One of the biggest headlines yesterday came from the Federal Reserve of the United States. Fed’s Powell, its Chairman, said that the Fed is looking into the benefits of a digital currency.
At this point, CBDC (Central Bank Digital Currencies) are more than just a simple idea. After the ECB (European Central Bank) announced that it applied for a trademark for the digital Euro, other central banks stepped up the process of embracing digital currencies (e.g., Bank of Japan, Bank of Canada). Now, the Fed signals the same.
What will CBDC bring to the digital world? Will they represent a threat to the current digital currencies? (i.e., stablecoins, altcoins, Bitcoin).
A Long Road Ahead for CBDC
Before anything, we should add that there is a long road ahead until we will see any CBDC launched. However, by that it means that there is still a lot of work to be done, from the legal framework to the infrastructure needed, but it does not mean that it will take a long time.
One of the biggest questions regarding CBDC is if they will have legal tender status? Or will they fulfill the functions of money (are they able to) as we know it today?
According to a study launched this year, most central banks in the developed world are likely to issue their first CBDC within the next few years. Sure, “few” is more than a “couple” but less than “several”. However, judging by the rush of important central banks to announce their interest in the CBDC space, we can safely assume that they will become a reality sooner rather than later.
The big problem with a CBDC, when compared to its physical counterpart, comes from cyber-attacks. A successful cyber-attack on a CBDC will put not only the CBDC at risk, but an entire economy. So far, cyber-attacks have existed on all major crypto-exchanges. Also, the infrastructure in place for stand-alone projects was challenged multiple times.
Nevertheless, when central banks of this caliber study the possibility of introducing CBDC, the crypto world better listen. No other entities in the world have so many resources, so powerful research departments, not to mention regulatory power to make it a successful project.
How about the current crypto assets? The crypto market as we know it will change dramatically. When big guys step in, they mark the place. Remember what happened when the CME introduced futures contracts on Bitcoin? That was the top of the 2017 highs, as professional traders stepped in.
Will it be the same, but this time for the entire crypto market?