Point Blank. 2024: Cryptos to gain credibility, CBDCs to face existential crisis

2023 did not see a major rally in cryptos but prices rose slowly | Photo Credit: CHINNAPONG

Towards the beginning of 2023, cryptocurrencies led by bitcoin were facing a bleak future. Bitcoin prices had crashed from $47,000 to $16,500 in 2022, following regulatory clampdown, punitive taxation, and increased scrutiny. The first quarter of 2023 was equally tough as Sam Bankman Fried-led crypto trading platform, FTX, collapsed.

The FTX scam threw the spotlight on the way cryptos had seeped into other segments of financial markets such as derivatives, hedge funds, deposits and lending, and posed a systemic risk to the banking system. The closure of Signature Bank and Silvergate Bank, which had large exposure to crypto start-ups, stoked these concerns further.  

Thankfully, the FTX saga made regulators realise that there is scope for innovation and growth in this segment and a way had to be found to allow cryptos to survive, but under tight supervision. Alongside came the thought that controlling the issuance, trading and usage of private cryptocurrencies cannot be done individually by any country.

Regulators concurred that global rules are needed for supervising these activities and for sharing information. The G20 adopting the IMF-FSB guidelines for regulating cryptos is likely to usher in a new era for cryptocurrencies in 2024, where they don a more credible but less flamboyant avatar.

There was no rah-rah rally in crypto prices in 2023 but despite that, prices slowly edged higher, making bitcoin one of the best performing asset classes of 2023, with 162 per cent gain.

CBDCs lose steam

The growing number of people wanting to buy cryptocurrencies and trade in them had given rise to the idea that if central banks issued an official digital currency, the people thronging towards cryptos could be diverted to CBDCs. Many central banks therefore tentatively began exploring the possibility of an official digital version of fiat currency in 2022.

In the beginning of 2022, China was the only large economy to have begun pilot testing of its digital yuan. But over the last two years, almost all the major economies are seriously exploring the possibility of launching a CBDC. Nineteen of the G20 countries are in advanced stages of exploring digital currencies with nine countries already launching pilot studies.

India too launched wholesale CBDC (for interbank and large transactions) for transactions in the government securities market in November 2022 and the retail e-rupee (for peer-to-peer payments or point of sale transactions by retail) in December 2022.

There was a lot of buzz around retail e-rupee in the first half of 2023 with many of us getting invites from the banks to download the e-rupee wallet and participate in the pilot. While some did do so, the pilot has not gained traction. According to reports, retail e-rupee transactions in a day were limited to around 18,000 by September 2023, against a target of one million transactions by the end of the year.

Cryptos is 2024

So, what lies ahead for the cryptocurrencies and CBDCs in 2024?

With the acceptance of the IMF-FSB paper on cryptocurrency framework and deadlines, fast-paced action is likely in crypto regulations in India and in other countries, next year. Crypto trading platforms and allied services will have to register with the designated regulator (it could be SEBI or a new regulator in India). These platforms will have to store records of all trading transactions and be ready to share it with domestic or overseas regulators.  Compliance will increase for crypto trading platforms, many of them may not meet the criteria set by the regulator and may have to shut shop.

Allied services such as providing deposits or loans against cryptos, guaranteeing fixed returns on trading cryptos etc, are unlikely to continue. These activities are being carried out in a regulatory vacuum and are not likely to be allowed by any regulator.

But once regulatory supervision is established, investors can feel more secure trading in cryptocurrencies. Undue volatility may also reduce once regulatory checks are placed on sharp price moves.

Prices of cryptocurrencies have already been moving up in anticipation of this sanitised environment in future. The punitive taxation on crypto transactions, introduced in 2022 could be withdrawn as the sector comes under regulatory supervision. New products built on blockchain technology can be introduced and the array of legal, and secure crypto assets could expand.

Retail CBDC may not take off 

While the outlook appears quite gung-ho for private cryptocurrencies, the same cannot be said of central bank digital currencies, especially CBDCs for retail users.

This is because the primary reason for introducing CBDCs — to wean people away from private cryptocurrencies — no longer exists. For it is now well established that private cryptocurrencies such as bitcoin cannot be an alternative to fiat currency. This is because cryptos do not have any intrinsic worth, do not have any credible guarantor and their price is too volatile to make them suitable for financial transactions.

Two, digital payments through the Unified Payments Interface are growing at an an extremely fast pace. Use of UPI for payments is superior to CBDC retail because the money remains in the bank while transacting through UPI, thus earning interest. For using CBDC, money must be transferred to the wallet, which does not earn any interest. Those who do not wish to leave money trail will prefer cash since CBDC is not entirely anonymous yet.

It’s for this reason that retail CBDC has not found too many takers since the launch of the pilot last December. While some did download the CBDC wallet and transferred money to friends or family, limited acceptance of CBDC by merchants has also held users back.  

While retail CBDCs may fight a losing battle with UPI in 2024, wholesale CBDC is expected to do well with the RBI expanding the segments where they can be used. Most countries, including the US are exploring wholesale CBDCs, given their use in cross border payments. There are currently more than 10 cross-border wholesale CBDC projects in the works.

The good times are expected to return for cryptocurrency traders next year, but trading activity could stay muted until the regulatory framework is established and all stakeholders adjust to it. We could hear less about retail e-rupee as it starts fading out gradually. Wholesale CBDC could stick around a little longer.