EU Parliament Study: Central Bank Digital Currencies ‘Will Reshape Competition’ in Crypto Market

A study on issues of competition in fintech, commissioned by the European Parliament Committee on Economic and Monetary Affairs (ECON), was published July 20. It found that central bank-issued digital currencies could be a “remedy” for a lack of competition policy in the crypto sector:

“The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the cryptocurrency market, broadening the number of competitors.”

The study mentions cryptocurrencies like Bitcoin (BTC) as “technological and operational paradigms that are a source of disruption for the entire sector, including monetary policy and financial stability.” Other “disruptive and innovative applications” of new technologies include “AI, cloud computing, biometrics, digital identity, blockchain, cybersecurity, RegTech, internet of things (IoT), augmented reality.”

Private digital currencies are defined separately from central bank-issued digital currencies (CBDC), noting that the CBDCs differ by being based on a “conventional bilateral settlement with a trusted central party.”

According to the study, since closed cryptocurrency systems require a supervisory authority, central banks could be considering using “permissioned cryptocurrency systems” to “complement or substitute” the currencies already used.

The study claims that CBDCs “will reshape the current competition level in the inter-cryptocurrency market” by adding to the pool of competitors:

“A potential inadequacy of traditional competition policy to address competition issues in the cryptocurrency markets can be found, suggesting direct public participation through a central-bank digital currency as a remedy.”

The competition issues, the ECON study notes, can be divided into “inter-cryptocurrency market” competition between cryptos, and “intra-cryptocurrency” market competition between service providers like wallets and exchanges.

In terms of “inter-crypto market” competition, the study reports that the “presence of network effects” and a high number of users of a cryptocurrency could provide a barrier to entry for other cryptos attempting to join the market. The study hypothesizes that this competition “may lead to potential collusive agreements between members of hypothetical cartels.”

For “intra-crypto market” competition, wallets, exchanges, and payment providers could create practices that would keep others out of the market, such as receiving inducements from miners that favor one cryptocurrency over another.

In mid-July, a new EU directive came into force that set stricter transparency rules for digital currencies to protect against money laundering and terrorist financing.

Also in July, virtual currencies were discussed for the first time at ECON’s “Monetary Dialogue” session, with five different briefing reports discussed on topics ranging from crypto and central banks to crypto and the “Eurosystem.”