The establishment of Central Bank Digital Currencies (CBDCs) could increase demand for privacy coins this year
Governments developing CBDCs could be a popular trend in 2021 as they try to combat corruption and money laundering using digital currencies. The CBDCs would be controlled by governments, making it easier for regulators to track funds’ movement. It will also empower the regulators to track down the actors behind any illicit activity.
The increase in CBDC establishment can be pinned to one major factor—the surge in Bitcoin’s value over the past year. Several governments globally still consider cryptocurrencies like Bitcoin as a tool for facilitating illegal activities. Hence, the development of CBDCs would help the government fight the cryptocurrency sector’s excesses.
Furthermore, the coronavirus pandemic laid bare the inadequacies of paper cash as the need for cashless transactions grew at an unprecedented rate last year. Governments and their central banks will develop CBDCs to enable the transition from paper cash to digital currencies.
Despite the positives of CBDCs in helping fight money laundering and other financial crimes, there are concerns about developing central bank-issued digital currencies. The CBDCs will enable governments to have more control over users and their financial activities. Many people believe that governments will use this power to increase financial discrimination. Others fear that anonymity and freedom will be at risk with the development of CBDCs.
The government will likely impose stricter know-your-customer (KYC) requirements for making a transfer, a move that could expose more user data to the mercy of financial and tech entities. Suppose tech giants like Apple and Google start processing payments for individuals. In that case, hackers will find it easier to harvest user data thanks to the electronic transaction history available from such platforms.
CBDCs could boost privacy coins adoption
The rise of CBDCs could boost privacy coin adoption. Privacy coins would be the best digital alternatives for people who wish to keep their anonymity during financial transactions. Several countries like South Korea, Russia and the United States are in increasing efforts to suppress the use of privacy coins. Some regulators have even instructed cryptocurrency exchanges to delist the privacy coins from their platforms, making it harder for people to access privacy-oriented cryptocurrencies.
The general perception is that privacy coins are used to facilitate illegal transactions. However, privacy coins like Monero offer numerous benefits such as private transactions and ensuring the security of financial data.
These features could help convince more people to switch to privacy coins as they seek financial anonymity in the face of government control.