Economies all over the world are gradually building up toward a digitized platform. Central Bank Digital Currencies have since been the talk of the town. Government-backed virtual currencies have become an essential factor of how the monetary ecosystem could look in the future. While there are quite a few advantageous sides to CBDCs, such as faster payments and financial inclusion, it is intriguing to witness the impact it has had on previously existing cryptocurrencies like Bitcoin and Ethereum. Analyzing the impact of CBDCs on cryptocurrency reveals their growing influence on digital currencies and financial systems.
CBDCs and the Cryptocurrency Market Capitalization
The total cryptocurrency market capitalization currently stands at $2.43 trillion as of October 2024, with Bitcoin at $1.34 trillion to account for approximately 55.3% of the total market capitalization. This represents an increase of 85.04% year-on-year, reflecting the continued resilience of the cryptocurrency market.
Meanwhile, CBDCs are mushrooming in terms of adoption. The digital yuan of China, eCNY, alone has processed more than 7 trillion eCNY ($986 billion) transactions by mid-2024. This is in contrast to the 1.8 trillion eCNY ($253 billion) recorded in 2023. Across 17 provinces, the digital yuan has percolated into healthcare and education.
CBDC Impact on Adoption and Usage of Cryptocurrencies
The wide uses of everyday digital transactions in CBDCs may, therefore, affect the trendiness rate of cryptocurrency adoption, especially stablecoin-inclined uses. According to the Bank for International Settlements, 93% of all central banks are currently working on projects related to CBDCs as of 2024, indicative of how the world is pushing towards digital currencies.
India’s eRupee pilot, launched in 2022, had already facilitated over 1.5 million transactions by the first half of 2024. Stablecoins such as USDT and USDC still conduct more than $6.5 billion in daily transaction volume. But with the increased traction of CBDCs, analysts are predicting as high as a 30% reduction in stablecoin use in 2025 in countries that are looking to introduce strict regulations on stablecoins in favor of their use of CBDCs.
CrossBorder Transactions: CBDCs vs. Cryptocurrencies
While intrinsically more conservative, CBDCs are bound to alter the face of cross-border payments-one turf where cryptocurrencies like Ripple and Stellar have conventionally enjoyed pole positions. In 2023 alone, about $180 billion in cross-border transactions went through cryptocurrencies. But now the thunder is slowly being hijacked by CBDCs.
In 2023, the mBridge project-a cross-border CBDC project between China, Thailand, and Hong Kong-settled US$30 million in transactions during its pilot phase. Furthermore, the European Central Bank plans to launch the digital euro in 2025, which is expected to process 10-15% of cross-border transactions in its initial introduction stage. This would potentially reduce the use of cryptocurrencies to process international transactions by up to 25% in the regions where CBDCs become the go-to choice.
Privacy and Financial Inclusion: Coexistence or Conflict?
Despite a fair number of advantages proposed by CBDCs, including financial inclusion, more and more privacy-related concerns are emerging. Cryptocurrencies emphasizing user privacy, such as Monero and Zcash, have increased in use. The volume of transactions using Monero grew 40% last year, driven by privacy worries about government-controlled digital currencies.
In this respect, eNaira, issued last year by Nigeria, has already accrued an active wallet number of 3.5 million in service to around 11% of the adult population. “As CBDCs become more widespread, perhaps these new digital currencies could raise financial inclusions in underbanked regions by 2030% by 2025,” says an expert opinion. On the other hand, cryptocurrencies will continue to retain their place in terms of providing privacy and being one avenue of investment.
Final thought
Even though CBDCs would reduce the usage of stablecoins and compete with cryptocurrencies, especially in cross-border payments, it will coexist. Till there is a demand for decentralized financial systems, decentralized digital currencies especially with on-chain privacy will prevail. By 2025, both CBDCs and cryptocurrencies will be important yet different contributors to the new digital economy.
Photo Credit: TagiAfrica