Central bank digital currencies (CBDCs) are the buzz phrase on many lips right now. While many see them as the next stage in digital coin evolution, others see them as a way for the original concept of cryptocurrencies to gain wider acceptance.
CBDCs are permissioned and centralized and as such are open to control and censorship from an issuing authority. This flies against the idea that was behind the launch of Bitcoin and which spawned so many imitators and rivals – so could CBDCs actually be a factor in helping the crypto sector gain a bigger audience than it has at present?
One of the big attractions for CFD traders drawn to the crypto sector is the almost in-built volatility in value due to the vigorous trading environment in which they are exchanged. On the other hand, this is one of the aspects that major financial institutions, hedge funds and central banks find off-putting about blockchain-based digital tokens.
JP Morgan unveiled its own stablecoin this month. JPM Coin runs on a permissioned ledger and is something of a turnaround for a company that has previously been quite vocal in talking down Bitcoin. However, this particular digital coin only settles transactions between JP Morgan banks themselves, so it poses little threat to Bitcoin or any of its rivals.
Any CFD trader using a ‘news’ strategy might have thought otherwise, as headlines such as “JPMorgan Just Killed the Bitcoin Dream” painted a different and somewhat unlikely picture. In truth, CBDCs and stablecoins do share some characteristics of cryptocurrencies in so much as they can facilitate low-cost cross border transfers of funds in a fast and efficient way, but in terms of privacy and non-accountability, they have little in common.
Even so, the question of how CBDCs will grow and impact the crypto sector is one that deserves consideration. Sheila Bair, former chair of the United States Federal Deposit Insurance Corporation, said last year that CBDCs could have “severely negative consequences” for the “bank-dominated payments system”.
However, how CBDCs such as JPM Coin may negatively affect the larger established financial system is unclear due to their limited use and impact so far. What is clear is that the emergence of central bank digital currencies aims to draw a distinction between an ‘official’ form of digital coin and the likes of Bitcoin which are still seen by many as a method to facilitate dubious and sometimes criminal activity. The way that many ransomware attacks often ask for payment by Bitcoin is just one way this idea is embedded in the public consciousness at the present time.
Permissioned ledgers are considered to be pseudo-blockchains by some in the crypto industry, as the digital currencies that are used in their transactions offer real-time tracking of customer spending. This means that funds can be easily frozen or even confiscated, which definitely goes against the ethos of the original Bitcoin White Paper.
The legacy financial system is built on the idea of giving power to governments, law enforcement agencies and regulators, and the evolution of ‘electronic money’ to date has only entrenched the levels of control, both real and potential. CBDCs play into this existing scenario, which is one of the reasons they are proving to be a popular concept for those interested in maintaining the status quo. China’s present social credit system could be a model for a wide-scale Western central bank digital currency operation.
The report from the Blockchain Observatory and Forum (EUBOF) that was released last December looked at the possibilities of a blockchain-based digital identity system and pseudo-crypto national currencies for Europe. This made it quite clear that these ideas are being discussed at the highest levels, but when it spoke of giving governments the ability to “put fiat currency on the chain” it really pointed towards how CBDCs could be viewed as a ‘crypto killer’ that would take away the need for complicated and difficult to enforce regulation.
However, the increased adoption of digital currencies is something that many involved in cryptocurrencies actually want to happen, and for CFD forex traders, any increase in trading volumes will be a welcome progression. The lack of privacy and possible censorship that come hand in hand with CBDCs means that the move might actually backfire by making the advantages in these areas offered by true cryptocurrencies even clearer.