Does the Introduction of CBDCs mean Increased Cryptocurrency Regulation?

Does the Introduction of CBDCs mean Increased Cryptocurrency Regulation?

cbdc

The price of bitcoin has plunged into an all-time low since January 2021 and as usual with any price drop, different reasons would be quoted as reasons for this drop. One of such reasons is that in China, self-regulating agencies have recently addressed associated members to not engage in crypto businesses.

The recent crackdown on crypto comes at a time where several reports state that China is leading the lines in the development of Central Bank Digital Currency. In recent times is there a connection between the rise of CBDCs and increased crypto regulation? Currently, the Financial Times observed in a recent article titled “Bitcoin gyrates on fears of a regulatory crackdown” that “The development reflected China’s campaign to limit institutional activity in cryptocurrencies as it prepares to launch its digital currency”.

To recognize the potential effects of CBDCs on crypto, one has the recognize that cryptocurrencies are a phenomenon for the future. In 2018 it was even argued that CBDCs would “destroy” cryptocurrencies.

How an increase can lead to increased crypto regulation?

In recent times according to Bitcoin Rejoin official website, no country has established a CBDC team and provided insights into how CBDC operates. To answer questions to the latest examination, we observed that while CBDC and cryptocurrency are digital currencies, they’re different because of the characteristics that include the extent of decentralization.

We agreed and then argued that decentralisation provided some benefits in terms of financial regulation and compliance and that when a CBDC is eventually introduced, the extent to which it is decentralised is very important and also discussed was how decentralization can cause concerns relating to the potential for financial crimes.

However, it is the approach to decentralisation that explains why CBDC introduction could lead to increased cryptocurrency regulation. It is through a definition of the extent of decentralisation that governments, regulators and policymakers can still assert some influence over any CBDC.

With the recent direction of things, it’s not hard to see a looming tension between the government created CBDC and the leading cryptocurrency. With all the possibilities of CBDC which include bringing in the benefits of a digital currency such as no cash, real-time tax collection, AML and KYC benefits, reduced anonymity, improved transaction monitoring, less potential for fraud and more consumer protection and regulations, this could lead to the potential downside of cryptocurrency which includes no control over the issuance, anonymity, more potential for financial crime, and more difficult regulation. There are also going to be those who see the very existence of cryptocurrencies as a threat to the introduction of a CBDC.

Conclusion

Responding to China’s recent move to block crypto businesses, Henri Arslanian, Global Head at PWC, had this to say “I would not be surprised to see other regulators and policymakers do the same [as the Chinese restrictions] over the coming weeks as they warn investors of speculative trading or crypto market volatility”.

Another individual, Chief Market Analyst at Markets.com, says that “China has for some time been putting pressure on the crypto space, but this marks an intensification” adding “Other countries might follow now as central banks make strides towards their digital currencies”

Of course, drawing correlations from the markets does not mean causation, however, while many countries would advise taking china’s approach, there is certainly evidence of increased scrutiny by both regulators and prosecuting authorities.

Copyright Lyonsdown Limited 2021

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