16.02.202111:58 Forex Analysis & Reviews: CBDC halts crypto rally

The rally of Bitcoin and other cryptocurrencies stalled, after investors closed their positions in the market.

To add to that, this halt in Bitcoin has decreased the hype that sent cryptocurrency to Wall Street, due to the fact that large companies and investors have changed their attitude towards digital assets.

As cryptocurrencies become more and more popular, there is growing pressure on the world's largest central banks to advance their plans to issue digital money. Accordingly, this increases the threat to traditional money.

In fact, Bitcoin, which is the most popular cryptocurrency, has already moved from funding to large investors, companies and even cities. For example, Tesla's investment has driven BTC to an all-time high of nearly $ 50,000. Meanwhile, the Facebook-backed digital currency Diem, formerly known as Libra, is slated to launch this year.

To combat this, central banks of G7 countries outlined how a digital currency would function, but warned that progress would be slow.

CBDC is the electronic equivalent of cash.

Like banknotes or coins, they would give holders the right to make a direct claim to the central banks, overtaking commercial banks. With the support of central banks, they will be as "risk-free" as traditional money, and will allow holders to make online payments.

So far, access to central bank money is limited. But now, the situation is changing since central banks fear losing control of the global payment system in favor of cryptocurrencies, which are usually not controlled by any central authority or individuals.

Such could weaken the control of central banks over the money supply, one of the main ways of managing the economy. This threat has become more real amid the rapid proliferation of digital currencies.

Last week, financial firms BNY Mellon and Mastercard said they would support digital assets. City of Miami, on the other hand, is seeking to allow bitcoins to be used to pay workers, as well as to pay fees and taxes.

What will the CBDC look like?

CBDC can take the form of a token stored on a physical device such as a mobile phone or prepaid card, making it easy to go offline.

Alternatively, it can exist in accounts managed by an intermediary such as a bank, which will help the authorities control it and possibly pay interest in the form of interest.

While the idea for CBDC was born in part as a reaction to cryptocurrencies, there is no reason to say it should use a blockchain, or the distributed ledger that supports these tokens.

In fact, the People's Bank of China already said its digital yuan will not rely on blockchains, and it will be the first to issue CBDCs as part of its push to internationalize the yuan and reduce reliance on a dollar-dominated payment system.

According to local media reports, state-owned Chinese commercial banks are already testing a digital wallet app.

Meanwhile, the European Central Bank and the Bank of England are still on the stage of consulting. ECB President Christine Lagarde said it would take years to create a digital euro.

The Bank of Japan and the US Federal Reserve, on the other hand, put this idea on the back burner.

As for Sweden's Riksbank, it has begun testing its e-krona. The Bank of Canada has also accelerated work on its digital currency.

Smaller countries are moving forward too, with the Bahamas becoming the first country to roll out CBDCs nationwide.

But central banks also fear that massive migration to CBDC will devastate commercial banks, depriving them of a cheap and stable source of funding, such as retail deposits.

In a crisis, this would leave them vulnerable to overspending in their coffers, as clients would prefer the security of an account guaranteed by a central bank.

For this reason, most projects have a limit on how much each consumer will be allowed to keep in the CBDC. For example, remuneration rates may be lower to reduce attractiveness.