Central Bank Digital Currencies to Reshape Crypto Markets

The European Parliament Committee on Economic and Monetary Affairs (ECON) published a report this July that concluded that centralised digital currencies could be the answer to the lack of any real competition in the crypto arena. According to the report, central bank-issued digital currencies (CBDC) also have the potential to be used as an alternative to fiat currencies. In a previous article on Crypthor, we discussed the rise of cryptocurrencies and their lack of regulation. As such, the aim of the EU Central Bank (ECB) is to have a regulated, centralised currency that it can use for trade.

The main theme of the report was that ECB issued digital currencies have the potential to create a more stable financial system. Factors based on the law of supply and demand as well as the dependence on goods and foreign currencies, create the volatility of current cryptocurrencies. Therefore, not being backed by any monetary authority, they are not a viable alternative to any fiat currency. The centralised nature of ECB issued digital currencies, however, backed by a trusted central party, has the potential to complement or substitute the current banking infrastructure and pave the way to a more stable financial system.

In the European financial context, the report also highlighted how the financial technology (Fintech) behind cryptocurrencies can be a disruptive and innovative service provider. It described how Fintech provides lower cross-border barriers and facilitates financial services between EU states by providing financing and investment alternatives to European businesses and private individuals. Moreover, cryptocurrencies and Fintech can contribute to EU objectives like the Digital Single Market and the Capital Markets Union. These innovations have the potential to bring benefits like cost reduction, better efficiency, improved transparency and ultimately contribute to the goal of financial inclusion in the European market.

The Eurozone market, therefore, is a uniquely crucial region for crypto markets, as events that affect one country can greatly affect the rest in terms of trade. As such, digital currency traders and investors will do well to keep an eye on world events that can impact their trade and affect the already volatile crypto markets. The Economic Calendar on FXCM shows trends and volatility within the EU, with the current consumer price index showing a bullish reading for the Euro. It also notes European Central Bank (ECB) policies and how they have the potential to influence currencies in the Eurozone. This gives crypto traders and investors a tool for analysis of market.

The ECON report also mentions that CBDCs will have an impact in the Eurozone by reshaping the current competition level in the cryptocurrency market. It defined competition as inter-cryptocurrency, between digital coins and intra-cryptocurrency, and between service providers like wallets, exchanges and payment providers. This competition has the potential to create asymmetric effects, including barriers, formation of cartels and collusive agreements. It can also lead to situations where service providers could create incongruent policies that could keep other competitors out of the market, leading to an unfair system. The ECB believes that CBDCs will be able to resolve these issues.

Now, with new EU directives for the Eurozone that came in mid-July, which set stricter rules for digital currencies in order to protect against terrorist financing and money laundering, it seems an opportune time for the ECB to forge forward with its CBDC. Coin Telegraph remarks that the closed cryptocurrency systems require a supervisory authority, and are based on a bilateral settlement with trusted party, unlike decentralized digital currencies which are not regulated. By adopting a digital currency, the ECB, according to the report, embraced the disruptive change that has the potential to avoid the recurrent instability of the current banking system.

Thorsten Burger
Thorsten Burger
I am a digitization / Cryptocurrency / NFT enthusiast and author for crypthor.net with a long and extensive experience in the financial and digital transformation industry. I have successfully managed projects around the world, motivated employees to create a variety of beneficial strategic portfolios, digital marketing, e-commerce and platform solutions and supporting the agile transformation.Happy to connect!

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