CBDC Is The Solution to Cryptocurrency Dominance, ECB Says
The European Central Bank last week released a discussion paper on the pros and cons of implementing central bank digital currency.
While looking for ways to ensure that central banks across the world keep its monetary sovereignty and not getting beaten by cryptocurrencies, the ECB finds a solution in CBDCs.
The paper suggests that, while CBDC could prevent further dominance from BigTech firms in the payments space due to ‘network externalities’ which come along with the selection of a medium of exchange, they may also be the “the only solution to guarantee a smooth continuation of the current monetary system.”
The ECB details that while certain digital platforms have become dominant business models, it could also create an anti-competitive environment that is centralizing digital market power with only a few tech giants.
Caused by ‘network externalities’ users being attracted because others are also using it, the tendency towards centralization “in the extreme can give rise to a winner‐takes‐it‐all outcome with a single dominant platform in a particular market segment,” the report says.
The ECB is therefore very much in fear of certain platforms becoming dominant issuers of private money following these ‘network externalities’ and change the current status quo of a domestic economy’s monetary sovereignty.
CBDCs can help retain a central bank’s control over monetary policy, the research said. Cost of payments can be reduced while day-to-day use of a reliable currency can be ensured.
The report elaborates:
“Theoretically, the monetary authority can ‘print’ unlimited amounts of the domestic currency to support financial institutions in distress. However, such liquidity support is no longer available if liabilities are denominated in foreign currency, which increases the risk of bank runs (even for solvent institutions).”
So far, CBDCs have officially been launched in two countries: the Bahamas (Sand Dollar) and in Nigeria (eNaira) with central banks around the globe are becoming increasingly interested. China’s ‘soft launch‘ of its digital yuan has gone largely unnoticed, nevertheless.
Reading between the lines, it is not far-fetched to believe that an additional push for CBDCs is to stave off further adoption of the world’s flagship cryptocurrency, Bitcoin.
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Source: igaming
