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Central bank digital currency can lead to the collapse of cryptocurrency

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  • Ozili, Peterson K

Abstract

Cryptocurrencies have become popular. Economic agents use cryptocurrency such as bitcoins to make payments and it pose a threat to fiat currency. Central banks have begun to respond to this threat. They realize that they need to join the race to offer a digital currency and dominate the digital currency landscape which can lead to the collapse of most private digital currencies that are not issued by a central bank or a monetary authority. In this paper, I show how the issuance of a central bank digital currency can lead to the collapse of private digital currencies such as bitcoin. I argue that central banks will leverage on their monetary powers, and the trust that citizens have in government-backed money. This may give central banks strong incentives to issue a central bank digital currency. The issuance of a central bank digital currency can erode trust in cryptocurrencies, and lead to lack of trust in cryptocurrency, thereby leading to the collapse of cryptocurrencies although not immediately.

Suggested Citation

  • Ozili, Peterson K, 2021. "Central bank digital currency can lead to the collapse of cryptocurrency," MPRA Paper 111218, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:111218
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    References listed on IDEAS

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    12. Ozili, Peterson K, 2021. "Central bank digital currency in Nigeria: opportunities and risks," MPRA Paper 110152, University Library of Munich, Germany.
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    Cited by:

    1. Ozili, Peterson K, 2021. "Central bank digital currency in Nigeria: opportunities and risks," MPRA Paper 110152, University Library of Munich, Germany.
    2. Kwami Ahiabenu, 2022. "A Comparative Study of the Design Frameworks of the Ghanaian and Nigerian Central Banks’ Digital Currencies (CBDC)," FinTech, MDPI, vol. 1(3), pages 1-15, August.
    3. Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Akdeniz, Coşkun, 2023. "The impact of central bank digital currency news on the stock and cryptocurrency markets: Evidence from the TVP-VAR model," Research in International Business and Finance, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    central bank digital currency; cryptocurrency; bitcoin; blockchain; distributed ledger; payment system; central banks; CBDC; digital innovation; cryptoassets; stablecoin; Covid-19; fiat digital currency;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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