Central Bank Digital Currency Can Lead to the Collapse of Cryptocurrency

12 Pages Posted: 28 May 2021 Last revised: 26 Oct 2021

Date Written: May 21, 2021

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.

Keywords: central bank digital currency, cryptocurrency, bitcoin, blockchain, distributed ledger, payment system, central banks, CBDC, digital innovation, cryptoassets, stablecoin, Covid-19, fiat digital currency

JEL Classification: E42, E58, O33, G21

Suggested Citation

Ozili, Peterson K, Central Bank Digital Currency Can Lead to the Collapse of Cryptocurrency (May 21, 2021). Available at SSRN: https://ssrn.com/abstract=3850826 or http://dx.doi.org/10.2139/ssrn.3850826

Peterson K Ozili (Contact Author)

Independent ( email )

Nigeria
Nigeria
Abuja
Nigeria

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