Cryptocurrencies have been around for a little over a decade now. In that time, like every other concept that tempts to shake up the world, there have been many attempts to keep these assets from blowing up into the mainstream.
Incidentally, many of these attempts came from the establishment itself. Many in the financial space could see that cryptocurrencies threatened to make their industry obsolete, and they set out on an offensive to quickly quell the excitement that these assets had gotten.
However, crypto has now become more than just something you can kill with a few bad reports and criticisms. As usual, banks have been the first to realize this too. So, it is time for an embrace.
The Rise of CBDCs
Central Bank Digital Currencies (CBDCs) have become the ideal way for central banks to harness the power of crypto and embrace it. These assets combine the benefits of each (sovereignty and stability) and crypto (transaction speed and the opportunity to be a part of the cashless society).
The speed with which central banks have been interested in developing CBDCs has been more than impressive in the past two years. Just about any institution in the developed world has been consulting on the prospect of digitizing their currency - even the reluctant ones like the United States.
So far, many have pointed out different reasons why governments seem to have turned their focus towards CBDCs. The most prominent reason is Libra - the stablecoin project launched by Facebook.
When Facebook announced Libra in 2019, it was a wake-up call for governments worldwide. The company was embarking on a crypto project the likes of which the world hadn’t seen before. Libra would be a stablecoin, so its price would not have been prone to volatility and wild swings like Bitcoin and co. Even better, its value would be pegged against a basket of currencies - unlike normal stablecoins, which are pegged to just one.
Libra would also work to make payments easy and seamless by connecting through Facebook’s family of applications - Instagram, WhatsApp, Messenger, and the Facebook app itself.
Libra immediately gained massive attention when it launched. The U.S. government was livid, with politicians immediately grilling top company officials about the project. All in all, the company could have actually pulled it off. The only problem was that Facebook had suffered a significant loss of trust with the people - and rightly so.
In the end, what doomed Facebook’s stablecoin project was Facebook itself - not necessarily the project or its scope. Soon after, regulators abroad also decried the asset and confirmed that they would not let it launch in their economies. Even before launching, Libra was dead in the water.
To be fair, Libra isn’t exactly dead. Facebook rebranded it to “Diem” last year, and the company still hopes that it can make it work. But, the original iteration of Libra is very much dead and buried.
China Forces Everyone’s Hand
After the Libra saga died down, China immediately began pushing its crypto agenda. President Xi Jinping gave a stirring speech supporting blockchain and its applications, hailing the technology as an important part of the country’s objective to become the world’s leading economy.
As soon as that speech went out, it was on. Everyone began speculating that China would launch a CBDC, and the government began running tests from 2020.
China’s objective with a CBDC is simple - the country is looking to use the superior asset to optimize its trade, ensuring that the yuan becomes even more effective. With its pivotal position in global trade and a currency that is easier to work with, China could effectively knock off the dollar as the world’s reserve currency.
Countries saw this, and they immediately acted. The mission was to stop China’s possible rise to global superpower status by using its own tactics against it. If everyone can make their currencies better for trade, perhaps the demand for China’s yuan might not be so high that it displaces the dollar as the global reserve currency.
The Coronavirus Threat
The coronavirus is another significant reason for the push towards currency digitization. When the pandemic hit, it changed life as we know it. One important area that the pandemic changed was commerce. Everyone was wary of paper money as it could be a medium for the disease’s transfer. So, it was time to digitize.
A Bank of International Settlements (BIS) report highlighted that the pandemic pushed people to use digital payments more, and this trend appears to have stuck. Services like PayPal and Square saw their businesses boom significantly during the pandemic as online payments surged. In the same way, banks now want to capture that trend.
Whatever the reason, it is good that central banks have now given up on the dream to kill crypto - it just won’t happen. The crypto market itself is too vibrant to be disturbed, and CBDCs will only increase that fact.