World governments have shifted focus from regular cryptocurrency tokens and stablecoins to Central Bank Digital Currencies (CBDCs).
While apprehension exists on one end, CBDCs provide economic and monetary control tools for central banks and other financial regulatory institutions, which gives broad entry points per the adoption of cryptocurrencies and their underlying technologies.
If the adoption of these technologies is to coexist with fiat currencies and other financial instruments, the financial industry must develop a global framework within the broader financial ecosystem.
For cryptocurrencies to be adopted more widely, CBDCs are going to be essential. The ease with which people could switch from conventional fiat currencies to digital ones is one possible benefit of CBDCs. CBDCs will be more universally recognized and trusted than cryptocurrencies since they are backed by a central body, unlike decentralized cryptocurrencies.
It is important to note that how CBDCs are created and implemented will determine their influence on the adoption of cryptocurrencies. For instance, if central banks strictly supervise and regulate CBDCs, this could restrict the uptake of other cryptocurrencies that function outside of conventional financial systems.
On the other hand, CBDCs may assist in accelerating the adoption of cryptocurrencies if they are created to function seamlessly with other digital currencies and encourage innovation.
By offering a regulatory framework and control, CBDCs contribute to legitimizing the usage of cryptocurrencies and boosting consumer trust in the technology. Moreover, CBDCs might aid in bridging the divide between established financial systems and the developing cryptocurrency industry.
Our panel of experts provided us with the necessary concepts and ideas that could drive the deployment of CBDCs and improve general cryptocurrency adoption.
Here are their thoughts.
Alex More, Head of Litigation at Carrington, Coleman, Sloman & Blumenthal
CBDCs will likely improve cryptocurrency adoption because they are, by definition, state-sanctioned. Regulatory uncertainty surrounding the treatment of cryptocurrencies continues to inhibit broader crypto adoption, and pending crypto legislation and regulatory proposals suggest tighter state crackdown on crypto may develop over the next several years. For businesses and customers who see the benefit of crypto technology but fear the regulatory risks and uncertainty of using crypto, CBDCs will likely offer a path toward adoption that gives access to crypto’s benefits while mitigating the risks and uncertainty that plague the crypto industry today.
David Waugh, Managing Editor, The Daily Economy, American Institute for Economic Research
Both cryptocurrencies and central bank digital currencies (CBDC) are digital, but the similarities end there. CBDCs are centralized, not peer-to-peer, and their development and usage are controlled by national governments, leading to risks of currency mismanagement and financial privacy concerns.
In Nigeria, for example, recent laws and regulations limit citizens from using physical cash to generate adoption of their new CBDC, the eNaira. The restrictions are actually driving Nigerians toward bitcoin, the opposite of their intended effect, as reflected by bitcoin price premiums ranging from 60 – 165% across the country.
In the UK, government officials recently indicated that if they introduce a CBDC, the government will ban citizens from “hoarding” significant balances of the digital government currency.Both examples reflect the clear threat CBDCs present to financial privacy and individual sovereignty. In the end, CBDCs will likely push citizens toward open-source digital currencies the government can’t control, like bitcoin.
Related: Op Ed: Central Bank Digital Currencies are the Future of Money
Justin Giudici, Co-Founder at Telos
At Telos we know from experience that larger players in the space like VCs, institutions, and LPs become more hesitant to deploy capital to dex’s and smart contracts the more layers of vulnerability are involved. We know for example that they prefer to deploy larger amounts of capital without bridges being required. It stands to reason then that they have a preference to have even less layers of vulnerability.
Currently, we need to trust that companies like Circle and Tether respectively are holding government-issued assets one to one, the banking institutions they are using, and on top of that, the governments issuing the currency. It would be reasonable to assume CBDCs would take market share from these types of companies due to having two less layer of trust/security being involved – this change represents a vastly lowered risk profile for the space, particularly as it relates to the 99% of funds that have yet to come into the space.
Anndy Lian, Inter-Governmental Blockchain Advisor
CBDCs (Central Bank Digital Currencies) refer to a digital form of fiat currency that is created, issued, and backed by a central bank. CBDCs do not necessarily need to be based on blockchain or use cryptocurrencies. In fact, many CBDC projects are not based on blockchai technology at all.
CBDCs play a significant role in cryptocurrency adoption by providing a more secure and efficient way to conduct digital transactions, improving financial inclusion, and facilitating cross-border payments. As long as the currency is digitalised, it has one less step to convert into cryptocurrency. This is a big plus in cryptocurrency adoption.
Donald Patterson, Professor of Computer Science at Westmont and UC Irvine and CTO at Blockpliance
In my opinion, the value proposition of Central Bank Digital Currencies remains somewhat unclear. This is due in part to the fact that most developed nations’ currencies are already primarily digital and therefore the added benefit of moving them to a blockchain-based infrastructure seems unnecessary. The risk of undertaking such a significant infrastructure overhaul may also be unclear. Digital currencies were originally formed as a way to evade state monetary policy controls by eliminating government gatekeeping, facilitating international transfers, and increasing privacy. Nation-states have valid interests in maintaining these controls, so I don’t quite understand what value a CBDC offers.
In the United States, it is worth noting that there is little lack of access to traditional banking services, which makes the potential benefit of using CBDCs for facilitating financial inclusion less compelling. Additionally, transaction costs are minimal when using established payment systems such as the Automated Clearing House (ACH), and payment system efficiency is already robust. Furthermore, the monetary policy in the United States is strong and effective, making the advantages of transitioning to a CBDC somewhat difficult to elucidate.
Thus, while CBDCs have the potential to offer several benefits in certain contexts, it is crucial to evaluate the specific circumstances in which they would be beneficial. In the case of the United States, there may be limited incentives for a transition to a CBDC, given the current robustness of the existing financial infrastructure. The advantages of adopting CBDCs in this context would need to be carefully considered and compared against the potential challenges and risks associated with implementing such a significant infrastructure overhaul.
Related: What Challenges Arise When Designing A CBDC In 2021?
