The future of money is changing faster than ever. For over a decade, Bitcoin has shown the world a vision of a global, decentralised financial system. Now, central banks around the world are entering the digital space with their own version of money: Central Bank Digital Currencies (CBDCs).
This is an important moment. We are moving from talking about digital money in theory to seeing two very different systems emerge side by side. But what are the differences between them? What rules and regulations might apply? And most importantly: can they work together?
What are Central Bank Digital Currencies?
A CBDC is a digital form of a country’s official currency, created and managed by its central bank. CBDCs are not designed for speculation. They are simply another way to use the money people already know and are familiar with.
Key motivations for central banks include:
Financial inclusion: Offering digital access to the unbanked.
Payment efficiency: Reducing costs in domestic and cross-border transactions.
Monetary policy: Giving central banks new tools to manage the economy.
Tackling financial crime: Providing more transparency in payments to reduce fraud and illicit activity.
Pilot projects are already under way. China’s digital yuan has been tested in several cities, the European Central Bank is advancing its “digital euro” project, and countries from Nigeria to the Bahamas have launched retail CBDCs.
Bitcoin’s alternative path
Bitcoin, by contrast, was never designed to be managed by a state or institution. Its decentralised architecture is resistant to censorship and inflation, with issuance capped at 21 million coins. This scarcity and independence has made Bitcoin attractive both as a hedge against monetary debasement and as an alternative store of value in regions with unstable currencies.
But Bitcoin is not frictionless. Regulatory uncertainty, volatility, and questions about scalability remain challenges. Where CBDCs promise integration with existing systems, Bitcoin offers an entirely new monetary paradigm: open, borderless, and free from centralised control.
Regulatory implications
The rise of CBDCs alongside Bitcoin introduces new complexities for regulators, who must balance innovation with stability. Key issues include:
1. Legal status and interoperability
CBDCs are legal tender, while Bitcoin occupies a patchwork of legal definitions worldwide. In some countries it is treated as property or a commodity, in others as a form of currency, and in a few (such as El Salvador) it is recognised as legal tender. Regulators will need to define how CBDCs and Bitcoin can coexist in payments and settlement systems.
2. Financial stability
CBDCs could reduce the role of commercial banks in deposit-taking, as individuals might prefer to hold central bank money directly. This could alter the structure of financial intermediation. Bitcoin sits outside the traditional banking system although it’s increasingly becoming incorporated, raising different risks during times of financial stress.
3. Anti-money laundering and compliance
Governments are keen to use CBDCs to strengthen Anti-Money Laundering and Counter-Terrorist Financing frameworks. Bitcoin transactions, though pseudonymous, are traceable on the blockchain, leading regulators to push for tighter compliance obligations on custodians and exchanges. Coexistence will require harmonisation of reporting standards across both systems.
4. Cross-border payments
One of the strongest cases for CBDCs is their potential to simplify and reduce the cost of cross-border payments. Yet Bitcoin already fulfils this role for individuals and businesses seeking fast, borderless transactions. Regulators may need to reconcile the frictionless nature of Bitcoin transfers with CBDCs’ more controlled architecture, especially in jurisdictions with capital controls.
The Role of banks and custodians
One of the most interesting dynamics will be how banks and custodians position themselves. As CBDCs evolve, banks may handle wallet distribution, compliance, and customer services. For Bitcoin, institutions that can combine robust custody with regulatory clarity will become essential bridges between decentralised assets and traditional finance.
In both cases, trust and security will be decisive. CBDCs will depend on the credibility of central banks, while Bitcoin’s integration will depend on the credibility of custodians to safeguard private keys without exposing clients to counterparty risk.
Xapo Bank’s Perspective
At Xapo Bank, we have long understood that the future of finance is not a zero-sum game between the old and the new. Our entire model is built on bridging the gap between the traditional financial world and the revolutionary potential of Bitcoin.
We understand that the financial system is evolving. CBDCs may redefine how central banks interact with citizens, while Bitcoin continues to challenge the boundaries of money itself. At Xapo, we provide members with a safe, regulated platform to navigate both worlds: protecting wealth today and preparing for the opportunities of tomorrow.
