Developing central bank digital currencies: A reality check during cryptocurrency euphoria

Abstract

The creation and testing of central bank digital currency (CBDC) have been observed as a potential pathway to the strengthening of cryptocurrency regulatory conditions. However, for some, such central bank intervention is observed as nothing more than an unnecessary hindrance and a threat to both confidentiality and potential profitability. Using estimated sentiment indices based on CBDC-related social media posts, and testing for the effects of regulatory-related announcements upon blockchain and cryptocurrency-related funds, this research presents two key findings: first, the continued evolution of the pricing structures of digital finance products to respond to such perceived threats constitutes a further evolutionary point in the product’s life-cycle. However, secondly, the very fact that returns fall while volatility increases indicate a largely negative market response to the threat of potential external regulation of cryptocurrencies in the future. The nature of this negative response validates concerns that anonymity continues to be an attractive central feature for cryptocurrency stakeholders, further verifying the necessity for third-party oversight.