Jason Cozens

For centuries, consumers have had no choice but to trust in the banking system. Anyone looking to secure their financial future was encouraged to entrust their savings to banks. Banks and financial institutions enjoyed dominance and a steady stream of consumers willing to hand over their life savings so banks could put these at risk whilst chasing a profit. You can read more about how consumers have been punished for saving as their purchasing power reduces as the value of cash declines in my recent blog for Scottish Financial News.

Fortunately, things are beginning to change. Consumers now have more options available to them than ever before; able to trade cryptocurrencies or spend and share in real gold via Glint’s app and Mastercard®. But, crucially, consumer awareness has also shifted and there is now greater understanding that there are alternatives to fiat currencies and government-backed money. These are experiencing a surge in popularity; for example, it’s estimated that there will be a billion Bitcoin users by 2025, whilst, at Glint, we’ve seen our number of clients increase by 40% in the last four months. The alternatives are certainly gathering momentum.

Central banks and traditional financial institutions are understandably nervous about this rise and, for the first time, see their dominance threatened. In order to cement their position, it’s likely that they will mount a strong fightback against the alternative currencies. How might they do this?

The anonymous nature of cryptos means we could see governments seek to criminalise ownership and shut down exchanges. US Treasury Secretary Janet Yellen has used strong language when discussing Bitcoin in recent weeks and linked its use to illegal activities. This all suggests that it is coming under increasing scrutiny.

We’ve also seen several celebrities and influencers in recent months shilling for cryptocurrencies such as Bitcoin and Dogecoin. A range of individuals, including Snoop Dogg, Gene Simmons and Elon Musk (more on him later), have promoted cryptocurrencies and in some cases have contributed to spikes in price. This is a major cause for concern. The value of a viable currency should be based on its performance, not on the popularity of whoever happens to be tweeting about it. Consumers and private investors need to be very wary of tying their financial security to the popularity of an individual. After all, what goes up, can come down - this bubble could burst and many could see the value of their portfolios collapse overnight. Could we see central banks and regulators taking a much closer look at celebrity endorsements in the name of protecting consumers from themselves?

There are already reports that the SEC is investigating Tesla’s purchase of $1.5bn Bitcoin and the timing of Elon Musk’s tweets which helped to drive the price to an all-time high. I’d expect to see increased focus on cryptocurrencies, as governments look to rein it in from its current wild west landscape to something more rigid and controlled. It seems that the regulators are circling.

But perhaps the most significant step by central banks to respond to the threat of alternative currencies is the development of Central Bank Digital Currencies (CBDCs). Currently, China is leading the race to launch its own CBDC, already trialling and expanding its rollout to several cities, but other countries and governments are accelerating their activities here too. In fact, research from the Bank for International Settlements (BIS) suggests that 86% of central banks are engaged in some sort of CBDC activity, with central banks responsible for the finances of a fifth of the world’s population looking to launch a CBDC within the next three years.

How will CBDCs impact cryptocurrencies? Whilst we can’t know for certain, it could be that cryptos are driven back underground and out of the mainstream. These government-backed CBDCs will offer all the accessibility and usability that attracts many towards cryptocurrencies but will be based on something with a more tangible value – fiat currencies, whether that’s the dollar, sterling or Yuan.

And here lies the problem. If a digital currency is backed by fiat money, then its value is impacted in the exact same way as cash or savings. Whether you are using a £10 note or £10 in a CBDC, the value of cash and your purchasing power will be eroded through a combination of inflation outstripping interest rates, continued quantitative easing and increased borrowing. It’s important that consumers remember that the underlying factors that drove them towards alternative currencies whether gold or crypto, are unlikely to be solved with the introduction of CBDCs.

Unfortunately, the launch of CBDCs is likely to be merely a power grab by central banks – it may at first seem as though consumers have more choice, but we will still suffer from the same issues that have plagued savers for decades. The power will remain with the financial institutions which have controlled our finances for generations, to the continued detriment of consumers and savers worldwide. We’ve reached a potentially decisive moment in unlocking fair access to money and providing everyone with an equal opportunity to prosper, it’s vital that we don’t stop now.