Central bank crypto-Currency (CBDC) schemes are popping up all over the world with varying levels of support. While there are certainly difficulties in creating a digital CBDC, for all the hype surrounding them, central banks seem to be shying away from the idea. In this post, we will look at why central banks may be worried about crypto – what does the academic literature say?
Three months after bitcoin hit $10,000 for the first time, the price of the cryptocurrency that is the world’s first decentralized digital currency has since lost a quarter of its value. It is now trading at around half that level. While many experts believe bitcoin will eventually be the world’s dominant currency, others say that the digital coin’s rapid ascent is an artificial bubble that will inevitably come crashing down. As one of the world’s most common currencies and one that is widely accepted by online merchants and online payment processors, it is difficult to see why central banks around the world would be afraid of bitcoin.Are central banks afraid of cryptocurrencies?
Their actions seem to indicate that this is the case. The European Central Bank today officially announced that it will begin the research phase of the digital euro.
The people behind this announcement seem to be positioning this potential digital euro as a better version of bitcoin.
The digital currency will use user preferences, be environmentally friendly, have privacy features and prevent illegal activities. Let’s simply ignore the fact that the last two points directly contradict each other.
The distributed video, in which Augustine Carstens, director of the Bank for International Settlements, seems unaware that she is outlining a dystopian future, underlines this perfectly.
It’s all about design decisions, or at least that’s what they want you to believe.
Asked about central bank digital currencies in a speech to Congress, Federal Reserve Chairman Jerome Powell said that if you have a U.S. digital currency, you don’t need cryptocurrencies – I think that’s one of the strongest arguments for it.
Bitcoin is not popular because it is digital. They are popular because it is money that does not depend on politicians and bankers.
The ECB has launched a two-year study to find out which design users prefer – funnily enough.
Let me save them some time. People want a separation between government and money.
In general, people don’t like unelected central bankers making unilateral decisions that affect us all.
One of the most controversial actions of central banks is money creation, a topic we discuss often in these updates.
Of course there is the fear that printing too much money will lead to runaway inflation. As we saw in yesterday’s CPI data, higher inflation is already happening, and as the Fed continues to print dollars, it could get worse.
The question is this: Is bitcoin a reliable protection against inflation?
There seems to be a lively discussion about this in the cryptocurrency community. This morning’s Cointelegraph article, with quotes from you, gives a pretty good overview of the various opinions.
Recent evidence suggests that digital currencies do not offer good protection against inflation, at least from a trader’s perspective.
In recent months, CPI inflation has risen fairly steadily while the price of bitcoin has fallen. However, gold prices have behaved similarly. And what does it say?
This tells us nothing. As with most things related to bitcoin and cryptocurrencies, we don’t have enough data to answer this question.
By way of example, here is a World Bank graph of global CPI statistics since 1981. As we can see, inflation has been phenomenally low during bitcoin’s existence.
As one advocate in South Africa noted, bitcoin does a good job of protecting its assets from the rapid decline of the rand.
From this perspective, the benefits of bitcoin as an inflation hedge are significantly underestimated.
Frequently Asked Questions
Why Cryptocurrencies are a threat to central banks?
Cryptocurrencies are a threat to central banks because they can be used as a means of payment and store of value.
Are banks afraid of Cryptocurrency?
Banks are afraid of Cryptocurrency because they don’t know how to regulate it. They don’t know how to control the flow of money and they don’t know what the future holds for this new technology. What is the future of Cryptocurrency? The future of Cryptocurrency is uncertain. It’s hard to predict what will happen with this new technology because it’s so new.
Is Cryptocurrency a threat to banks?
Cryptocurrency is a threat to banks because it can be used as a means of payment.
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