DENISA KELE // THE FUTURE OF MONEY IS DIGITAL CUYRRENCIES
What is digital currency?
Digital currency is any form of currency that is available only in digital or electronic form. Those can be stored on a decentralized and distributed online ledger using blockchain Technology. Digital currencies do not require intermediaries and are the cheapest way of making transactions. Transactions involving digital currencies are made using computers or electronic wallets connected to the internet or designated networks, which enable instant transactions that can be seamlessly executed across borders. For instance, it is possible for a person located in Europe to make payments in digital currency to a counterparty residing in Asia, provided they are both connected to the same network.
Private money is as old as money itself, and banks are the dominant providers of private money in the modern monetary system. Crypto assets, on the other hand, are a new development that provides an alternative to conventional money. The emergence of cryptocurrency is challenging the way many people think about private money. The primary thought is “Is this the end of cash”?, “Are we heading for a cashless future”?
Our current system of money and payments has banks at its center. This system provides a high level of trust, as banks are highly regulated and resilient and, therefore, a strong pillar of the money and payments system. However, that is not to say that the existing system is perfect. New forms of money may be able to deliver money more efficiently at a lower cost than banks and serve niche use cases that are non-commercial for banks.
In this sense, new forms of money may support greater efficiency, innovation, and inclusion in our money and payments systems. However, they must be able to do this without undermining the system’s reliability.
Credit card and cell phone payments have disrupted the physical cash market already, and the real driving force will be central banks—as new cryptocurrencies continue to emerge and their popularity expands, central banks will react by developing their own more stable forms.
If alternative models of money become more significant, we may see banks respond positively to changes. They can compete with alternative providers directly, for example, by allowing more innovation within their existing networks through initiatives such as Open Banking.
As we see, some major central banks around the world have begun issuing their own digital currencies. Some of the larger, more notable examples include the countries below.
China: Since 2020, the People’s Bank of China (PBOC) has been testing the digital yuan, also known as e-CNY, in a number of Chinese localities. Millions of Chinese citizens currently utilize the digital yuan, which is intended to be used for retail transactions.
Sweden: Also since 2020, Sweden’s Riksbank has been testing the e-krona digital currency. The e-krona is being created to complement Sweden’s diminishing use of currency and to give the general public access to a safe and effective payment system.
EU: A digital euro that may be issued by the European Central Bank (ECB) and used for retail transactions within the Eurozone is being investigated.
England: The Bank of England is looking into the prospect of launching the “Bitcoin” cryptocurrency. The UK’s payment system would be backed by a digital currency, which could also reduce the nation’s dependence on cash.
Canada: The Bank of Canada has been conducting research and consultations on the idea of creating a CBDC.
Any CBDC that could be rolled out would allow the central government to track every transaction an individual makes. Every wallet would likely be tied to your identity. This issue could inhibit the younger generation from adopting CBDCs if they already see the benefits of non-central bank currencies such as Bitcoin. The Bitcoin blockchain tracks all transactions, but there is no direct tie between your wallet and your identity. An individual can have infinite wallet addresses controlled by the exact seed phrase, which keeps users anonymous on the internet.
The implementation of a Digital Dollar in the form of a Central Bank Digital Currency is a validation of the crypto thesis. One of the reasons Bitcoin and other cryptocurrencies have gained popularity is the lack of easy digital payments in the modern age. Bitcoin will remain a valuable part of any portfolio because it is outside the realm of the government. A Digital Dollar still has the same potential for inflation as cash. Bitcoin and other cryptocurrencies will also benefit from increased infrastructure, funding, attention, and innovation within the digital financial world. People will be more familiar and comfortable with digital assets, removing the dependency on physical cash that stops some people from believing in cryptocurrency as a viable asset.
The crypto asset market and other innovations in money and payments, particularly those with the potential for wider use, should be closely monitored. Better regulatory certainty would provide innovators with the confidence to experiment within safer parameters..