Booming institutional adoption has lifted the world's largest cryptocurrency to meteoric new highs this year, but bitcoin's underlying technology has also piqued the interest of central banks looking to forge their own digital currencies–a move that Bank of America warned Wednesday is bad news for the cryptocurrency market.
KEY FACTS
A growing number of central banks (about 86%, according to the Bank for International Settlements) are actively exploring the development of central bank digital currencies, or CBDCs, in an effort to "defend their territory from cryptocurrencies," Bank of America analysts said in a Wednesday note to clients.
CBDCs effectively combine the efficiency of cryptocurrency transactions with the safeguards of a central-bank-backed asset (like cash), and though "highly radical," their implementation would also make it easier for governments to implement the monetary policy measures that have helped keep the economy afloat during the pandemic.
That's particularly bad for bitcoin, whose booming prices have been "exclusively" dependent on heightened demand that's outpaced the token's fixed supply, Bank of America says, pointing out that bitcoin's volatility makes it impractical as a store of wealth or payments mechanism–unlike the allure of a CBDC.
The European Central Bank has helped lead the charge on CBDCs, calling for a digital euro that "safeguards the role of sovereign money in the digital era," while blasting other cryptocurrencies as "highly speculative assets."
In a February note, Macquarie Capital analysts said the Federal Reserve and ECB could debut their own CBDCs as soon as next year as governments ramp up regulation in the space that discourages consumers from embracing other tokens–a move the analysts say could lead to crypto prices tanking below current levels.
CRUCIAL QUOTE
"Regardless of the technology used for a digital euro, its nature–the fact that it is a risk-free liability of the central bank–makes it fundamentally different from crypto," ECB board member Fabio Panetta said in October of the central bank's CBDC exploration. "Cryptoassets... are mostly unregulated, which poses high risks to the users, and their price is highly volatile because [they] lack any intrinsic value, which means that they trade like a speculative commodity."
WHAT TO WATCH FOR
Bank of America expects the ECB will decide to run a full CBDC trial by the middle of this year, but the Fed has been much more hesitant to move forward with its own token. "We are looking very carefully at the question of whether we could issue a digital dollar," Fed Chair Jerome Powell said while testifying before a Senate committee last month. "We don't need to be the first; we need to get it right."
KEY BACKGROUND
The price of bitcoin has skyrocketed 10-fold over the past year as institutional investors flock to the cryptocurrency space and heightened government spending ramps up inflationary concerns. On Wednesday, Morgan Stanley became the first big bank to offer up bitcoin exposure to wealthy clients, but it's limiting the funds to investors with “an aggressive risk tolerance.” Goldman Sachs is also dabbling in the space; the banking powerhouse restarted its cryptocurrency trading desk this month after dropping plans to do so when the cryptocurrency market crashed in 2018.
SURPRISING FACT
Bitcoin prices surged more than 2,000% in 2017 as pioneering crypto-brokers like Coinbase helped make cryptocurrency trading mainstream, but prices tanked more than 80% in the following year as countries like India, South Korea and China clamped down on the space with heightened regulation.
This article originally appeared on Forbes.
