As Bitcoin’s volatility becomes a constant, so does its sophistication, with a new asset class benchmarked on its volatility (essentially a 1×2 call spread done at zero cost), creating the crypto’s first “fear gauge” index, Bloomberg reports.
Yet, as crypto-enthusiasts, Redditors and Elon Musk cheer in jubilee, they forget one crucial thing: the house sets the rules, and the house always wins.
Enter Central Bank Digital Currency (CBDC), and corporates. Let’s take a look at some overlaps, and dive into the above statement.
The House Factor
The common denominator and sell-point of virtual currencies, relies in their safety and security, rendering practices such as double-spending and counter-fitting relics of the past, without the need of central and overseeing authorities.
Moreover, depending on the cryptos’ underlying infrastructure set up, CBDCs can vary in degree of similarity with cryptocurrencies such as Bitcoin.
For example, essential to many is their coding upon a blockchain ledger, with a central node overseeing the network and its transactions, or lack thereof.
In fact, they can be more anarchic in nature, like Bitcoin, with the user not only in the driver’s seat, but also playing the role of infrastructure and traffic watchdogs.
Yet, no matter what systemic format is chosen, CBDCs have the core advantage of being backed by a central bank, underwriting its value.
CBDCs would presumably be pegged to their analogous currency 1:1, unlike anarcho-cryptos whose value is entirely set by the market, typically via decentralized and permissionless networks.
CBDCs are thus issued and monitored centrally, and not in a free-for-all setting such as with Bitcoin. Further, the implied implication is that CBDCs have no predefined monetary mass cap.
Albeit some may consider Bitcoin et al’s setting as more democratic, they are inherently more volatile in nature, as there is no legal entity bearing responsibility for it. Could we imagine the Euro today without Mario Draghi’s “whatever it takes”? No, we cannot.
Outside the duopoly of CBDCs and anarcho-cryptos, there are corporate-backed cryptos, such as Facebook’s Libra/Diem endeavor. Yet, whether the broader public will confer these the legitimacy they require for success, and whether the unavoidable regulatory hurdles which come with critical mass can be overcome, remain matters to be seen.
The State of Play
Most importantly, non-state-cryptos are rule takers and not rule makers, thus their future operational freedom cannot be fully discerned today.
Regulators are beginning to question whether there ought to be regulation in place, for example to prevent assets being prone to whims of single men, or to prevent, or at least to give the impression of, curtailing illicit activities in these networks.
This has prompted US lawmakers to introduce a bill to clarify crypto regulations; as of now it is largely a matter of individual member states. Moreover, a handful of countries have outright banned select cryptos like Bitcoin. These include China, Russia and Colombia.
Thus it should not come as a surprise when looking at the Atlantic Council’s CBDC Tracker to find 19 countries in pilot phase, 28 in research and 14 in development. Amongst these are the Renminbi, and the imminent Euro-project, as Frankfurt readies its teams.
At the end of the day, it is a house’s game – if the State decides to enter the fray, it will do so holistically, with the house’s rules.
As Brussels readies to unveil its digital passport and wallet, one can’t help but wonder, what’s next?