As the name suggests, Central Bank Digital Currencies (CBDCs) are digital currencies controlled by the federal government or the central financial authority of a nation. Though they might look too similar to other digital tokens like crypto, their value is fixed by the central government according to the value of the national currency.
In other words, CBDCs comprise the centrally controlled digital version of the country’s fiat money. Needless to say, the primary aim of such currencies is to offer greater financial security at a juncture where the crypto market has seen a dip in currency prices, leaving investors quite vulnerable.
With the current situation in the crypto market, where humongous crypto giants have suffered irreparable losses, the debate regarding whether CBDCs are to replace cryptocurrencies is quite pertinent. Are CBDCs a threat to the crypto market? Let’s find out.
Banks Driving a Wedge between the Crypto and Stock Market
There are various factors behind the recent crash of cryptocurrencies, and one of the primary reasons could be its direct connection with the stock market.
As mentioned by the CEO of Binance, champing Zhao, the crypto and the stock market have become directly proportional to each other because people trade both cryptocurrencies and stocks at the same time. Do the central financial bodies have any hand in it?
We are aware that the central banks increase their interest rates to control inflation, which leads to an immediate crash in the stock market. Thus, traders are compelled to sell their cryptocurrencies, bringing a similar fate to the crypto market.
Investing in digital currencies no longer remains a wise choice during inflation owing to the highly integrated investor base in most countries. Of course, the central bank has a role to play in this price fluctuation, and this could be seen as the best opportunity to introduce CBDCs, which in turn would be resilient to such price changes. However, does a greater chance for CBDCs indicate a barren market for crypto? Maybe not.
Can CBDCs Boost Blockchain Technology?
While some might see CBDCs with a lens of suspicion, there are more positives to it. Even though centrally controlled, these digital currencies are expected to validate blockchain technology and sow the seeds of mass digital adoption of tokens in general. As a result, CBDCs might, in fact, instill greater trust regarding digital currencies amongst users, especially the ones who have always been apprehensive about the same. In short, digital currencies circulated by the government is a great way to enhance the legitimacy of blockchain technology and induce greater awareness. Evidently, such a scenario leaves an incredible opportunity for the crypto market than ever before.
If you are wondering whether CBDCs can supersede the crypto market, you might need to pause and think of their implications. As centrally controlled digital currencies, CBDCs would offer lesser privacy in terms of transactions.
Veteran investors and financial experts have, in fact, claimed such a system could lead to the development of a totalitarian government through easy tracking of all the economic activities and details of the citizens.
On the contrary, the crypto market offers complete privacy through highly encrypted transactions carried out in a decentralized manner, prioritizing the liberty of the investors. Thus, it is evident that while CBDCs can open up new scopes for the crypto market, they are far from replacing cryptocurrencies, owing to their nature of functionality.