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First Mover: Bitcoin Could Get a Boost From Central Bank Digital Currencies

With the near-term picture cloudy, some analysts are focusing on a longer-term trend that could be surprisingly bullish for bitcoin: the emergence of digital currencies issued by central banks.

It’s not an obvious investment thesis because bitcoin was invented to be used in an electronic peer-to-peer payment system that would be free of government control and operate outside of the traditional banking system.

And most central bank digital currencies, or CBDCs, would, by their very nature, be issued and controlled by governments, and in many cases distributed through banks.

But Jack Purdy and Ryan Watkins of the research firm Messari wrote last week in a report that the “coming digitization of money,” including the launch of CBDCs, could provide a “secular tailwind” for bitcoin.

CBDCs have gained momentum over the past year as countries consider whether to roll out digital versions of their currencies to keep up with Facebook’s proposed Libra and China’s forthcoming digital currency electronic payment, which is already in testing.

The journal Central Banking, which is supported by the Bank of International Settlements and the European Central Bank among others, found in a survey earlier this month that some 46 countries are considering CBDCs using a constrained form of distributed ledger technology.

Federal Reserve Chair Jerome Powell told Congress in February the U.S. central bank is in the early stages of researching digital currencies, and that having a “single government currency at the heart of the financial system is something that has served us well.”

Even so, JPMorgan said last week in a report that “there is no country with more to lose from the disruptive potential of digital currency than the United States,” as reported by Bloomberg News. “This revolves primarily around U.S. dollar hegemony.”

The largest U.S. bank’s warning merely reinforces the urgency and significance of the efforts, and that’s what the Messari analysts were homing in on.

“Catalyzed by bitcoin and the recognition of the benefits of blockchain technology, many countries and companies around the world have begun researching, testing and launching their own digital currencies,” the analysts wrote.

“When these projects launch, they will have the combined effect of exposing billions of people to cryptocurrency-related technologies,” according to the report. “This will increase people’s comfort with and understanding of cryptocurrencies, get more people creating and using cryptocurrency wallets, and provide on-ramps into decentralized cryptocurrencies like bitcoin.”

So CBDCs might be used to facilitate purchases of bitcoin? That’s the idea.

First Mover: Bitcoin Could Get a Boost From Central Bank Digital Currencies, CoinDesk, May 27

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