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.
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.
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.
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.
