The Rise of Central Bank Digital Currencies (CBDCs): How It Will Impact Crypto Markets
Posted On May 15, 2023
Central Bank Digital Currencies (CBDCs) are proving to be a creative way for governments to benefit from digital currencies while maintaining control over monetary policy. Many in the cryptocurrency sector think about the potential influence on cryptocurrency markets as CBDC projects become more common in various countries. Let’s examine how CBDCs might affect the cryptocurrency market in more detail:
The Background of CBDCs
CBDCs gained popularity as governments sought to rebuild confidence in their monetary systems following the 2008 financial crisis. The Central Bank of Ecuador introduced the first CBDC in 2014. Since then, many nations—some more seriously than others—have been investigating CBDCs. For instance, the governments of Sweden and China are far along in creating a CBDC, while the US Federal Reserve is just starting to explore the idea.
Specifications of CBDCs
CBDCs are centralised, managed by central banks, and employ a private ledger in contrast to cryptocurrencies like Bitcoin and Ethereum, which are decentralised and run on a public ledger. This implies that compared to cryptocurrencies like Bitcoin, which many governments find challenging to oversee, CBDCs are simpler to regulate and manage, making them more appealing to governments. When designing their CBDCs, various central banks must consider that token-based or account-based systems can be used to execute CBDCs.
Updates on Government Regulation
Different governments have different perspectives on cryptocurrency. While some have embraced their development, others have outlawed it. On the other hand, most governments involved in CBDCs tend to think that they provide an alternative that is more closely related to conventional monetary systems. They believe CBDCs can provide enhanced regulatory capabilities that can aid in lowering money laundering and tax evasion activities. However, because governments will continue to exert tight control over their distribution and use, CBDCs might only partially replace other cryptocurrencies.
Potential Effects of CBDCs on the Markets for Cryptocurrencies
Given their complexity and infant stage of development, it can be challenging to forecast how CBDCs may affect the Bitcoin market. One potential effect is that CBDCs boost public trust in digital currencies by providing a government-backed digital currency. Public opinion of current digital assets, such as cryptocurrencies, may be affected by a digital currency backed by the government. However, some contend that CBDCs could cause cryptocurrency to lose market share due to competition.
Global financial systems may become more regulated, secure, and stable due to the use of CBDCs. To what extent CBDCs will interact with other cryptocurrencies and if they will continue to complement or compete with current digital assets is still being determined. Over the coming years, CBDC initiatives will evolve and mature further, increasing their influence on the cryptocurrency market.
As governments plan how to capitalise on the advantages of digital assets, CBDCs are gradually gaining acceptance on a global scale. The value of current digital assets and the regulatory environment are all things that CBDCs can affect. However, it is still too early to anticipate how CBDCs would affect the cryptocurrency market, given that different central banks and stakeholders have implemented and designed different CBDCs.
MA in English and literature. I have a passion for writing, and I read – A lot! Recently I became super interested in the economy and especially decentralized economy and cryptocurrency. This blog is a hobby of mine, I like to put together pieces from what I am researching every day.