The financial institution considers that CBDCs could validate the use of cryptocurrencies as a store of value. The universal basic income (UBI) and stimulus checks serve as incentives for inflation.

The Bank of America recently wrote a report on the distribution of central bank digital currencies (CBDC) to stimulate the economy. They said that these assets can aggravate inflation in the countries that apply these measures.

Due to the crisis that the COVID-19 pandemic caused, there have been frequent artificial stimuli to the fiduciary economy. The destruction of jobs, the closure of businesses, and the impact of world markets have also contributed to this situation.

Central Banks View CBDCs as a Solution to the Shortage of Cash

Central banks have approached national digital currencies as a solution to the shortage of physical money. They also seek to use them to bring the economy to electronic platforms. For that reason, users may be concerned about the operation of monetary policies.

The report from the Bank of America is entitled “Digital Love: Central Bank Digital Currencies”. It indicates that CBDCs could be easily transferable to their creditors both nationally and internationally.

For this reason, inflation expectations could boost demand for cryptocurrencies as a store of value. However, the report does not mention Bitcoin (BTC) or other cryptocurrencies, but the ability of states to distribute CBDC. The Bank of America considers that the latter situation will create conditions that lead to monetary inflation.

“The disruption of cryptocurrencies is pushing central banks to ensure their dominant role in the management and execution of payments. They also seek to guarantee their ability to supervise other banks and conduct monetary policies,” said the Bank of America.

The Evolution of CBDCs May Contribute to Increase the Level of Inflation

The financial institution stated that CBDCs represent the next frontier for central bank stimuli. These incentives include measures such as stimulus checks, emergency loan programs, the universal basic income (UBI), and increasingly powerful money drops. They also said that the evolution of CBDCs may increase inflation expectations, boosting inflationary assets during this decade.

Given that governments could have access to information on people’s financial activity, the report also considers the risks to user privacy. For example, various members of the DAO can scrutinize profiles to verify whether they are human. If they wrongly brand a profile as fake, they may risk losing part of the user’s assets.

Several countries are planning to issue their CBDCs and are at different stages of development. China is the most advanced in this regard since it has already run several tests. Its financial authorities have even launched a digital wallet for the digital version of its fiat currency.

Other countries having similar initiatives include the United States, Canada, Brazil, and the Eastern Caribbean. The most recent case is Japan, which is working on the development of its digital yen. They are even starting to run a phase-1 proof of concept.

By Alexander Salazar


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