The race to develop a central bank digital cryptocurrency is on, and the implications of this are uncertain. On the Jan. 19 episode of "The Crypto Show" on Backstage Pass, Fool.com contributors Chris MacDonald and Jon Quast discussed what could come to pass as a result of the recent comments made that the U.S. is looking into a CBDC right now.
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Jon Quast: We did want to talk about some news regarding regulation of the cryptocurrency market. This is some news that you covered I believe it was last week here, Chris, it's just some things here in the USA with federal chair Jerome Powell talking about some potential cryptocurrency regulation.
Chris MacDonald: Yeah, this is an interesting development. Basically, the market has been focused in on the recent hearings, Fed minutes, etc, regarding interest rate hikes and expectations are for our March hike, the market's pricing in potentially a 50 basis point move now, or some likelihood of that. But hidden in the footnotes of these discussions were some interesting comments about a report that the Federal Reserve is looking to release on the potential for a central bank digital currency in the next few weeks.
Jerome Powell made a comment that within a few weeks the Fed is expected to release their report on this. In advance of this going through, this piece dove into there was a Republican representative that went through and put a bill forward that would preemptively stem the amount of power that the Federal Reserve would have in requiring U.S. citizens to set up accounts at the central bank for this currency.
I know other countries like China have looked at creating their own and centralizing what is a decentralized space. Obviously, proponents of the crypto world don't want any centralization. But this is something that looks like Federal Reserve officials are looking at as a potential tool. Essentially on this report, a lot of cryptocurrencies dropped. But I know we're going to talk about one that climbed on this news. It can be a pro or a con depending on which token you are.
Quast: Let's jump off there. I know it makes intuitive sense, but let's just say in clear terms. Why is this potentially a con, if the central bank was to create its own digital currency? Why would that be bad news for something like Ethereum (ETH -2.14%) or Solana (SOL -1.78%)?
MacDonald: Well, it would just mean more competition for cryptocurrencies in terms of capital flows. We talked a little bit about institutional money and where it's flowing right now, maybe into a Bitcoin (BTC -0.91%) or Ethereum or Solana. Well, if the central bank comes out with their own digital currency and it's backed by something or it's more stable then there might be an impetus for a lot of money that's in stable coins right now or trying to flow into these other.
Maybe a country like El Salvador will buy the U.S. central bank digital currency rather than Bitcoin because it's essentially the same as buying dollars, but it's digital. There's that argument that capital flows might be disrupted. More competition among these other networks. Regulation is never a good thing for something that is supposed to be decentralized. When that gets centralized, that's something that investors are going to keep their eye on.
Quast: I guess, is it logical to also assume that the next step would be if you create your own centralized digital currency, the next logical step is then to regulate the decentralized ones, because that's your competition in a sense. So do you pass laws making that not OK to deal in decentralized currencies?
MacDonald: Yeah. That might be the worry for sure.
Quast: Maybe a worst case?
MacDonald: Yeah. There's more of an increased likelihood maybe of regulation. Whereas today that's sort of uncertain and there's a lot of people who believe, well, you can't regulate Bitcoin. But if something like this comes about maybe there's an incentive for regulators to really focus on it. Right now it looks like crypto, in general, has flown under the radar for, in the case of Bitcoin, 13 years, which is great. The extent to which that will continue is uncertain right now.
