How CBDCs could actually expand Bitcoin's user base
Bitcoin's high performance has fueled the popularity of CBDCs partly because many countries still see this crypto as a tool for illegal activities and they think that a sovereign digital currency will better complement existing financial systems.
Starting last October, Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, Sveriges Riksbank (Sweden) and Swiss National Bank, began working with Bank for International Settlements (BIS) to explore the possibilities that digital currencies could bring. Most of these CBDCs, or central bank digital currencies, share some other technology and design principles and largely cater to retail use. In all likelihood, these sovereign digital currencies will help regulators monitor the flow of money and help them trace illicit activities.
But CBDCs will be connected in some way to an existing sovereign currency.
CBDCs based on blockchain technology will use digital wallets that will closely replicate the cryptocurrency experience. This infrastructure will help expand the user base of cryptocurrencies and support the current crypto economy without stifling innovation.
Another benefit of CBDCs is the standardization of regulations and even offer more clarity on accounting and reporting issues like crypto taxes, for instance. However, CBDCs will enable regulators to access and store all consumer data through a centralized server that better controls monetary activities. Meaning, these regulated digital currencies don’t guarantee a decentralized experience that crypto assets otherwise offer. Naturally, CBDCs have received some criticism.
Possibilities of stricter regulations can't be overlooked. Some fear that if people don't fall in line, certain governments could order payment processors to carry out their work and enforce restrictions, making financial discrimination worse. At the same time, there is a sense of irony that comes from a centralized authority using a settlement method with decentralized origins.
But this hasn’t stopped nations from testing their CBDCs.
If at all, there happens to be a race to launch CBDCs, then China and Sweden are in the lead with both nations now test-launching pilot versions of their digital currencies. China’s government, for example, is planning to set up a virtual-asset exchange to complement the pilot launch of its CBDC, digital yuan. Meanwhile, Sweden’s CBDC, e-krona, could be connected to the real-time gross settlement system, which could link the CBDC with other payment systems.
Similarly, Hong Kong Monetary Authority, Bank of Thailand, Central Bank of UAE and People's Bank of China are collaborating on "multiple CBDCs" (mCBDCs), a cross-border CBDC bridge. This would largely help in connecting sovereign digital currencies to multiple CBDC systems and this interconnectedness could stabilize financial markets.
It's reasonable to predict that the price of CBDCs will be less volatile. Since cryptocurrencies also depend on fiat prices, global financial stability will most likely steady crypto prices too.
To learn more about the latest developments in the crypto space, visit BitOasis, the region’s largest crypto-asset exchange.