Where CBDCs Are in Crypto and What Else Can Drive Adoption

[ad_1]

The last few years have been characterized by the rise of fintech and blockchain companies.

Cryptocurrency, in particular, has been in the spotlight this year, and not necessarily for the right reasons. June saw the implosion of the Terra-Luna pair, and the resulting chain reaction also saw companies like Hodlnaut, Celsius and Three Arrows Capital crumble.

In November, FTX was also declared insolvent and its founder Sam Bankman-Fried was arrested in the Bahamas and is expected to face fraud charges in the United States.

Yet a rival use of blockchain technology has also been in the spotlight, for much more benign reasons. Indeed, central bank digital currencies (CBDCs) appear to be the blockchain application of choice for many governments and banks. Cambodia launched a retail CBDC in 2020, and the central bank of Kazakhstan has just recommended a gradual rollout of the CBDC over the next few years.

More importantly, however, global payments company SWIFT announced in October that its infrastructure could support the movement of CBDCs and other tokenized assets. The announcement, however, made no mention of similar support for cryptocurrencies. Instead, token assets meant token bonds, assets, and cash.

Obviously, this news does not bode well for cryptocurrency. Given that crypto is being promoted by its proponents as a viable alternative to fiat currencies, the decision to integrate CBDCs instead of cryptocurrencies into large-scale projects with enormous reach is concerning.

So does this mean that crypto is losing the battle for adoption by CBDCs, and why is this so?

A cryptocurrency is either stable or volatile, but it cannot be both

Is crypto better suited for investment or as a medium of exchange?

The answer to this question is complex – it depends on the cryptocurrency you are talking about and, most likely, the context. Certainly, a case can be made for both.

Banks and payment companies collect transaction fees from merchants, which can deter business owners from adopting these means of receiving payments. Cryptocurrencies with low transaction fees and large block sizes can certainly alleviate this problem.

Money should function as a store of value and a medium of exchange / Image credit: Investopedia

But for businesses and banks, stability is a valuable asset. It ensures that the token they accept in exchange for their goods and services will not fluctuate too much in value, and that they in turn can pass it on to someone who will agree to provide them with goods and services in return. As a medium of exchange, stability rather than volatility is preferred.

Yet, at the same time, it is also true that the price volatility of cryptocurrencies is enjoyed by those who view crypto as an investment. After all, fortunes have been made by investors who bought and sold their holdings at the right time.

However, it is difficult for cryptocurrency to be both. After all, the stability might be appreciated by those hoping to use cryptocurrency as a store of value, but it would not be a welcome trait for those hoping to enrich it by investing in crypto using only small amounts of money. money.

CBDCs, however, do not have this conundrum. As central bank liabilities controlled by the central banks themselves, they are simply digitized forms of fiat money. For many currencies, functioning as a medium of exchange instead of a mode of investment is already built into how money works.

While cryptocurrencies can claim to be viable payment methods, and some stablecoins certainly are, the SWIFT update also means that CBDCs may currently have the upper hand when it comes to adoption.

After all, why bother with a stablecoin that may or may not be accepted, when banks around the world are willing to accept CBDCs without any problems?

Are privacy and anonymity really a selling point?

Part of the appeal of cryptocurrencies is their anonymity. Wallet addresses, although public, are also anonymous. In other words, while transactions on the blockchain are visible to everyone, an individual can hold any number of wallets without having to declare their identity.

For businesses and regulators, however, this can prove to be a sticking point. Businesses must fulfill know-your-customer (KYC) obligations, as well as take steps to prevent money laundering and terrorist financing (MLTF). Not knowing your customers can mean they’re breaking the law, and unpleasant results can follow when investigators knock on the door.

Cryptocurrencies are still used for illicit purposes / Image credit: Chainalysis

The anonymity of cryptos, while a virtue for some, can be a vice for others. Such a conundrum does not exist for CBDCs.

Since CBDCs are run by central banks, the principles and obligations of traditional finance find themselves quite at home in government projects of this type.

In fact, wholesale CBDCs only allow financial institutions to hold CBDCs, which means that the risk of terrorist financing or money laundering can be closely monitored.

When the organization designing the CBDC is the very one that works closely with government, government concerns are much more easily heard and understood. In contrast, delegating the design of a digital currency to a private organization dedicated to profit seems reckless at best.

The absence of anonymity within such a system forms the basis of such a system. Since there is a common interest in ensuring that KYC and MLTF regulations are adhered to, CBDC integrations into national economies are much more likely and much more favorably viewed compared to cryptocurrency integrations.

A perhaps more productive strategy for crypto proponents who value privacy and anonymity would be to examine how privacy and anonymity can be maintained while addressing the very real concerns of money laundering and financing. of terrorism that governments are eager to solve.

Otherwise, CBDCs can be expected to be the default choice for governments hoping to increase financial inclusion and improve cross-border payments.

Should the Crypto Industry Compete or Cooperate?

Clearly, the crypto industry still has some way to go before convincing anyone that it can challenge fiat and CBDCs, especially in developed economies.

In many important ways they have now lost the battle. A survey by the Bank for International Settlements showed that of the 81 central banks surveyed, 90% of them create their own CBDC.

In the liberal economy, competition regulates the market – and in the technology market, governments are an important customer.

The BIS survey and SWIFT update show that governments overwhelmingly prefer CBDCs over cryptocurrency as a form of digital currency.

The same point was noted by eminent writer Donovan Choy, in his article on why CBDCs are bad.

In some ways, Choy is right – CBDCs are direct competitors to cryptocurrencies, and the widespread adoption of CBDCs could mean that many people see much less use for cryptocurrency.

As Choy pointed out, CBDCs can indeed be used to reinforce government control. However, technology does not progress to an endpoint – it always evolves in response to the needs of governments, businesses and individuals.

If cryptocurrencies are to replace fiat and CBDCs, they also need to prove themselves better than fiat and CBDCs – part of that includes fulfilling the functions that fiat and CBDCs do.

Centralized control, regulation and stability are all part of the package. The most obvious place to start is to change the reputation of the crypto industry from one where illicit activity is rampant and regulatory evasion is encouraged.

In this regard, many of the biggest crypto players are already on the right track and are cooperating with regulators instead of trying to circumvent them. Crypto.com is seeking licenses, with recent approvals from France, Singapore and Brazil. Binance, although it moved out of Singapore, has also sought licenses in countries like France, Bahrain, Dubai, and the United States.

Why? Because to be competitive in the long term, the crypto industry must first cooperate. It is this cooperation with governments and mainstream finance that will legitimize the industry and bring it real use cases.

Eliminating money laundering, fraud, raffles, and other unethical uses to focus on legitimate activities is necessary to ensure the future growth of the cryptocurrency industry.

Benefits of cryptocurrency / Image credit: Cloud Credential Council

After all, the cryptocurrency industry provides real value – the promise of lower transaction fees, instant settlements, and, with stablecoins, a viable store of value.

These are all real issues with the fiat currencies that cryptocurrencies can address, but as things stand, not all governments and corporations are yet ready to throw away traditional financial principles for these benefits.

For the crypto industry to survive, it must learn to choose its battles and sometimes it may take losing the battle to win the war.

While CBDCs seem to have the upper hand for now, cryptocurrency is still far from relegated to the dustbin of history. The way forward, it seems, is not just to tout how crypto can improve finance and fintech, but how they can meet regulators and corporate goals while delivering more.

Featured image credit: Phemex

[ad_2]