Central Banks and Cryptocurrencies: A Bitter-Sweet Relationship

The primary objective of central banks around the world is to act as currency regulators and cash reserves, while also serving as the cornerstone of a nation's monetary policy. From managing the money supply to ensuring the stability of the currency, central banks help democratically elected governments make decisions that benefit the public.

However, as cryptocurrencies have become increasingly popular, central banks have become increasingly wary of blockchain operations. Now, many central banks are calling for a ban on cryptocurrencies, particularly after the FTX episode.

In this article, we will examine the complex relationship between central banks and cryptocurrencies, exploring the reasons behind it and the potential effects of CBDCs on central banks' future stance on cryptocurrencies. We will also consider the implications of this relationship in the global context.

Why Central Banks are Skeptical About Cryptocurrencies?

Cryptocurrencies are widely viewed as a viable alternative to traditional financial systems. It is believed that, over time, cryptocurrencies will reduce the economy's reliance on central banks. However, the data available suggests that most investments in blockchain and cryptocurrencies are not driven by a lack of trust in traditional finance.

Central banks are intimidated by the complete elimination of centralized entities in any payment mechanism. This can cause the central banks to lose control of the liquidity flow in an economy and eventually become ineffective in driving the monetary policy of the country. As a result, there is visible resistance to streamlining the flow of cryptocurrencies in most countries.

In addition, the volatile prices, lack of awareness, and an absence of global consensus on crypto regulations further impede the process of crypto adoption for central banks. This is a major obstacle to the widespread acceptance of cryptocurrencies, as central banks are essential for the successful implementation of any new financial system.

Reasons that Make Cryptocurrencies Inevitable

Despite the fact that cryptocurrencies are unlikely to supplant the hegemony of fiat currencies, they are sure to become an essential part of the modern economy. The efficiency, control, and transparency that cryptocurrencies offer to the general public make them an attractive option for certain types of transactions. The adoption of cryptocurrencies is inevitable in the long run, and the following are some of the most common reasons for this:

• Even though there is still a lack of awareness about crypto, millions of users are doing daily activities in the markets and the number is rising with time. 

• The banking system as we know it today has evolved over hundreds of years, contrary to which cryptocurrencies are surprisingly young to achieve the impact that it has today

• With CBDCs becoming the currency of commons, the general masses would be much more ready to accept the cryptocurrencies

• The world is getting smaller with the advancement of tech and blockchain technology is an inevitable part of this tech revolution that we are living in today. 

• Crypto adoption is no more a question of ‘if’ but ‘when’ as people will surely understand the value of cryptocurrencies in the times to come.  

Will CBDCs Open the Gates of Crypto Adoption?

Contrary to their initial skepticism, central banks are now increasingly intrigued by the potential of central bank digital currencies (CBDCs). From Australia to Thailand, Brazil, India, South Korea, and Russia, many central banks are actively exploring the possibility of launching their own CBDCs in the near future.

The Reserve Bank of India is in the final stage of testing its CBDCs and making them available for retail users. But would these actions of promoting blockchain tech in global economies translate into an acceptance of cryptocurrencies? The answer to it lies in the attempts of nations to regulate the crypto space. The CBDCs under development could become a perfect template for the government to unleash the potential of blockchain technology, making the mechanism much more efficient and transparent. 

Once Central Bank Digital Currencies (CBDCs) are made available to retail users, the general curiosity about this new class of currency will help to educate the public about the fundamentals of blockchain technology. This will have a direct impact on the adoption of cryptocurrencies in the nation, as more people will be able to comprehend the process behind their functioning.

Conclusion

Blockchain and cryptocurrencies are extremely young technology and it is apparent of it receive criticism from those who do not understand their true potential. Central Banks around the world are calling out for complete regulation of cryptocurrencies and the centralized entities operating in the space to ensure investors’ safety. However, it is also true that cryptocurrencies are intrinsically different from other modes of value transfer and would need new standards of regulations. 

However, the relationship between the centralized banks and cryptocurrencies is going to spice up more in the times to come and it would be a sight to see how central entities will deal with this fin-tech revolution.