Bitcoin and other cryptocurrencies have evolved into a new asset class that has generated extraordinary profits over the past decade, greatly increasing the institutional interest of the central banks of many countries.
In this article, we will look at the pros and cons of introducing a national cryptocurrency, as well as why states should issue their national cryptocurrencies, and how this will affect businesses.
National cryptocurrency: pros and cons
In recent years, central banks have been actively exploring cryptocurrency and its technological advantages for issuing their own national digital currencies. However, as with any technological innovation, there are both pros and cons.
- Distribution of currency. It is safer and cheaper to transport than cash. Provides public access to legal electronic means of payment.
- Payments. Conventional digital fiat and centralized cryptocurrencies have the following advantages: faster settlement rates, potentially lower fees, and a single point of failure. More anonymity than with card payments.
- A cryptocurrency based on blockchain technology has a similar set of advantages. It improves settlement timeframe, operational resilience, and cyber resilience. All transactions are recorded in one ledger. Cheaper international payments.
- Interest-bearing monetary policy. Provides direct transfer of monetary policy data to households and companies. Competes with private cryptocurrencies to improve monetary policy. Efficient in case of widespread use of private cryptocurrencies.
- Distribution of currency. Significant investment is required for release. Transactions over a certain size must comply with AML/CFT legislation. Consumers can accidentally lose large amounts of regular tokens.
- Digital currency or cryptocurrency. Reduces the demand and supply of cash, which can reduce the availability of cash during a power outage.
- Payments. Сryptocurrency, like blockchain, has slower payment authorization, as well as an inefficient use of electricity and higher transaction fees at a low cost of payments. Doesn’t scale and has probabilistic finality. Cross-border transactions in any digital currency will require an exchange.
- Interest-free monetary policy. Creates a zero bottom line for monetary policy.
- Reduction of financial stability and resilience of banks to economic downturns and stimulation of profit-seeking behavior. The increasing dependence of commercial banks on wholesale financing from abroad, susceptibility to a decrease in turnover in foreign markets. Increase the likelihood and severity of mass withdrawals from a bank during periods of system-wide instability.
Summary. Policymakers should investigate the implications of central bank digital currencies for monetary policy and the financial system, examining how a central bank digital currency can be issued to the public, while mitigating possible disadvantages.
Why should states issue their cryptocurrencies?
The COVID-19 pandemic has certainly accelerated the digitalization of the economy around the world, opening up discussions about the future of digital financial services and whether our economy should advocate for the financial accessibility of Bitcoin (BTC) and other digital assets.
Over the past year, discussions in different countries have increasingly focused on whether we need a digital currency or not. It is becoming apparent to many politicians that decentralized financing only underlines the need for CBDC.
For example, in June 2020, the US Senate Committee on Banking, Housing, and Urban Affairs held a virtual conference on the topic “Digitizing Money and Payments.”
During the conference, the conversation mostly revolved around stablecoins and whether the country’s economy is ready for the digital currency of the US central bank. At the opening session, Senator Crapo brought up for discussion such important issues as:
— Efforts by various groups to develop digital money and payments.
— When developing national cryptocurrencies, it is necessary to take into account design and operational aspects as well as risks.
— Specific problems, which are currently not being addressed or cannot be solved by a whole list of payment innovations that have already been completed or are in the process of implementation, that a CBDC must solve.
— The rules for regulating state cryptocurrencies.
Summary. Undoubtedly, a central bank’s digital currency can have a significant impact on monetary policy and financial stability, both positive and negative. However, more research is needed to weigh all the pros and cons.
While the US economy has one of the highest penetration rates of digital payment systems compared to other countries, China seems to be leading the way in legitimizing digital money and cryptocurrency in its economy.
For example, China recently adopted a new civil code designed to protect the civil rights of inheritance, marriage, property, identity, contracts, and violations. The new inheritance law, effective January 1, 2021, not only defines bitcoin as an asset that can be inherited but also allows Chinese citizens to transfer their cryptocurrency and other digital assets to their heirs.
And this year, China has already begun testing its digital currency DCEP (digital version of the yuan) in selected cities.
Like Bitcoin, DCEP uses blockchain technology, a type of a digitized ledger that is used to verify transactions. In practice, this means that users do not need a bank if, for example, they want to pay each other using their phones.
So far, the People’s Bank of China has not announced an exact date for the nationwide launch. Once established, however, the new development will allow users to link downloaded e-wallets to their bank cards, make transactions, and transfer money.
How will national cryptocurrencies affect businesses?
The impact of cryptocurrencies on the business world has been a subject of controversy for many years. As the world and the public become more friendly towards digital currencies, the influence of the cryptocurrency market itself is growing.
One of the most significant trends in cryptocurrency is its increasing acceptance by governments.
Fun Fact: Some American businesses such as McDonald’s and Subway are participating in the test of the Chinese national currency. This kind of international support for cryptocurrencies provides unparalleled legitimacy and attention to cryptocurrencies.
As cryptocurrencies have grown, the authorities introduced new tax rules for cryptocurrencies and their evaluation. For example, the SEC currently classifies cryptocurrency tokens as securities, but some government laws are changing this. This is a significant win because companies can take advantage of these changing rules and switch to cryptocurrency without significant tax disruptions. These rules can also make cryptocurrency investments a safer option for more businesses.
Previously, the impact of cryptocurrency on businesses was not fully realized due to uncertainty. Many companies were afraid to invest because the rules were unclear. Now that governments are taking a more solid stance on this issue, it may be more convenient for businesses to deal with cryptocurrency.
Therefore, digital currencies can soon become the norm for international trade. In turn, the Cratos platform, as a licensed cryptocurrency exchange, already works with the most popular and reliable cryptocurrencies, which fully satisfy the needs of corporate clients from all over the world in terms of payments and exchange of cryptocurrencies.