CBDC is the great disruption of the cryptocurrency market

With the recent boom in cryptocurrency investment, it is no surprise that governments are exploring digital versions of their own foreign exchange. The result could be a big problem for cryptocurrency companies, fintech companies, big banks and, if we are investing in any of them, for our portfolios...

What are CBDCs?

A central bank digital currency, or CBDC, is a fiduciary currency of a country in digital version: we can see digital dollars or, as is already implementing in China, the digital yuan. Instead of printing physical money, a central bank issues government-backed digital currencies. To be clear, this it's not what Same as paying with credit cards and payment apps like we do now. Those are just ways of moving money electronically, where a digital currency actually converts money into computer code.

According to the Bank for International Settlements, 90% of the world's central banks have launched digital currency projects. It is a sign that essentially everyone is fighting for control of their monetary systems. Investing in cryptocurrencies is increasingly becoming a challenge to fiat currencies, which in turn threatens the tools that central banks rely on to control their economies.

What are the benefits of CBDCs?

There are many benefits to investing in cryptocurrencies like CBDCs. No can be faked, make it easier for governments to detection of criminal activities and, since they have the same value as their paper versions, they will be much less volatile than investing in cryptocurrencies. They also allow you to carry out instant and cheap money transfers (including cross-border payments) that could boost economic activity as well as give the two billion people unbanked the right to be able to carry out such transactions without as many problems as usually occurs. 

Additionally, governments could use CBDCs to quickly implement measures that boost the economy. For example, to transfer money to the population as happened during the pandemic, it would be much faster and easier if they had been deposited directly without intermediaries. Last but not least, the money can be programmed. China has tested expiration dates on its digital yuan to encourage citizens to spend it quickly, at a time when the economy needs a boost. And perhaps even more importantly, the Bank of England has claimed that its digital pound would allow parents to schedule the allocation of money to their children to control how they spend it.

All that it sounds great, but therein lies the biggest disadvantage of investing in cryptocurrencies like CBDCs: they give unprecedented power to central banks, allowing them to track people's spending in real time and keep a record of all movements of money in their economies. And that immediately generates a great and important debate about privacy and basic freedoms…

What impact will investment in cryptocurrencies like CBDCs have?

Payment companies ​

Investing in cryptocurrencies like CBDCs could eliminate payment companies entirely. The digital yuan, for example, is designed to move from point A to B instantly, eliminating the need for private electronic payment systems dominated by Ant Group's Alipay or Tencent's WeChat Pay, both of which China is increasingly taking censorship measures. .

Other CBDCs could be designed to work with private payment companies or to replace them entirely. If the latter comes true, it would be bad news for companies like Square, PayPal, Mastercard, View y Global Payments.

Traditional banks ️​

During financial crises, bank sieges can occur when many of its customers, concerned about the bank's security, rush to withdraw their physical money at once. Now let's imagine that those customers, with the touch of a button, could move their money to a completely secure CBDC that is stored digitally at the central bank. This makes bank sieges much easier, which is not great news for the sector.

Central banks could implement measures to prevent this, for example by limiting the amount of CBDC people can hold. But bank sieges are not the only problem here. Even in good times, customer deposits, an essential source of funding for banks, could still leave the system if people simply prefer to keep digital money stored in a central bank. In that scenario, banks would have to look for alternative, potentially more expensive sources of financing, which could dent their profit margins.

Investing in volatile cryptocurrencies ⛓️​

A digital economy revolution could go in two directions:

• In the first scenario, regulators increasingly crack down on cryptocurrency investment and push CBDCs as an alternative. In an extreme situation where a country's entire monetary system becomes a CBDC, the government could completely ban people from using them to purchase cryptocurrencies. That scenario would be bad for both cryptocurrency investment prices and investment in stocks of companies exposed to the broader cryptocurrency market, such as Coinbase.

• In the second scenario, governments' push toward CBDCs could end up accidentally boosting investment in volatile cryptocurrencies. On the one hand, investment in cryptocurrencies such as bitcoin They have a limited supply which (in theory) makes them a good store of value. The supply of CBDCs could be constantly inflated by governments, eroding the purchasing power of digital currencies.

On the other hand, CBDCs nullify one of the main attractions of investing in cryptocurrencies: user anonymity. That's because they are controlled by the government, while cryptocurrency investing operates in decentralized systems outside the government's reach. If the push toward CBDCs makes people feel like they are losing their privacy and basic freedoms, it could lead citizens to investment in cryptocurrencies, since they protect privacy and at the same time are decentralized.