What do cryptocurrencies and digital currency mean for global financial markets?

Dive into digital money

Digital currency refers to just about any means of payment that only exists through an electronic form. This means that these currencies are not physically tangible, as might be the case with the dollar bill or the euro, or any coin.

Digital money was developed as a way to streamline the current financial infrastructure and make it much cheaper and faster to transfer money globally.

Some of the most notable examples of digital currency are cryptocurrencies, central bank digital currencies (CBDS), and stablecoins.

However, digital money has historically been susceptible to hacking and could potentially compromise user privacy if mismanaged, which has raised serious concerns about it.

That said, there are a few areas in the cryptocurrency sphere where things have taken a turn in the right direction.

Central Bank Digital Currency (CBDC) vs. Stablecoins

Central Bank Digital Currencies (BDCS) are essentially digital currencies similar in functionality to cryptocurrencies; however, they are exclusively issued by a central bank.

Although they are much more centralized, they usually have the added benefit of being pegged to the value of a country’s FIAT currency.

These coins are usually issued and regulated by a country’s monetary authority or central bank.

They can promote financial inclusion and simplify the overall implementation of monetary or fiscal policy.

Over the past few years, we have seen many countries begin to explore how these CBDCs can affect their economies and financial networks and contribute to their overall level of stability.

The main danger surrounding the CBDC is the tracking of citizens or total control of the money by the central authority. This could lead to many risks within these systems.

They are structured as follows:

  • The Central Bank Core Ledger – this is the fast and highly secure platform that offers simple payment functionality. It is nicknamed the “Core Ledger”.
  • Then there is API access which allows private sector payment interface providers to connect to the aforementioned ledger and block unauthorized access. This means that only regulated entities can connect.
  • Then there are payment interface providers, which are licensed and regulated companies that provide user-friendly interfaces through which they can interact with the ledger.
  • Finally, users can register with payment interface providers and access these CBDCs.

Then there are stablecoins, which are not considered the main competitor of CBDCs; however, they are likely to be used more by privacy-conscious cryptocurrency enthusiasts.

These are cryptocurrencies that attempt to have their value pegged to the value of an external currency, the most common being the US dollar (USD).

However, they are not limited to this ankle.

They can also be pegged to gold or even be algorithmic stablecoins that are, in theory, supposed to control supply.

As the most advanced economies move towards a cashless system, with the recent surge in cryptocurrencies, the main thought in everyone’s mind is what they could bring to global financial markets.

The impact digital money will have on global financial markets

Digital currencies can help increase the efficiency of cross-border payments.

One of the biggest problems with global payments for years has been payment settlement times.

This can range from the same working day to five working days in some cases.

Additionally, there has always been a requirement for human interaction to verify sender and receiver information.

An example of this includes Anti-Money Laundering (AML) and Countering Terrorist Financing (CTF).

Because these digital currencies rely on decentralized ledgers, they can move money in seconds, 24/7, 365 days a year because the digital ledger never sleeps.

Specifically, when we discuss CBDCs, there are many ways to contribute to a healthy global financial market.

The main reason control is needed is to insulate economies, facilitate real-time payments, combat dollarization, improve inclusion, and reduce cross-border costs.

However, on the other hand, they can also create unfair competition and have less to lend.

Stablecoin regulation amid a larger shift in the global banking landscape

Due to the rapid growth in market capitalization regarding stablecoins and their potential impact on financial systems, they are under constant regulatory scrutiny.

As one of the world’s leading central banks, the US Federal Reserve calls for a comprehensive regulatory framework regarding stablecoins.

While it is good to see that financial regulators aim to reduce the risks associated with stablecoins, it is important to understand that regulating them is not just about avoiding destabilizing runs that could impact financial stability.

However, these regulators will also need to address operational resilience standards and the protection of customer information.

Moving forward with payments

By essentially circumventing all global restrictions, digital currency promises flexibility and economic growth.

The future of payments is likely to be inexpensive, easy, and fast.

There are specific issues and limitations that blockchain networks must address first, such as scalability and throughput (transactions per second) to put stablecoins and CBDCs ahead of billions of people’s applications.

However, with the Central Bank Digital Currency (CBDC) and Stablecoin variety currently available or in development, we will be spoiled for choice.