CBDC could spark tighter regulation of cryptocurrencies

A report from the German bank’s chief investment office said they considered it highly likely that private cryptocurrencies will stay with us for the foreseeable future

The widespread introduction of central bank digital currencies (CBDC) could spark tighter regulation of cryptocurrencies and therefore create a more challenging environment for crypto-assets into the future, according to analysts at Deutsche Bank.

On Monday, a report from the German bank’s chief investment office said they considered it “highly likely” that private cryptocurrencies will “stay with us for the foreseeable future” and that the longer they persist “the more robust and credible they become due to network effects”.

Once we see some stability in terms of price fluctuations, the use of cryptocurrencies for the exchange of goods and services goods could increase as long as central banks have not introduced their own digital currencies, the bank said.

However, Deutsche added that should central banks around the world eventually introduce CBDCs, this could force private cryptos to adapt to the changing trading environment, saying that differentiation based on individual business models and utility could emerge as the key parameter for sustainability.

Despite this, the bank said the introduction of CBDCs is expected to be a long one, meaning crypto investors may not have to worry about the imminent shake-up of crypto markets caused by an influx of state-backed digital coins.

Governments would need to consider all the socioeconomic, technological and regulatory aspects of such a move before an issuance can take place for the fear of generating an unwanted financial disruption and social backlash. The adoption rate of a truly digital currency within societies could ultimately be dependent on the preference between privacy vs. convenience. Banknotes and coins greatly reduce digital footprints because a cash transaction does not generate digital data. By contrast, digital currency transactions, albeit convenient, can be traced by CBDC, Deutsche Bank said.

One key sticking point will be whether any CBDCs will be maintained through decentralised or centralised systems, with Deutsche Bank saying central banks are likely to desire to retain centralised control of any digital currency due to serious governance concerns for maintenance and supervision were not centrally-determined.

Central bank officials argue that to remain credible as a central bank there must be one institution which guarantees the stability of value, ensuring the elasticity of the money supply and oversees the security of the system. Central banks are interested in keeping the control of circulating money flows and to respond appropriately to economic shocks in accordance with their price stability mandate, the bank said.

However, they added that one strong attraction of centralised CBDCs is that traceability will improve the ability of authorities to combat terrorist financing and money laundering, making governance much more effective.