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Blockchain: Why Central Bank Digital Currencies Are Good News For Blockchain Adoption

Blockchain:

Central banks are getting into the crypto game; that is a good thing for crypto and blockchain adoption.

Blockchain: View of Federal Reserve Bank of New York during COVID-19...

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Cryptocurrencies are rapidly becoming part of the mainstream investment conversation, but that does not mean that the development of new crypto options is slowing down. Even with the bitcoin halving making news, and the subsequent speculation on the price of bitcoin and other cryptocurrencies, an underlying trend continues to forge ahead. Permissioned blockchains and more centralized crypto options continue to permeate the marketplace, and seem well positioned to lead further adoption and utilization of both blockchain and cryptoassets at large.

One particular iteration of this shift toward increasingly centralized or permissioned options is the potential for a central bank digital currency (CBDC). Seemingly contradictory when compared to the initial idea and spirit of cryptocurrency, there are several reasons why a CBDC makes sense, and is a logical next step in the blockchain/crypto conversation.

Why a CBDC makes sense

A CBDC issued and governed by a central bank or other governmental agency will help push the accounting and reporting conversation forward. Accounting might not make for splashy headlines, but in order for any crypto, and by extension blockchain, to achieve wider usage, accounting and reporting needs to be standardized. Looking at the tax issues linked to cryptocurrency alone highlights the need for standardized and consistent regulatory treatment that does not stifle further innovation.

An additional benefit of a CBDC is that, in all likelihood, this crypto will be connected in some way to an existing fiat currency. Stablecoins are a rapidly growing segment of the crypto marketplace, and a CBDC is a natural extension of that existing trend. Specifically, as the blockchain and crypto experience more closely replicates that of a traditional banking experience, the easier it will be to expand the user base.

Building on this connection, it would be reasonable to forecast that a CBDC would have lower price volatility than some of the other options currently available. Reduced volatility, and the backstop of a central government or central bank, might also reassure individuals and merchants that have been hesitant to accept or use crypto to date. Price swings make headlines, but might not help the argument that crypto is actually a legitimate alternative to fiat and stable medium of exchange.

The concept of a CBDC might seem like a new idea, or something that will require large amounts of incremental investment, but that is an incomplete view of the situation. Digital currencies and virtual currencies exist, and are used by millions of people on a daily basis via e-commerce and peer-to-peer platforms. In other words, the infrastructure for a widely used and accepted digital currency already exists, and could serve as a model for future CBDC initiatives.

Announcements by several global credit card companies seeking to, in essence, convert existing fiat currencies to blockchain enabled digital versions reinforces the idea that the infrastructure for wider CBDC development already exists.

Viewed through the lens of a crypto purist, the idea of a CBDC might seem like a betrayal of the essence of what blockchain and crypto were supposed to represent. Acknowledging that, it is also important to keep in mind that the true potential of blockchain and crypto will not be realized until it achieves mass market adoption. Numerous obstacles continue to stall wider usage; technical complexity, user interfaces that are unfamiliar, regulatory ambiguity, and concerns over how to disclose, report, and insure cryptoassets.

CBDCs might not have been the original idea of blockchain and crypto, but the continued development of them is good news for blockchain and crypto adoption.

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