Digital Currency: Emerging Global Financial Architecture


Digital currencies (also called cryptocurrencies, e.g. Bitcoin) are currencies that use blockchain technology to record and secure every transaction. Digital currencies, as the name suggests, can be used in the form of digital cash to pay for everything from groceries to durable household goods, including buying homes.

A digital currency can be purchased using one of many digital wallets or trading platforms and then transferred digitally to complete a transaction involving a purchase or any other transaction with the blockchain recording the transaction and the new owner.

Blockchain is the digital platform behind all digital currencies. It aims to create faster and more efficient ways to transmit, receive and track orders using secure data. Blockchain, also known as Distributed Ledger Technology (DLT), makes any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.

A Blockchain, as the term suggests, is a chain of blocks and runs on a large network of computers. Making a change to any block in the chain requires reconfiguring not only the block with the change, but also all blocks that come after it. This is why blockchain technology is so difficult to manipulate. In fact, the blockchain allows the existence of digital currencies.

According to MIT Technology Review, “The whole point of using a blockchain is to allow people – especially people who don’t trust each other – to share valuable data in a secure and tamper-proof way.” In summary, a blockchain is a database that stores encrypted blocks of data and then strings them together to form a single chronological source of truth for the data.

Blockchain makes the theft of digital currency much more difficult because each currency has its own irrefutably identifiable number that is attached to an owner. A transparent change log maintains document integrity, which creates trust in assets. More importantly, a digital currency reduces the need for individualized currencies and central banks. With blockchain, currency can be sent anywhere and to anyone in the world without the need for currency exchange or interference from central banks.

The adoption of a digital currency such as bitcoin has the potential to reduce the risk for current and future governments, whether domestic or foreign, of imposing policies that may restrict the free movement of capital, assets and restrict other financial transactions.

Technological innovation facilitates digital currencies. Blockchain is a particularly promising technology and it helps to reduce risk, eliminate fraud and bring transparency in all its uses. Blockchain also enables transactions without a central authority, i.e. a central bank which has advantages that have been hailed as key to the growth of international trade.

A digital currency allows its owner to be the custodian of his own assets without any intermediary. Therefore, it comes with some personal responsibilities as there is no central authority like a central bank that can help if one lets one’s guard down. Security, vigilance and a healthy dose of skepticism will help with dealing in a digital currency. Also, as you trade any financial product, stick to the saying “if it sounds too good to be true, it usually is”.

There are many legitimate concerns with blockchain-based digital currencies, such as the lack of regulation or any codified laws regarding the treatment of these currencies. Digital currencies have shown a high degree of volatility for the above reasons which have allowed speculators to enter the market to make speculative gains.

But in the process, speculators have further added to market volatility, for example, the price of bitcoin per token has fluctuated between $450 and $60,000 since 2016. The lack of stability has produced winners and losers. Despite all these concerns, many large companies such as Tesla have invested in bitcoin and are accepting it as payment for their cars.

The spread and volatility of digital currencies, including the technology involved, has caught the attention of many financial experts. Digital currencies also challenge the definition of money as we now understand it by shifting from public fiat money to private electronic money. They have also created powerful decentralized payment systems which, among other things, also help to overcome certain limitations of economic development.

Digital currencies could spur economic growth in developing countries, as they have the potential to solve many of the practical constraints these countries face in providing financial services. It is estimated that half of adults in developing countries do not have a bank account. Digital currencies could significantly reduce transaction costs and enable increased economic activity, thereby boosting economic growth.

Many developing countries rely heavily on remittances. Existing money transfer services charge fees for these transfers which can represent a significant portion of the money sent, especially for small transfers. Additionally, many people do not have a bank account that requires collecting money in person, which further increases transaction costs. One of the uses of digital currencies today tends to substitute for bank accounts, but this requires internet access.

It has been observed that internet usage in developing countries has increased significantly over the past decade and continues to grow rapidly, thereby reducing the cost of cross-border payments using digital currencies. Digital currencies could therefore help increase financial inclusion in developing countries by serving as a quasi-bank account, since anyone with internet access can download a bitcoin wallet.

These currencies are not only very promising for remittances but also for participating in international trade without having a bank account. Decreasing transaction costs could also increase the possibility of microloans, as fiat currency-based transactions currently face high costs.

Increased financial inclusion is the most important benefit of digital currencies for people in developing countries. As already pointed out, digital currencies not only reduce transaction time and costs, but can also act as a type of bank account to enable all bank-like transactions to be carried out.

El Salvador passed a bill in June last year that would see bitcoin become legal tender in the country alongside the US dollar, the country’s national currency. This is the first time bitcoin has been adopted as legal tender in a country.

As a developing country like El Salvador unlocks the opportunities bitcoin can bring, central banks have also embarked on explanatory projects on issuing central bank digital currencies (CBDCs). A CBDC uses an electronic record or digital token to represent the virtual form of fiat currency. A CBDC is a direct claim on the central bank and is issued and regulated by the central bank, so it would have the same status as a traditional fiat currency

The G20 countries are in the front line to undertake these projects. A Bank for International Settlements (BIS) (which serves as a bank for central banks) survey of central banks found that 86% were actively researching the potential of CBDCs, 60% were experimenting with the technology, and 14% were rolling out pilot projects. .

But the widespread use of CBDCs does not seem imminent, as central banks study the effects of a CBDC on interest rates, price stability, financial security and most importantly safeguarding public confidence in the currency. , as well as an assessment of its impact on the banking system. in its entirety. But it will definitely come, just a matter of when.

According to the BIS, a central bank digital currency (CBDC) would be a digital banknote. It could be used by individuals to pay businesses, stores or each other (a “retail CBDC”), or between financial institutions to settle financial market transactions (a “wholesale CBDC”).

The BIS further adds that “if successful, CBDCs could ensure that as economies go digital, the general public retains access to the safest form of money – a claim on a bank. This could promote payment diversity, make cross-border payments faster and cheaper, increase financial inclusion, and potentially facilitate tax transfers in times of economic crisis (such as a pandemic).”

Until now, the unique status of the US dollar in the global financial system allows the United States to exercise its power extraterritorially without resorting to military intervention using economic sanctions. In fact, the United States has weaponized the dollar to achieve its global strategic goals.

Now, CBDCs offer US-sanctioned countries like Iran, Venezuela, and Syria to Cuba, North Korea, and Russia the ability to operate outside of the dollar-dominated global financial system. American regardless of sanctions.

The widespread use of CBDCs, especially the Chinese digital yuan which is at an advanced stage of development, could offer US-sanctioned countries an alternative to the US dollar for global trade. A digital yuan can also accelerate internationalization within the Belt and Road Initiative (BRI).

An internationalized digital yuan would dramatically affect global finance and political-economic governance with transformative implications. Additionally, China is the largest exporting country in the world, and the digital yuan can make it easier and cheaper to buy or sell in China and bypass the global bank-based system for making and receiving payments.

More importantly, countries around the world could start considering a basket of currencies, including CBDCs like the digital yuan, as a new global reserve currency, which could cause the US dollar to lose its pre-eminence as a reserve currency. world.

With the emergence of CBDCs such as the digital yuan as a potential global reserve currency, we are now living in a very exciting time heralding a new era in digital currency evolution. Now it looks like the stage is set for the global monetary system to undergo the most significant changes since the Bretton Woods agreement that led to the US dollar becoming the world’s dominant reserve currency. The global financial architecture is unlikely to be the same as today.

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