What will happen to the cryptocurrency market when central banks introduce their own digital currencies?
The cryptocurrency market is more popular than ever. Since the pandemic started, digital currencies led by Bitcoin have risen to all-time highs that were unimaginable only a year ago.
The recent Initial Public Offering (IPO) of Coinbase, one of the largest crypto exchanges in the world, showed how popular cryptocurrencies are among retail traders. But cryptocurrencies are not solely speculative; they’re also useful for sending money around the world at lower costs and without the burden of a bank account.
Central banks cannot remain indifferent, and ongoing efforts have led each of them into a digital space race: a race to introduce a Central Bank Digital Currency (CBDC). China is already piloting a digital yuan, the European Central Bank (ECB) has announced a future digital euro, and the Bank for International Settlements (BIS) in Basel, Switzerland, has made no secret of its research in this area.
Why Do We Need CBDCs When Other Cryptocurrencies Already Exist?
All major central banks — including the Bank of England, the European Central Bank, the Reserve Bank of Australia, and the Bank of Canada — have said they are studying the introduction of a CBDC.
Does this mean that cash payments will disappear? Probably not, at least in the short term. The plan is for CBDCs to complement cash and cashless payments as we know them today.
Are central banks in a hurry due to the popularity of the current cryptocurrencies? For sure, but this doesn’t mean that cryptocurrencies represent a threat to the fiat money issued by central banks.
The current cryptocurrency market is unregulated, and when one big jurisdiction (e.g., the United States) bans any of the major cryptocurrencies we know today, the whole set of dominoes will fall.
Cryptocurrency fans bet on the fact that such a move would be impossible because of the size of the cryptocurrency market and the systemic risk it poses to the current financial system. The bigger the currency cryptocurrency market becomes in terms of market capitalization and investors’ adoption, the bigger the systemic risk to the financial system will be.
Central banks want to reduce the influence of the current cryptocurrencies by introducing CBDCs that will be more transparent, trusted, and safe for digital payments. So, a digital currency space race has started between CBDCs and the current cryptocurrencies. Who will win remains to be seen, but the showdown should be interesting to crypto and fiat fans alike.