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Why CBDCs Aren’t a Threat to Crypto

Why CBDCs Aren’t a Threat to Crypto
By Yasmin Sharbaf
Date February 24, 2023

Crypto Market Musings

One of the catalysts for our current crypto bear market was the collapse of Terra in early 2021. As a refresher, the algorithmic stablecoin TerraUSD failed to maintain its $1 peg. That caused its companion coin Luna to collapse. The twin collapses rocked the crypto ecosystem. And the SEC is finally charging founder Do Kwon and Terraform Labs with securities fraud.

Regulators are continuing to tighten their grip on cryptocurrency. Last week the SEC voted four to one to propose a rules change about how firms hold their customers’ crypto. The SEC wants to mandate that only qualified custodians (I won’t dig into the complicated definition of what that is here) can maintain custody of a client’s crypto investments. This rule could be a major blow to some crypto exchanges and institutional investors that have embraced crypto in their offerings. Institutional investors may have to partner with custodians or be limited to trading on a handful of exchanges, bringing extra costs and complications to their services. And that’s what Hester Peirce, the only SEC commissioner that voted against the proposal, is concerned about. She is worried it would be difficult for small investment advisors to comply with this rule and would discourage them from advising their customers to invest in crypto.

What Yasmin Is Thinking About

On the topic of government, the rollout of central bank digital currencies (CBDCs) is becoming more prevalent worldwide. A few days ago, both Japan and Russia announced they are moving forward with issuing CBDCs. Each country will run a pilot in April. UAE also announced creating a CBDC as one of the first steps in its financial transformation program. In the U.S., the Federal Reserve Bank of San Francisco is also developing a CBDC. But how does this affect crypto?

First, it’s important to note that CBDCs are not cryptocurrencies. They are a digital form of a country’s fiat currency. CBDCs are typically issued and controlled by a country’s central bank and don’t necessarily require blockchain technology. The purpose of a CBDC ranges from implementing monetary policy to government financial control and facilitating digital financial transactions.

Most people don’t see CBDCs as a replacement to crypto. But some governments have coupled their CBDC rollout with a crypto ban, such as when China banned crypto in late 2021 and piloted its CBDC in April 2022. Nevertheless, CBDCs might have a positive effect on crypto. People who are exposed to digital currencies will probably become more familiar with crypto as a result. CBDCs could actually reduce skepticism and build up trust around crypto because blockchain technology will likely be more secure than what CDBCs will use. 

Furthermore, a country issuing its own CBDC doesn’t really solve people’s distrust in a centralized financial system. A good real-world example of this behavior is Nigeria. The country issued  its CBDC, the eNaira, in October 2021. But less than 0.5% of the country’s population uses it. Meanwhile about a third of Nigerians use crypto according to a KuCoin survey. 

So I don’t think CBDCs pose a threat to crypto. And as more of them are rolled out, I think the trust and usage of crypto will actually increase. If you are curious about the developmental stage of CBDCs in each country, here is a cool CBDC tracker to check out: https://www.atlanticcouncil.org/cbdctracker/

And Finally…

While some countries are cracking down on crypto, other countries are relaxing their policies. On Monday, Hong Kong announced its plan to lift its ban on crypto and allow retail investors to buy cryptos from licensed platforms. This decision has been made to protect investors from using unregulated trading platforms such as FTX. Time to book a flight to Hong Kong? 

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