Arun Kumar Shrivastav
Currently, the history of cryptocurrency has become extremely strange. The phenomenal rise in the value of bitcoin (BTC) in 2021 is completely reversed today. For investors, it’s a saga of disappointment and frustration. From an all-time high of around $69,000, BTC plunged to $20,000 within six months. The story is much worse for other coins (altcoins) which have risen hundreds of times in 2021 and fallen just as sharply, driving the crypto industry’s market capitalization down from nearly $3 trillion to less than $1 trillion.
The skeptics are right. Throughout the rise and fall of crypto, India’s central bank top brass have commented negatively on cryptocurrencies, calling them a threat to financial stability. In today’s circumstances, they are justified. After all, how can a country cope with such a dramatic drop in the value of currencies?
Well, the Crypto Meltdown 2022 has a clear message that cryptocurrencies cannot be legal tender. No government or central government can allow this to happen. The case of El Salvador must be an exception.
The sharp rise and fall has made cryptocurrencies popular. People are now curious about their benefits and eager to use and experience them. The focus now seems to have shifted from the crypto market to central bank digital currencies (CBDCs) and how they can make cross-border payments easy and seamless.
At the European Central Bank (ECB) Central Banks Forum (June 27-29) in Portugal, Cecilia Skingsley, Deputy Governor of the Swedish central bank, remarked that CBDCs should be seen as an evolution of central banks . It is an investment to protect the fiat-based monetary system.
“I see it as an evolution of the role of the central bank, rather than a revolution…. I think cash is going to disappear as a mode of payment, that’s for sure,” Skingsley said.
Skingsley’s comments in favor of CBDCs take on significance given his appointment as head of the Bank for International Settlements’ (BIS) innovation hub. She will take up her new duties in September for five years. BIS Innovation Hub has several CBDC projects underway and all set to play a key role in how banking and monetary systems move from cash to digital. BIS Innovation Hub is expected to release a report on CBDC interoperability next month. This report should contain the vision and roadmap for this transformation.
While India has maintained a hawkish stance towards cryptocurrencies, it is launching its CBDC later this fiscal year. One of the main advantages of stablecoins and cryptocurrencies is that they can be used for international payments with the same experience as sending an email. Even hundreds of millions of dollars can be sent in real time while traditional methods can take days and weeks. Another advantage is the low transaction fees.
Due to these advantages, digital coins are considered the solution for cross-border payments and remittances. The high cost of remittances is a big concern for the global banking industry. New age digital currencies seem to hold the promise of solving this problem.
It is thanks to these advantages that the Indian CBDC project has the support of the Indian banking industry and the government. However, the Reserve Bank of India (RBI) said it would proceed with its CBDC project with caution. The RBI wants India’s CBDC to be in line with the country’s monetary policies and to cause little or no disruption to existing payment and settlement systems.
China has launched its e-CNY CBDC and the Chinese government-backed blockchain-based service network (BSN) is working with central banks and financial institutions around the world on a five-year project to implement places the interoperability of CBDCs. The vision is to link the Chinese digital yuan to similar digital currencies from other countries. Interestingly, blockchain is a priority area for the Chinese government, but it wants nothing to do with cryptocurrencies. Unlike any other blockchain network, BSN does not use a native coin. Its CEO, Yifan He, recently stated that bitcoin is nothing more than a Ponzi scheme and its value will soon fall to $0.
At the BIS Innovation Hub, similar CBDC interoperability projects are underway. At the ECB Central Banks Forum, Skingsley remarked that CBDC interoperability may not be easy to achieve. CBDCs are the result of each country’s national monetary system and they may not be ready to interact seamlessly with each other. Some countries may not play well given their concerns and reservations. Thus, CBDC interoperability can be a complex and multi-layered experience.
Looking at the RBI reserves against stablecoins and cryptocurrencies, it does not appear that the Indian CBDC is allowed to interact with them. This will affect its interoperability with other CBDCs that may interact with these assets.
Yifan He says blockchain rose to prominence with bitcoin, but its scope and definition have since expanded.
Thus, there are several dimensions to blockchain technology and one of them is cryptocurrencies that have become a store of value that is immune to inflation and governments’ fancy fiscal and monetary policies. But the big crypto story is currently experiencing a sharp correction.
A cyclical downturn in the market is considered good because it removes overvaluation and hype for the market. Following the latest stock market crash, several top coins and companies fell flat. The collapse of the Terra Luna ecosystem, the fourth-largest cryptocurrency before its crash, highlights the risk of algorithmic stablecoins over fiat-backed ones. Similarly, the fall of crypto lending platform Celsius Network hints at overexposure to one particular asset, Terra Luna in this case. The calm after a sell-off in recent months has rendered many exchanges insolvent. The whole phenomenon can be understood with the example of two leading crypto exchanges – Coinbase and FTX. In its rush to expand rapidly, Coinbase increased its workforce to over 5,000 while FTX ran its business with just 300 employees. Now, with most crypto firms downsizing and going bankrupt, FTX plans to increase the number of employees to 400. It is also spotting stressed assets for buyouts.
This explains the current turmoil in the cryptocurrency market! (API)