Benzinga - Bitcoin (CRYPTO: BTC) advocates have dreamed for years of a world where Bitcoin becomes the world’s reserve currency. It’s easy to see why— if Bitcoin had as big a share of global currency markets as the US dollar, it would mean a Bitcoin price of over $2 million USD.
Governments are not going to take this lying down, however. In response to the growing popularity of decentralized cryptocurrencies, many central banks are issuing digital currencies of their own.
So who is going to win this epic struggle for the future of money?
A Brief History Of CBDCs Central Bank Digital Currencies (CBDCs) seem like central banks’ answer to cryptocurrency, but they’ve actually been around much longer. The first proposal for a central bank-issued digital currency was in Finland in 1993, but the idea didn’t really start to gain momentum until decades later.
The first major country to start serious CBDC development was China in 2014, followed by Venezuela and Iran. Note that these are countries that are very unhappy with the international dollar system. Venezuela and Iran are always looking for ways around sanctions, and China has been cautiously looking for ways to dethrone the dollar for years.
Other countries soon followed and started developing plans for CBDCs. In 2020 multiple countries announced CBDC plans, including Brazil, India, Russia, and the EU. By 2023, at least 114 countries were either exploring the possibility of releasing CBDCs or in active trials and implementation.
How Will CBDCs Affect Crypto Markets? Risk Factors CBDCs could potentially hit a number of cryptocurrency’s selling points. Some of them are designed to settle instantly, which would make them more resistant to fraud. They could also enable more efficient transactions, worldwide.
CBDCs will probably be based on the same encryption technology, which means they could have the same advantages as cryptocurrencies in terms of security. Another concern is that some countries, especially where repressive regimes are in power, will try to secure a monopoly for their CBDC by force. Cryptocurrencies have long been competing for the international remittance market, and CBDCs could dash those hopes. When it comes to day to day transfers and business transactions, most people prefer to avoid the instability of cryptocurrencies, so regulated CBDCs would have an advantage.
Currently, stablecoins like USDT and USDC fill this role in crypto markets, but there are doubts surrounding these currencies. Governments will probably be more able to inspire confidence than stablecoin issuers.
Long-Term Outlook A lot of crypto valuation is speculative, meaning it’s based on what people think will happen in the future. Some of that valuation is based on the expectation that cryptocurrencies will replace the role of government-backed currencies in many areas.
CBDCs will probably limit how much cryptocurrencies can really catch on for ordinary commerce. Governments, especially more repressive ones, may also try to force people to use their digital currencies.
Still, there are many reasons that decentralized cryptocurrencies will continue to have appeal.
- Inflation concerns. Many people prefer to store wealth in cryptocurrencies because they don’t trust central banks. This was the original reason for creating Bitcoin, and 14 years later, inflation and money creation are still running hot.
- Concentration of power. Many don’t like the idea of governments or central banks having absolute control over everyone’s finances. It means more concentration of power in the hands of politicians and bankers, which are two of the least trusted groups of professionals worldwide.
- Privacy. CBDCs invoke “big brother” vibes for some privacy advocates.
- Volatility. Let’s face it— a lot of people look at the cryptocurrency market as a giant casino. For better or worse, the wild price swings continue to attract a certain demographic.
- Black market usage. There is strong demand for cryptocurrency from black markets, and it’s unlikely that criminals are going to switch over the using a currency controlled by governments.
All attacks on cryptocurrency by governments so far seem to have made it stronger. For each country that restricts or outlaws it, there are other countries competing to attract crypto entrepreneurs and investors.
To gauge the impact that CBDCs will have on the crypto market, we need to know how much of cryptocurrency’s value is based on use cases that could be replaced by CBDCs. The answer is not much.
For the most part, cryptocurrencies have failed at their goal to become digital cash. Instead, they have come to play the role of a speculative asset class, an inflation safe haven, and a tool for privacy and censorship resistance.
These use cases are more than enough to support continued growth in the usage and demand for cryptocurrencies. Over the long term, the effect of CBDCs on cryptocurrency will probably be minor.
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