Central bank digital currencies (CBDC) and private-sector cryptocurrencies both appear poised for lift-off even though they are far from being two sides of the same coin, according to the Chief Investment Office of Deutsche Bank’s International Private Bank.
“These two distinct but interlinked developments may now be approaching critical mass,” Christian Nolting, Global Chief Investment Officer, writes in a special report entitled “A tale of two siblings: cryptocurrencies and CBDC”. Nonetheless, the two separate approaches to digital currency face distinct issues and challenges, he says.
Cryptocurrencies “are here to stay” but should be considered in relation to factors including asset class comparisons, regulation, valuation, and the potential ESG impacts, Nolting writes. Assessing them is made more difficult by their volatility and the perception that they are simply speculative vehicles.
“Claims around cryptocurrencies’ characteristics as investment vehicles either in terms of portfolio diversification or inflation hedging need to be treated with caution,” he says.
As for CBDC, it is hard to assess their potential policy and social impact until one comes into full operation in a major economy, which may take several years.
“Widespread adoption may take time: major financial and social questions need careful consideration,” Nolting says. He adds that CBDC need to be evaluated not only in their own right, but also in terms of how they could “complement, or displace, increasingly widely used private-sector cryptocurrencies”.
Ultimately governments and more digitally aware populations may prefer to use CBDC at the possible expense of some cryptocurrencies, Nolting concludes. In that event, “the more successful cryptocurrencies are likely to become increasingly differentiated in terms of business models and utility”.