Why central bank digital currencies (CBDCs) are bullish for Bitcoin


Governments may take time to implement them, but the trend toward central bank digital currencies (CBDCs) is clear. Major economies from China to Japan, Sweden to the UK, and even smaller countries like Uruguay are all throwing their hats into the ring. Many in the crypto space argue that central actors and permissioned blockchains are the very antitheses of what Bitcoin represents. But banks getting into crypto is a catalyst for furthering adoption. And that can only be good for Bitcoin.

 

Cryptocurrency Is Being Talked About at the Highest Level

It was not so long ago that major banks and governments were dismissing Bitcoin as a bubble or even labeling it as a scam. Yet, fast-forward to today and cryptocurrencies are dominating the conversation at the highest level.

We're seeing major macro investors entering the space, institutional funds pouring in, and the (once highly skeptical) largest financial institution in the U.S., JPMorgan, opening up bank accounts for major cryptocurrency exchanges. How quickly times are changing.

While it may not be to everyone's liking, centralized cryptocurrencies and permissioned blockchains are a growing force. And it is these regulated, monitored implementations of crypto that will lead the next surge that propels the space to mass adoption at last. CBDCs may not offer the ‘great promise' of crypto but they will be bullish for Bitcoin in the long-term.

 

CBDCs Will Help the Ecosystem Grow

According to a recent survey by the Bank of International Settlements (BIS), 80% of central banks are actively engaging in some kind of research work into CBDCs, while 10% are likely to issue one in the short-term.

But whether we see 20 CBDCs or 200, cryptocurrencies issued by central banks will help the ecosystem to grow. They will lead to a massive influx of investment from financial institutions. All of this will depend upon a solid and secure infrastructure to transact and store these digital assets. This can then be used by the wider public for non-central bank digital currencies like Bitcoin.

Along with a robust and mainstream infrastructure, the onslaught of CBDCs will clear up any gray areas in regulation, such as the standardization of accounting, taxation, and reporting across the industry.

This may not be immediately compelling to many within the space, but it is a necessary tradeoff for crypto to become widely adopted. CBDCs will provide a regulatory and familiar framework for millions (and eventually billions) of people to begin to understand how to interact with digital assets. This is crucial for moving into Bitcoin.

 

Reduced Volatility Will Lead to Widespread Acceptance

Stablecoins have been growing in protagonism in recent years to counter the infamous volatility present in cryptocurrencies like Bitcoin and Ether. In fact, Tether (USDT) is currently neck-in-neck with Ripple's XRP to hold the third-place ranking by market cap, almost reaching $9 billion. CBDCs are the next logical step and they will be familiar to users as they will likely replicate their current banking experience.

Moreover, as volatility is one of the main factors that keep merchants from accepting payments in crypto, CBDCs will dramatically shake up that dynamic. The greater public can enjoy the benefits of near-instant transactions and minimal fees that cryptocurrency affords (perhaps not in its purest form) as a widespread medium of exchange.

After all, CBDCs are really just the next extension of the already digital currencies used by hundreds of millions of people every day around the world.

 

Removing the Barriers to Adoption

The cryptocurrency space may be thriving, but it is still comparatively very small. There are still only around 40 million Bitcoin wallets with an estimated 1% of the world owning BTC. If we really mean to take Bitcoin to the masses, we need to grow and reach mass-market adoption. And for the 99% of the world not engaged in the industry, the barriers to adoption are still glaring.

Most everyday people are still put-off by the need to familiarize themselves with new concepts and vocabulary, complex interfaces, or uncertain regulation. They may simply not have the time or incentive to learn about private keys, or how to file and report their crypto transactions.

While the promise of Bitcoin was the simple transfer of value on a peer-to-peer basis, we've long seen that for onboarding more people, greater infrastructure is needed. This includes centralized exchanges like OKEx, Kraken, or Coinbase that continue to develop more tools to help people manage their assets, such as wallets and earning capability.

These exchanges may be criticized by purists for acting as middlemen, but for wider adoption, they've proven indispensable, providing on-off ramps to facilitate transactions and hedge tools for risk control. Soon, it will be the turn of CBDCs to lead the next wave, providing users will an even more familiar environment that will grow the space exponentially.

This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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