Central banks worldwide are exploring and developing their own digital currencies (CBDCs), potentially impacting the financial landscape significantly.
This move might be motivated by a desire to maintain control over monetary systems amid the growing popularity of cryptocurrencies.
While CBDCs offer potential benefits, concerns about privacy and personal freedoms remain crucial considerations.
The increasing adoption of cryptocurrencies has led governments to consider the development of their own digital currencies. While this move promises various advantages, such as improved efficiency and accessibility, it also raises valid concerns regarding privacy and personal freedoms.
Furthermore, the introduction of government-backed digital currencies could present hurdles for fintech companies, major financial institutions, and the cryptocurrency sector, and potentially impact the performance of investment portfolios that include exposure to these sectors.
What Are CBDCs?
Central Bank Digital Currencies (CBDCs) represent a digital version of a Nation’s conventional fiat currency. Picture it as a digital version of, say, US dollars, or, as China has already initiated, a digital yuan.
Rather than printing or minting physical money, a central bank would issue electronic coins supported by the government’s full faith and credit. It’s crucial to differentiate this from the current electronic payment methods like credit cards and payment apps, which merely facilitate electronic money transfers. CBDCs, on the other hand, encode money into computerized form.
"There will be control."
President of the European Central Bank, Christine Lagarde, admits the EU's new CBDC—the digital euro—will be used to impose control.
EU citizens already face imprisonment or fines for engaging in cash transactions above €1000, but the introduction of… pic.twitter.com/b9P2qxY4yS
The Bank of International Settlements reported that 93% of central banks globally are studying digital currencies. It expects 15 CBDCs to circulate by 2030. This trend suggests central banks are striving to retain control over monetary systems, particularly amidst the cryptocurrency market’s growing challenge to traditional economic regulation tools.
Their Impact On Payment Industry
These digital currencies have the potential to completely bypass payment companies. Take the digital yuan, for instance, engineered to facilitate instant transfers from sender to receiver, eliminating the reliance on privately owned electronic payment systems such as Ant Group’s Alipay and Tencent’s WeChat Pay.
Notably, China has previously taken regulatory actions against these companies.
In some regions, CBDCs may be structured to collaborate with or entirely supplant private payment entities, echoing China’s approach. Should the latter scenario materialize, it would pose challenges for companies like Block (formerly Square), PayPal, Mastercard, Visa, and Global Payments.
CBDCs Affecting Traditional Banks
Imagine a scenario where widespread fear prompts a bank run, with customers hastily withdrawing physical cash. Now picture these same clients effortlessly transferring their funds into a CBDC with a simple click, securely held by the central bank. This ease of access could heighten the frequency and ease of bank runs. It poses a significant challenge for the financial sector.
Granted, authorities could implement measures to mitigate this risk, such as imposing limits on the amount of CBDC individuals are permitted to hold. However, the challenges extend beyond bank runs.
Russia to involve 30 banks in its Central Bank Digital Currency (CBDC) test.
Even in stable economic times, if individuals choose to store their wealth in digital currency held by the central bank, customer deposits crucial for providing banks with low-cost funding could drain from the system. Banks would then need to seek alternative, likely more costly, sources of funding, potentially impacting their profitability.
Two Effects On Cryptocurrencies
The digital currency landscape could unfold in one of two directions. Regulators may tighten oversight of the cryptocurrency market and promote their Central Bank Digital Currency (CBDC) as an alternative. If a Country’s monetary system fully adopts CBDCs, individuals might be barred from using them to buy cryptocurrencies. This could harm crypto prices and related stocks like Coinbase.
Conversely, in the second scenario, governmental adoption of a CBDC could inadvertently bolster the crypto market. Cryptocurrencies like Bitcoin, for instance, boast a limited supply, theoretically positioning them as a stable store of value. In contrast, the supply of CBDCs could continually expand at the behest of governments, thereby diminishing the purchasing power of these digital currencies.
🚨BREAKING: USA CONGRESS ALONGSIDE #RIPPLE ANNOUNCES CBDC BACKED BY US DOLLAR ON CBDC BUILT ON THE #XRP LEDGER!
Moreover, CBDCs could accentuate one of Bitcoin’s core appeals: user anonymity. Given their government oversight, CBDCs contrast sharply with cryptocurrencies, which operate within decentralized systems beyond governmental control.
If the pivot towards CBDCs fosters concerns about compromised privacy and individual freedoms, it could drive individuals towards anonymous, decentralized cryptocurrencies.
Giuseppe Ciccomascolo began his career as an investigative journalist in Italy, where he contributed to both local and national newspapers, focusing on various financial sectors.
Upon relocating to London, he worked as an analyst for Fitch's CapitalStructure and later as a Senior Reporter for Alliance News. In 2017, Giuseppe transitioned to covering cryptocurrency-related news, producing documentaries and articles on Bitcoin and other emerging digital currencies. He also played a pivotal role in establishing the academy for a cryptocurrency exchange website. Crypto remained his primary area of interest throughout his tenure as a writer for ThirdFloor.