Why CBDC’s May Be the Future – And Are Particularly Important Now
The bitcoin price, which has failed to hold its ground over US$10,000 per bitcoin in recent weeks, has climbed some 30% since the beginning of the year—but remains far from its all-time highs (for the time being).
Now, crypto pioneer Adam Back has predicted bitcoin will soar to US$300,000 per bitcoin within the next five years, even without Wall Street's highly-anticipated institutional support.
"[Bitcoin] might not require additional institutional adoption [to reach $300,000] because the current environment is causing more individuals to think about hedging [and] retaining value when there’s a lot of money printing in the world," Back told financial newswire Bloomberg.
Last month, bitcoin got a big boost when legendary macro investor Paul Tudor Jones revealed he is buying bitcoin as a hedge against the inflation he sees coming as a result of never-before-seen levels of central bank money-printing.
"It is causing people to think about the value of money and looking for ways to preserve money," Back said, adding "it’s a difficult environment to get any yield."
Earlier this year, Back said, "hyperbitcoinisation" and "Modern Monetary Theory rationale for high inflation" could, in theory, mean bitcoin is one day worth $10 million.
"$100,000 bitcoin doesn't seem so far given we already crossed $10,000 threshold a few times when few expected even $1,000 some years back and $10,000 seemed crazy," Back said via Twitter.
Meanwhile, long-expected institutional adoption of bitcoin is still looking precarious despite some early signs Wall Street is coming around to crypto.
JPMorgan, once described as "bitcoin's biggest enemy," has added its first crypto exchange customers and its chief executive Jamie Dimon reportedly hosted secret meetings with the boss of major bitcoin and crypto exchange, Coinbase. (which we discussed last week here).
Back's latest bitcoin price prediction comes as Donald Trump's administration weighs another massive round of stimulus measures —potentially adding a further $1 trillion.
Already this year the U.S. has signed off on $3.5 trillion in relief measures to combat the economic downturn caused by the coronavirus pandemic and lockdowns put in place to contain the virus.
The stimulus measures, as well as the Fed moving to backstop financial markets, have meant stocks and shares resumed their march higher after a historic unprecedented crash in March.
Bitcoin has also rebounded but has failed to break recent highs set in February.
Bitcoin has been put further into contrast with fiat currency by a supply squeeze last month, which saw the number of bitcoin rewarded to those that maintain the bitcoin network, called miners, cut by half—dropping from 12.5 bitcoin to 6.25.
Additionally, Donald Trump has reignited his long-running battle with China, something that's likely to heavily feature in his re-election campaign.
Meanwhile, China is poised to launch a digital version of its yuan and could be about to create serious problems for the U.S. banking system—potentially forcing the U.S. to digitalise the dollar to compete.
Now, the Federal Reserve has warned central bank digital currencies might one day replace commercial banks, creating "a deposit monopolist" and playing "havoc" with the banking system.
"The introduction of digital currencies may justify a fundamental shift in the architecture of a financial system, a central bank 'open to all,'" Federal Reserve of Philadelphia researchers wrote in a 32-page paper titled "Central Bank Digital Currency: Central Banking for All?"
The paper examined the potential effects of "giving consumers the possibility of holding a bank account with the central bank directly"—something that could potentially replace commercial bank saving accounts.
"If the competition from commercial banks is impaired (for example, through some fiscal subsidisation of central bank deposits), the central bank has to be careful in its choices to avoid creating havoc with maturity transformation," the paper read.
If people started to exclusively hold cash with the country's central bank, the Fed and other central banks could end up becoming a "deposit monopolist," attracting deposits away from the commercial banking sector.
Theoretical discussions around central bank digital currencies, sometimes called CBDCs and often inspired by bitcoin's blockchain technology, have swirled for the past few years but central bankers have been kicked into action by China's efforts to digitalise its yuan and Facebook's plans to launch its own currency.
The Fed's paper echoes a warning raised by the International Monetary Fund in December last year, which said digital currencies could see deposits "withdrawn from commercial banks."
Digital currencies are expected to work just like regular coins and notes issued by central banks but exist entirely online—with some floating the possibility of government-run Fed Accounts being used to distribute digital dollars.
China has already started trialling payments in its new digital currency in four major cities, local media reported at the end of April.
Other countries around the world, including Norway, Sweden and Japan, are all working on digitalising their own currencies.
Digital currencies, expected to make it "quicker, cheaper and more efficient to buy, sell or transfer money from place to place" according to one commentator, could put pressure on the dollar's dominance.
"We may be heading towards a post-dollar world," the Financial Times reported last month, pointing to China's digital currency regime as one of a number of ways the dollar position is being eroded.
"It’s very possible that other countries adopt the China framework, and then a first-mover advantage turns into a strong network effect," Matthew Graham, chief executive of Beijing-based blockchain and cryptocurrency consultancy Sino Global Capital told Bloomberg Businessweek, adding, "this is the best-case scenario for China."
Donald Trump is unlikely to take this sitting down.
"We have only one real currency in the U.S.A., and it is stronger than ever, both dependable and reliable," Trump said last year in a Twitter tirade against Facebook's libra, bitcoin and cryptocurrencies.
"[The dollar] is by far the most dominant currency anywhere in the world, and it will always stay that way."
In order for the dollar to maintain its pole position, China could force Trump and the Fed into difficult decisions about the future of the financial system, all of which would have positive effects on the broader crypto market – potentially rocketing Bitcoin towards Back’s predicted $300,000 in 5 years.