A recent report on fintech development commissioned by an EU committee reveals that central banks adoption of a CBDC would alter competition levels cryptocurrency markets.
The European Parliament Committee on Economic and Monetary Affairs (Econ) reports that there would need to be some kind of realignment in the market which would broaden the number of players in the market, and if this were the case it would not necessarily be beneficial to Bitcoin. The Econ statement suggested:
“The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”
However, at this stage it is not clear if this is the direction that the financial sector will move in over time, as many banks have already rejected any suggestion of adopting a CBDC, while those that have looked at it have failed to make firm commitments as to whether they would implement anything similar to a digital currency within their financial structures.
It is more likely that the EU is more concerned about a challenge to its own competition policy by the international cross-border nature of cryptocurrencies, which are significantly being utilized around the world in increasing numbers. Many are now choosing alternative means of addressing their financial needs, by cutting out banks completely. The report found:
“Many of the players operate from global locations outside the jurisdiction of European competition authorities, which makes investigation or prosecution on anticompetitive behaviours more difficult.”
Banks are increasingly concerned about the rise of cryptocurrencies as viewed from the financial establishment’s comfortable position in history. Notably, earlier this year, deputy director Dong He of the International Monetary Fund’s (IMF) monetary and capital markets department, said that cryptocurrency could deprive central banks of their ability to carry out monetary policy.
He claimed that due to the advantages of cryptocurrency over fiat, cryptocurrency would reduce the demand for central bank money. Central banks conduct monetary policy by setting interest rates for inter-bank transactions, but if they cease to have a monopoly over the money supply due to cryptocurrency, then their power to control monetary policy would weaken.
Until ideas such as Fed-coin and eKrona do a U-turn, it seems likely that cryptocurrencies will continue to grow in their own space, to the point that increasing Bitcoin and Ethereum adoption could well present a serious challenge to CBDCs should they be thrown into a global all-comer cryptocurrency market.