential to serve as a cornerstone of a new decentralised financial ecosystem.

A VISION FOR THE FUTURE

If Bitcoin were to achieve widespread adoption as a dominant monetary standard, its deflationary nature could fundamentally reshape economic behaviour and velocity, challenging traditional frameworks of monetary policy and macroeconomic stability. With its algorithmically capped supply of 21 million coins, Bitcoin introduces an unprecedented scarcity that inherently incentivises savings over consumption. This dynamic is underpinned by its role as “good money” in the context of Gresham’s Law, whereby inflationary fiat currencies—considered “bad money”—circulate at a higher velocity while deflationary assets like Bitcoin are hoarded for long-term preservation of wealth. The resultant shift in monetary behaviour could engender a dual-monetary system: Bitcoin emerging as a “store of value” akin to digital gold, while fiat currencies persist as the “medium of exchange” for daily transactions. In this scenario, as trust in fiat currencies erodes due to their inflationary tendencies and declining purchasing power, their role as a reliable unit of account may deteriorate further. This depreciation could exacerbate capital flight from fiat systems to Bitcoin, accelerating the latter’s entrenchment as a preferred asset for wealth preservation.

However, the reduced velocity of money in a Bitcoin-dominated economy could present significant challenges. By disincentivising immediate consumption and investment, sectors such as retail, hospitality, and manufacturing which are heavily reliant on consumer spending, could experience stagnation, leading to a reimagining of financing and economic models to maintain dynamism in the broader economy. To counteract the potential macroeconomic stagnation associated with Bitcoin’s deflationary properties, economies might adopt alternative mechanisms to stimulate spending and investment. These could include micro-lending platforms, subscription-based business models, and tokenised economies that align incentives toward higher monetary circulation. Governments may also explore fiscal tools such as targeted tax incentives to encourage Bitcoin transactions; however, such interventions could face resistance given Bitcoin’s decentralised nature and its inherent resistance to state control. Moreover, the traditional monetary tools employed by central banks – such as inflation targeting, interest rate adjustments, and quantitative easing – would lose much of their efficacy in a Bitcoin-centric system, given its independence from centralised monetary authorities. Consequently, fiscal policy would become the primary instrument for managing economic fluctuations, though without the ability to debase currency or deploy expansionary monetary practices, governments could struggle to adequately respond to economic downturns or crises.

A feasible solution to mitigate these challenges may lie in the adoption of a hybrid monetary system. In this framework, fiat currencies would serve short-term liquidity and transactional needs, with Bitcoin operating as a long-term store of value and reserve asset. Salaries, rent, and routine expenditures would continue to be denominated in fiat currencies, ensuring liquidity and operational stability – meanwhile Bitcoin’s unparalleled scarcity and resistance to debasement would allow it to fulfil the role of a financial anchor, offering individuals and institutions a reliable mechanism for wealth preservation, particularly in regions plagued by hyperinflation or weak monetary governance. This bifurcated approach could also temper Bitcoin’s volatility, as it would not need to simultaneously function as a medium of exchange, unit of account, and store of value. (At this stage, Bitcoins volatility can in part, be attributed to its rapid growth from a nascent digital experiment to a trillion-dollar market cap within just 12 years, a trajectory that has naturally involved speculative cycles, evolving investor sentiment, and fluctuating liquidity levels.)

For governments, this hybrid system could be seen as a pragmatic compromise. Fiat currencies, remaining under central bank regulation, would enable continued use of inflation targeting and liquidity management to address short-term economic imperatives. However, the growing role of Bitcoin as a reserve asset could impose fiscal discipline, compelling governments to adopt more sustainable financial policies to retain public trust. This dual system preserves the operational continuity of traditional monetary systems but also provides individuals with a decentralised alternative that resists inflation and preserves purchasing power over time.

Francesca Crachilova

[email protected]

January 2025