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The rise in demand for digital payments during the COVID-19 pandemic further highlighted the importance of CBDCs and intensified the global race between central banks. The question is – which one will win?
Central banks all over the world have been developing their own state-issued digital currencies. According to a recent survey by Central Banking, 65% of the participants stated that they had been actively researching digital currencies, revealing a race between central banks to develop national cryptocurrencies. In fact, Kai Sheffield, the head of Visa‘s cryptocurrency division, considers central bank digital currency (CBDC) one of the most important trends for the future of money and the payments industry for the next decade.
Furthermore, the rise in demand for digital payments during the COVID-19 pandemic further highlighted the importance of CBDCs and intensified the global race between central banks.
Konstantin Anissimov, Executive Director at CEX.IO has shared his own view on this matter exclusively for Coinspeaker.
He said that from China and Japan to the European Union and the United States, numerous nations work on creating their state-issued digital currencies.
“From all the 46 countries that consider the development of a CBDC, China seems to be in the leading position to create the first state-issued cryptocurrency. In April, the People’s Bank of China (PBOC) was reportedly testing its CBDC, the digital yuan, in four cities.”
Let’s also not forget that the PBoC reported that it completed the back-end architecture development of the digital yuan last month, with draft laws ready to speed up the CBDC’s implementation.
“Based on this information, we can safely say that China is leading the CBDC race, with even the Bank of America admitting the same.”
He added that the Bank of Japan is also working on a central bank digital currency, announcing the start of the institution’s experiments with a digital yen earlier this month.
While the two Asian nations’ state-issued digital currencies are on the way, the United States has yet to decide on it.
“However, discussions on the matter have already started, with both the Congressional Task Force on Financial Technology and the U.S. Senate Committee on Banking, Housing, and Urban Affairs holding meetings about CBDCs last month.”
European Central Bank a Step ahead of U.S. in Cryptocurrency Race
The institution had confirmed its work on the digital euro last year with the development of two potential versions (wholesale and retail) of the CBDC.
Sweden and the United Kingdom are also actively putting in efforts into researching and implementing digital currencies.
Sweden had first revealed its intentions to run an e-krona pilot program back at the end of 2019, and began running the tests in February 2020.
In the UK, the Bank of England is debating on the potential advantages of issuing a central bank digital currency.
In March, the Bank issued a discussion paper on how a CBDC could be introduced and integrated into the existing markets and is welcoming input from local companies.
How Will CBDCs Impact Bitcoin and Crypto Market?
Anissimov says that as central bank digital currencies are still under development, we can only guess their actual effects on the cryptocurrency market.
However, despite that CBDCs feature centralized architectures, they will likely have a positive impact on decentralized cryptocurrencies.
“Currently, cryptocurrencies are still very new, and they have not yet reached mass adoption. However, as soon as CBDCs hit the market, billions of consumers will use digital wallets to send, receive, and store them. As a result, consumers will get more familiar with the technology, which will likely speed up the adoption of decentralized cryptocurrencies. Furthermore, consumers preferring control over their data and finances may choose decentralized cryptocurrencies over CBDCs.”
COVID-19’s Impacts on the Crypto Market and CBDCs
Anissimov says that with government measures – such as lockdowns and travel restrictions – to cut the spread of the virus, citizens worldwide are increasingly staying at home and limiting their visits to physical stores and venues.
“In general, this has resulted in a shift from offline to online activities among consumers. And these significant changes in consumer trends have impacted multiple markets and industries.”
He warns that as the coronavirus’s first and direct consequence, stock prices have started to fall rapidly between late February and March.
While both the S&P 500 and the Dow Jones Industrial Average fell by over 35% within this period, the crypto market also experienced a flash crash, driving down Bitcoin‘s price from $10,000 to $4,850 between February 23 and March 12.
However, Anissimov noted, the cryptocurrency market recovered quicker than traditional financial markets with a crypto bull run following the crash.
He also added cryptos have demonstrated a rather high rate of recovery compared to traditional assets.
“Following the collapse, Bitcoin grew by more than 100%, while S&P 500 and Dow Jones showed a growth of only 20%. In the future, we expect stabilization of all markets with a subsequent correction, as the positive factors at the moment are very fragile.”
He concludes that as a form of digital payments in an era where both consumers and merchants are turning away from cash transactions, the COVID-19 pandemic could increase the crypto adoption rate in the future.
And this provides one more reason for central banks to develop their own digital currencies to suit the changing consumer trends.
“Similarly to cryptocurrencies and decentralized finance applications, when CBDCs enter the market, they may offer access to distributed finance solutions, providing new financial products and services for the public,” concluded he.