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Central bank digital currencies could reshape competition in crypto market

Central Bank Digital Currencies Could Reshape Competition in Crypto Market

By Stefan Filipović
Published 5 months ago

The sudden rise of cryptocurrencies has taken the governments and banks by surprise.  Decentralization movement has gained a lot of attention and governments understood that they need to get invested into the blockchain technology. Playing a huge part in the blockchain movements might be essential for keeping up with the upcoming breakthrough financial technologies. The way in which governments are planning to get into the market is through the Central Bank Digital Currencies (CBDCs). These currencies are basically a digital form of fiat money, with the difference being that they are established by the government law, rather than being without central governance as it is the case with most other digital currencies.

CBDC Could Be a Remedy for the Lack of Competition in the Crypto Market

European Parliament Committee on Economic and Monetary Affairs (ECON) commissioned a study on the issues of competition in fintech. The study was published on July 20th and brought some interesting results which are stating that CBDCs might bring certain competition to the crypto market. It is stated in the study that future CBDCs could broaden the number of competitors in the market which could have positive effects on the market itself. 

The study has also noted that CBDCs differ from private digital currencies by being a "conventional bilateral settlement with a trusted central party". Using permissioned cryptocurrency systems might be considered by central banks in order to substitute or complement the currencies already used. This is pretty important as it might bring some major changes in the crypto market, and also it is a huge question whether this is a good thing for other decentralized cryptocurrencies.  

The study has found that a way of direct public participation through a CBDC as a remedy could address competition issues in the cryptocurrency markets. Competition issues have been divided into the inter-crypto market competition which is being held between different cryptocurrencies and intra-crypto competition which is ongoing between service providers like crypto wallets and exchanges. As far as inter-crypto competition goes, a study has shown that presence of certain "network effects" and a high number of crypto users could provide a very difficult entrance for new cryptocurrencies that are hoping to join the market. Also, there is a possibility of forming certain cartels with their own agenda, and this type of competition could bring possible harmful cooperation between cartels. The issue with intra-crypto market competition is that payment provider, wallets and exchanges could favor one cryptocurrency over another which could be very harmful to the market success. Study hypotheses that CBDCs could be a solution to these problems. 

Conclusion

There have been a lot of distrust towards CNBCs in the crypto community as they essentially go against the basic ideas of the decentralized currencies. Regardless, if they can solve more problems than they could create, it would not be a bad idea to consider them as a part of the crypto sphere. 

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