Would a CBDC Tank Crypto Investments?

Jack R. Mitchell

How Would Crypto Markets Respond to the Introduction of a CBDC?

Photo by Etienne Martin on Unsplash

Lately, there has been talk about the possible introduction of a central bank digital currency, or CBDC. Such a currency would be an official, widely distributed type of cryptocurrency.

So what kind of impact might this official cryptocurrency have on other, unofficial cryptocurrencies like Bitcoin? And how can traders prepare?

The Appeal of a CBDC

First, why are central bankers and government authorities even considering the possibility of a CBDC? After all, cryptocurrency was, in many ways, introduced specifically to resolve problems associated with central banks. Why would a central bank attempt to produce a digital currency of their own?

· Digitization and integrations. The first answer is the simplest one: society is increasingly flowing in the direction of digitization and integration. Increasingly, our lives are being taken over by digital products and services, and those digital products and services are connected together in a litany of different ways. At a certain point, it’s going to seem archaic that we have any kind of non-digital, traditional currency in circulation. Just as digital invoices have come to mostly replace traditional invoices, digital currency will almost inevitably come to replace most traditional currencies.

· Security. Cybersecurity is high on the priority list for most organizations and institutions, and the government is no exception. A sufficiently well-constructed digital currency infrastructure could give the government tighter security controls for currency – and practically eliminate the biggest problems associated with counterfeiting.

· Efficiency and convenience. Many people, perhaps rightfully, believe that digital currencies are more efficient and more convenient. Once the initial learning curve is overcome, people will be able to quickly and efficiently process transactions without having to carry around cash.

· Tracking and taxation. Another motivation is that introducing a CBDC will allow the government to impose more tracking and stricter tax enforcement on its citizens. When currencies are fully digital and controlled by the government, almost every transaction is going to be perfectly transparent; the government may then be able to impose stricter controls for certain transactions or enforce laws with greater consistency. By extension, the government will also be able to consistently collect tax revenues, as it will be much harder to “hide” certain “under the table” transactions.

· Maintaining control. Cryptocurrency represented an indirect threat to the control of central banks. If central banks are going to retain control over monetary policy in an era where independent cryptocurrencies exist, they must eventually introduce an attractive, competing cryptocurrency of their own.

The Problems for Existing Cryptocurrencies

So if a CBDC does roll out, what does that mean for existing cryptocurrencies?

There are some reasons to be bearish:

· Competition perceived as legitimate. A CBDC would likely have many of the same advantages as existing cryptocurrencies, with the unique selling point that it’s “legitimate.” If enough people switch from existing cryptocurrencies to a similar one issued by a central bank, it’s naturally going to cause prices to decline.

· Regulatory scrutiny. There are already several countries that have banned or severely regulated trading of cryptocurrency. If a central bank issues its own type of cryptocurrency, you can bet that regulations of non-CBDC coins are going to become much stricter. If the use of a cryptocurrency becomes more expensive or presents more obstacles, its user base is certainly going to diminish.

· Acceptance and accessibility issues. Vendors and sellers are going to have significant influence over which currencies eventually become most widely accepted. If a CBDC is introduced, vendors and sellers will likely have many incentives to accept it over other types of cryptocurrency, or even accept it exclusively. If you can’t use other types of cryptocurrency reliably, they’ll eventually die out.

Reasons for Optimism

However, there are some very good reasons for optimism.

· CBDC is unlikely in the near term. Initial talks of releasing a CBDC have been met with public skepticism and sometimes outrage. On top of that, CBDC is a massive project that would probably take decades to fully roll out. This official central bank currency is very unlikely in the near term, and it may never even take off.

· Problems with central banks may be exacerbated by CBDC. Remember, one of the motivations for producing independent cryptocurrencies is to mitigate issues associated with central banks. If a central bank introduces a CBDC, it’s probably going to make all those problems worse. In turn, people might become even more motivated to produce new cryptocurrencies or invest in the established players already in circulation.

· New cryptocurrencies will still emerge. Even in the face of mounting regulations, it’s likely that independent cryptocurrency developers will still try to produce more innovative coins. As long as crypto isn’t totally banned, crypto investors will have new opportunities to look forward to.

· There will always be a need for an alternative. For as long as there have been currencies, there have also been alternative currencies. No matter how cryptocurrencies or official currencies evolve from here, we can almost guarantee that people will be in search of alternative currency investments.

The future of CBDC, as well as other cryptocurrencies, is unpredictable. Accordingly, you should follow a set of strategies based on your own interpretations and your own risk tolerance. Diversifying your portfolio is always a wise move, so if you’re feeling uncertain or wary about the future, reassess your portfolio distribution and reallocate your holdings for greater stability.

The subject matter and the content of this article are solely the views of the author. FinanceFeeds does not bear any legal responsibility for the content of this article and they do not reflect the viewpoint of FinanceFeeds or its editorial staff.

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