There are several links between the strategic cases for inflation and cryptocurrencies—and not just from crypto’s possible future role as a hedge.
A persistent decline in money velocity was one challenge for policymakers trying to raise inflation in the years before the pandemic. It’s been suggested that a technological innovation like the adoption of CBDC or crypto could stop this decline by changing the way money is used. Any shift that increases the velocity of money could be very helpful for policymakers, but we see some circumstantial evidence that the shift to digital currencies won’t increase money velocity.
CBDC Adoption Still a Ways Off
The path of CBDC adoption is another consideration. According to the CBDC tracker website, only a handful of countries, including China, Canada, France, South Africa, Nigeria, Ghana, Uruguay and UAE, have reached the piloting stage for a CBDC program. A few other countries, such as Sweden, South Korea, Turkey, Japan, Ukraine and Thailand, have advanced proof-of-concept projects. Meanwhile, the US, the UK, Australia, India, Brazil and other countries are still only at the research stage. The Bahamas is the only country that has officially deployed a CBDC.
Most nations don’t have a firm timeline for CBDC launch and adoption. However, according to press statements by the European Central Bank, Bank of England and Sveriges Riksbank, those central banks aren’t expected to do so until at least 2025. It’s often noted that the US may have to pursue a CBDC to avoid ceding a significant share of international payments to China. This is part of the broader debate about the potential shift to a less dollarized world. However, that motivation is unclear—China has capital controls, but it’s not evident that a digital yuan could even fill such a role.
More Clarity on Regulation Likely in 2022
This year will likely bring more clarity on the regulatory aspect of cryptocurrencies. Securities and Exchange Commission (SEC) chair Gary Gensler has called for more regulation of cryptocurrencies and related financial products. He recently noted at a meeting of the Investor Advisory Committee that crypto is an “asset class that belongs inside public policy frameworks of looking after investors, guarding against illicit activity, and protecting our financial stability.” Gensler also noted significant gaps in investor protections in decentralized finance platforms, crypto lending and other related financial activities. According to Gensler, platforms offering securities fall under the SEC’s jurisdiction.
Dollar-backed stablecoins have been a regulatory concern in recent months. The President’s Working Group on Financial Markets, comprising the Secretary of the Treasury and heads of all key US financial regulatory bodies, noted that stablecoin issuers should become “insured depository institutions,” on par with banks that offer savings accounts for customers.
Currently, only Bitcoin futures exchange traded funds (ETFs) can trade in the US market, and the SEC continues to reject proposals for ETFs backed by physical Bitcoin. In the past few months, the SEC has rejected several applications for spot Bitcoin ETFs, arguing that the commission still lacked confidence that the Bitcoin market was free of manipulation and fraud.
Tokenization Assets: The Path Toward Tangibility
The next one to two years could be important for making tokenized real assets more tangible (Display). In previous research (Inflation and the Shape of Portfolios), we noted that real estate is particularly well suited for tokenization—that arena should see widespread adoption in the future. Despite a few high-profile efforts at real estate tokenization in recent years, such as the $18 million tokenization of St. Regis Aspen Resort in Colorado, the market is still in its infancy.