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Market & Analysis

Should Cryptocurrency Investors Be Concerned About the Rise of Central Bank Digital Currencies?

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Many things have morphed beyond the realm of what we originally designed them to do, such as the internet. When Satoshi Nakamoto first invented Bitcoin (CRYPTO:BTC) in 2008, they envisioned it as a peer-to-peer electronic cash payment system free from the grasp of central banks and governments. Today, those two entities are encroaching on that idealistic dream with a strategy of “if you can’t beat them, join them!” 

The threat of central bank digital currencies (CBDCs) replacing decentralized cryptocurrencies is a real one, and investors are already seeing the signs. For example, the U.S. Federal Reserve is moving forward in developing its own cryptocurrency with a research paper coming out this summer. What’s more, China’s central bank is already on the verge of launching the digital renminbi (eYuan). So just what does this mean for the future of decentralized crypto?

Troubleshooting a crypto mining rig.

Image source: Getty Images.

The empire strikes back

It’s difficult to see all of the implications at first glance, but CBDCs have the potential to revolutionize our economy, for better or for worse. Let’s say the Federal Reserve goes ahead and launches a digital U.S. dollar (eUSD) cryptocurrency. Like all cryptocurrencies, it will have a public ledger, allowing the Fed to see all consumer transactions on the network. Here’s the kicker — the Fed can then use that information to tabulate real-time economic data such as the consumer price index, manufacturing activity, and key product sales. This would greatly increase the Fed’s ability to accurately adjust the federal funds rate to balance the economy.

In the event of a force majeure (i.e., a financial crisis, deadly pandemic, alien invasion, etc.), the Fed could send stimulus in the form of eUSD to all applicable parties. Afterwards, the entity could monitor blockchain transactions for direct insight into how recipients are spending and determine if more stimulus is needed for the recovery. 

The corporate world would greatly benefit from such a system as well. For example, a blockchain analytics company could perform an analysis on all wallets associated with marijuana dispensaries/point-of-sales. It could then tally the transactions, quickly derive the industry’s total addressable market and share this information with sector players to enhance their business strategies for the year.

Lastly, the Fed’s eUSD would synergize well with law enforcement agencies and the IRS. Wallets suspected of engaging in illicit transactions or criminal activities could be suspended until their owners are no longer persons of interest. In addition, tax evasion would be far more difficult as the IRS could simply cross-reference wallet transactions with taxpayers’ fillings to identify any discrepancies.

What this means for Bitcoin (and other cryptocurrencies)

Ideally, a CBDC network would have little to no transaction fees, be lightning fast, and be environmentally friendly, which goes against everything Bitcoin is right now. In addition, governments could implement recovery services if a coin is sent to the wrong address or simply perform a real-ID check for someone who lost their wallet key. Bitcoin has neither feature.

Moreover, a CBDC network’s revolutionary potential, coupled with the legitimacy of government backing, has the potential to entice many people to flock to its coin, putting it in direct competition with decentralized cryptocurrencies. Since the latter require growing user adoption for sustained price appreciation, many cryptocurrencies could end up struggling in the face of this formidable competition.

Of course, CBDCs arguably give governments a lot of new power too, so the whole thing could turn dystopian. But the fact of the matter is governments want CBDCs to gain legitimacy for better economic planning. Decentralized cryptocurrencies might end up facing increased regulations and crackdowns as they’re simply not part of the government-approved system. For the sake of argument, it’s far more challenging to tabulate economic data if one half of the country uses the eUSD as a medium of exchange and another uses alternatives like Bitcoin. Hence, investors should brace for the possibility that the “golden age” of cryptocurrency investing is coming to an end.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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Blog

DOJ reportedly probes crypto company Tether for possible bank fraud

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A smartphone shows the Tether market worth on the by way of The Crypto App.

Guillaume Payen | SOPA Pictures | LightRocket | Getty Pictures

The Justice Division is investigating doable financial institution fraud by executives of Tether Ltd. stemming from actions throughout the early days of its stablecoin cryptocurrency, in keeping with Bloomberg Information.

The probe has implications for the cryptomarket. Tether’s stablecoin is the third largest digital asset by market cap, at $62.3 billion, in keeping with CoinGecko, and merchants usually use it as a substitute of {dollars} or different fiat cash to purchase bitcoin and different cryptocurrencies. Tether offers customers a strategy to transfer funds between exchanges shortly and gives some degree of safety from different cryptocurrencies’ value volatility.

The DOJ’s investigation is concentrated on exercise from Tether’s early days, probing whether or not the corporate misled banks by hiding the truth that transactions have been linked to cryptocurrency, Bloomberg reported Monday, citing three individuals with direct data of the matter who requested to not be named as a result of the probe is confidential. Federal prosecutors have despatched letters in latest months to people alerting them that they’re targets of the investigation and {that a} determination on the probe may very well be made quickly, in keeping with the information company.

The Justice Division declined a CNBC request for remark.

Tether dismissed the report in an emailed assertion, saying it is “enterprise as ordinary” on the firm and that it is decided “to stay leaders in the neighborhood.”

It additionally stated: “Tether routinely has open dialogue with legislation enforcement businesses, together with the U.S. Division of Justice, as a part of our dedication to cooperation, transparency, and accountability. We’re happy with our function as {industry} leaders in selling cooperation between {industry} and authorities authorities within the U.S. and all over the world. We stay dedicated to our prospects and the industry-leading know-how and transparency that has led to our development.”

Relying on the result of the investigation, it might result in stricter oversight of stablecoins by regulators and extra transparency in how digital property are backed, transacted, and traded, in keeping with Jesse Proudman, co-founder of crypto robo-advisor Makara Digital.

Tether was created in 2014 in response to one of many greatest challenges for crypto start-ups on the time: financial institution de-risking. Most companies dealing with cryptocurrencies had problem acquiring financial institution relationships as a result of the extremely regulated monetary establishments feared doing enterprise with corporations that might probably be tied to illicit actions.

Tether has long been controversial due to issues it does not all the time have sufficient reserves to justify its peg to the U.S. greenback.

Stablecoins, digital currencies designed to be extra secure than cryptocurrencies as a result of the peg their market worth to an out of doors asset just like the U.S. greenback, are within the regulatory sizzling seat as they develop in recognition. Final week, Treasury Secretary Janet Yellen and the President’s Working Group on Monetary Markets mentioned stablecoins’ potential function within the monetary system.

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