The rise in popularity of Bitcoin (CRYPTO: BTC) and other cryptocurrencies have lobbied the US Federal Reserve and other central banks around the world to create their own central bank digital currencies, or CBDCs.
The transition from currency to the digital world may not be easy for central banks or traditional retail banks.
Central banks face many of the same challenges as any other business facing a disruptive new innovation, DataTrek Research co-founder Nicholas Colas said Thursday.
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Challenges for the holder: First, incumbents tend to wait too long before taking aggressive action.
The Federal Reserve and the ECB are unlikely to have a functional CBDC until at least 2025, Colas said. Meanwhile, over the past decade, the global cryptocurrency market has reached $ 1.3 trillion.
Second, incumbents tend to focus more on homeland defense rather than taking risks to innovate in the business.
Part of the role of central banks is to ensure economic stability, so it’s understandable that they aren’t necessarily inclined to embrace Silicon Valley’s mantra of “go fast and break things,” Colas said.
Third, incumbents often do not see the big picture. While the Federal Reserve has focused on ensuring the integrity of the US dollar, Colas said the proliferation of technology-based payment systems, smartphone apps and digital currencies suggests that the core definition of what defines “money” in the public eye is already changing in the public eye. the nose of the Fed.
Change the definition of money: For now, Colas has said the best reason central banks should push aggressively into CBDCs is the potential to disrupt entire banking systems, which he says is already happening.
For example, the $ 351 billion market capitalization of pure-play digital payments Paypal Holdings Inc (NASDAQ: PYPL) is already above the market caps of US banking giants Bank of America Corp (NYSE: BAC), Wells Fargo & Co (NYSE: WFC) and Citigroup Inc (NYSE: C), he said.
“The only way to put traditional banks on a par with disruptive competitors is to give them a technologically competitive currency,” Colas said.
“Large-cap US financials, just as we like them for cyclical trading right now, need all the long-term help they can get.”
Benzinga’s point of view: One of the main drawbacks that still prevent many people and institutions from adopting cryptocurrencies as a store of value rather than just a speculative investment is the extreme volatility that remains in the crypto space.
Fiat currencies will be put to the test if the crypto market ever stabilizes or if global economic circumstances end up creating similar volatility among fiat currencies.
Photo: Jerome Powell, Chairman of the Federal Reserve in 2018. Courtesy of the Fed.