While the worldwide coronavirus crisis has put many a project on hold, one that is still in the works is China’s creation of a digital yuan. Many observers expected the digital yuan to have been introduced by now, but the coronavirus lockdown throughout China undoubtedly threw a wrench in those plans. Still, the Chinese central bank seems intent on bringing the digital yuan to fruition. And with fears of dirty banknotes spreading disease, the stage is certainly set for the introduction of the first major central bank digital currency (CBDC).
China’s efforts have spurred other central banks to speed up their development of potential digital currencies and national cryptocurrencies. No central bank wants to be left behind, treated as a dinosaur in a world in which digital currencies, cryptocurrencies, and electronic payments methods and payment systems are becoming increasingly important, indeed vital, to both domestic and international commerce.
The coronavirus crisis has made many realize some of the drawbacks of cash, which were already apparent in a world in which increasing money supplies means more and more cash in circulation. Hence the movement towards central bank digital currencies. But will CBDCs displace existing cryptocurrencies like Bitcoin, Litecoin, Ethereum, etc.?
Developed in the aftermath of the 2008 financial crisis, Bitcoin’s appeal was that it offered a finite money supply. Only 21 million bitcoins will ever be mined, and no one can change that limit. That’s a refreshing break from fiat currencies, which central banks can create ad infinitum. With CBDCs also capable of being created in huge amounts, will consumers trust them as much as they trust existing cryptocurrencies?
People in China won’t have much choice, since the government has taken numerous steps to shut down Bitcoin usage and trading. And while black markets may still exist, a digital yuan would likely see strong usage. In the West, however, with cryptocurrencies tolerated by central banks and financial authorities, it’s not at all clear that CBDCs would force out existing cryptocurrencies.
If anything, the introduction of CBDCs would make clear to people currently on the fence about cryptocurrencies that cryptocurrencies are the wave of the future. And that may lead to increased demand for cryptocurrency, benefiting both cryptocurrency users and those who have invested in cryptocurrencies for long-term asset growth.