Former Vice-Chairman of Bank for International Settlements (BIS) Raghuram Rajan commented about the growing use of cryptocurrency in a recent interview. He said,
“Of course, in some countries with a terrible currency which is inflating at very high rates, what we are getting is an effective replacement of the domestic currency by a cryptocurrency.”
We know that El Salvador adopted Bitcoin as a legal tender last year. A decision of which economist Steve Hanke has been a vocal critic. A decision that is argued to have violated several digital asset regulations by the Financial Action Task Force (FATF). But, along with that, the dollar-denominated debt raises alarm.
#Bitcoin is a volatile, speculative asset. Nayib Bukele is yet to realize this as he continues to throw El Salvadoran taxpayer money into the Bitcoin fire. Speaking of fire, El Salvador's dollar-denominated debt is in flames. pic.twitter.com/oOzftgFU5F
— Steve Hanke (@steve_hanke) January 13, 2022
Moody’s analyst Jaime Reusche recently told Bloomberg that the government’s Bitcoin holdings “certainly add to the risk portfolio.” However, in Venezuelan, another country battling sky-high inflation levels, peer-to-peer crypto exchange is fueling foreign exchange transactions.
Along with that, Rajan acknowledged that “private people prefer trading in the crypto” to trading in the official currency.
Research shows that 31% of young Americans between the ages of 18 to 29 (31%) have invested in or traded cryptocurrency compared with a lesser number of adults in older age groups.
However, the popularity has got central banks racing in to launch CBDCs. In a race where China appears to be the front runner, looking to officially launch its e-CNY in February. Rajan also noted,
“So any crypto has to deal with the possibility that the central banks will come in.”
However, he reiterated that while central banks will try to give competition to private cryptos, banks are still far from that. BIS research had found out that, 86% of central banks were actively researching the potential for CBDCs in 2021. Meanwhile, 60% were experimenting with the technology and 14% were deploying pilot projects.
The Central Bank of central banks had stated,
“Central banks are exploring whether CBDC could help them to achieve their public good objectives, such as safeguarding public trust in money, maintaining price stability and ensuring safe and resilient payment systems and infrastructure.”
But are CBDCs and private cryptos competing? Benoît Cœuré, Head of the BIS Innovation Hub, had opined that central banks have a mandate to maintain financial stability in a digital world. Having said that, he argued that CBDCs are essential to support competition.
“The market might come to be dominated by very big tech players with a lot of market power, with a lot of ability to control data.”