The European Parliament Committee on Economic and Monetary Affairs believes that central bank digital currencies (CBDC) could solve prevailing ‘competition issues’ within the cryptocurrency industry.

A study conducted by the committee noted that Bitcoin (BTC) and Ethereum (ETH) account for approximately 88 percent of the total cryptocurrency market capitalization, while the other 2,000 or so tokens cumulatively make up the remaining 12 percent. Even though the number of new cryptocurrencies has been rising steadily, a monopoly of this magnitude could be stagnating competition within the cryptocurrency sector.

Support in Europe for Cryptocurrency?

The European Union’s concern regarding the centralization of wealth within the cryptocurrency market is not newly found. On April 12, 2019, Chairman of the Bank of Lithuania and member of the Governing Council of the European Central Bank (ECB), Vitas Vasiliauskas, considered the repercussions of employing CBDC’s within the economy.

Vasiliauskas was of the opinion that state-backed tokens would not act as a conventional reserve account or a private cryptocurrency asset, but rather as a means of facilitating payments by acting as a medium of exchange. According to him, resorting to CBDCs would lead to an increase in the efficiency of payments and settlements of securities.

An alliance of Germany’s biggest political groups, The Christian Democratic Union and the Christian Social Union (CDU/CSU), also expressed some interest in creating a ‘Digital Euro.’ According to a document released by the party, such a digital currency would resemble a stablecoin pegged to the Euro. The party also published a paper exploring the various uses of blockchain technology and recognized Germany’s ability to set a new benchmark in the regulation and adoption of the technology.

The European Central Bank, in a May report seeking to address the impact of digital currencies on economic developments and monetary policy, stated that cryptocurrencies do not have any implications on monetary policy, positive or negative. This assertion was drawn in part due to the volatile nature of the digital currency resulting in limited widespread adoption and use.

CBDC: An Unconventional Solution to a Conventional Problem?

The paper argues that the introduction of new players such as CBDCs to the market could dilute the negative effects of such cartelization. The study said,

“The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors”.

Recognizing the limitations of ‘traditional competition policies,’ the study argues that resorting to unconventional methods such as CBDCs could act as a viable remedy. Furthermore, the study noted that an air of legitimacy would be granted to the cryptocurrency sector if such digital currencies are issued by central banks instead of relatively unknown developers.

With the European Central Bank pushing for the issuance of state-backed digital currencies, do you think that every country will have its own token in the future with limited interoperability? Let us know your thoughts in the comments below.