What Factors are Driving G7 Central Banks into Adopting Cryptocurrencies?

David Drake

With a total market capitalization upward of $625 billion, cryptocurrency is becoming a market force that mainstream banks can no longer ignore. China’s central bank initiated plans to work on its own digital currency, while Singapore has already begun experimenting with the idea.

But as the cryptocurrency market continues to grow, it’s the suggestion made by the
Bank of International Settlements (BIS), as well as the recent move by G7 central banks, that hints at future interactions between banks and digital currencies.

A few months ago, BIS encouraged central banks to see whether digital currencies would work for them. Shortly after that, central banks in G7 countries voiced their intention to include cryptos in their foreign reserves.

Could these moves be a result of a realization that fiat currencies are losing value against digital currencies? Sebastian Denis, the FinTech Markets Expert at
Decentralized ID, thinks so.

He says, “When the G7 banks realize that their national currencies are devaluing against cryptocurrencies, they will have to include cryptocurrencies in their foreign reserves. Cryptocurrencies will then be accepted as part of the tool that provides financial stability.”

Even so, the devaluation of the fiat currency isn’t the only thing that may be pushing central banks into accepting cryptocurrencies. With the increasing adoption of cryptocurrencies, G7 central banks might also be concerned that digital currencies could make it difficult to trade due to their rising market capitalization.

Andrew Prell, CEO of
Silica Nexus, says, “As the market capitalization for cryptos makes G7 trading seem inevitable, it is but one more move to further mainstream non-fiat currencies, potentially adding significant volume to the crypto market and building more mainstream acceptance of crypto trading.”

For many in the crypto market, the entry of G7 central banks into the space signifies growth. Christopher Cummock, Founder and Managing Director of
Vaultbank, notes that this will increase the demand for digital currencies, resulting in higher prices.

He says, “Crypto is really reaching its adolescence with this action by central banks and wealth managers now allotting up to 7 percent of clients asset portfolios in alternative currencies. This will create a massive demand and continue to bolster prices of the top 10-15 coins for years to come.”

Mainstreaming cryptos isn’t a bad thing at all. It will boost the acceptance of tokens sold by companies through initial coin offerings (ICOs).

“As trading broadens for major cryptocurrencies, ICO tokens will likely gain acceptance just like equity stock trading did over a century ago,” Prell adds.

It will also broaden the market for ICO tokens as Cummock notes, “Think of when Apple was added to the NASDAQ, it now creates a mandated natural buyer of its stock, so it’s a natural appreciation in pricing simply due to growing market and it needing to be part of so many portfolios. This will also happen to crypto when central banks and main street investors are also demanding allocations.”

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.