Digital money is becoming more popular & faster, with potential benefits for everyone. There is the potential for it to provide cheaper and faster payments, which can open up access to financial products for many people who would otherwise not be able to cope. It also enhances resilience and competition in the payment provider market, helping to establish better regulations that benefit everyone involved.
Creating and enforcing policies for cryptocurrencies isn’t all that difficult, but finding the right way to go about it is still a work in progress. The public and private sector have different views on which one should be responsible for what, so clarifying definitions can be a real challenge.
Some countries may be tempted to take the shortcut: implementing crypto assets as their local currencies. They can offer many benefits, but they also come with risks and costs that need to be considered.
Crypto-assets are privately issued tokens based on the use of cryptography and denote a predetermined unit of account. Due to their nature, they tend to be extremely volatile, as can be seen with Bitcoin whose peak reached $68,789 on Nov. 10, 2021, and crashed down to less than half its value after a divorce emerged.
Bitcoin is still going strong, even though it can come with some downsides. Many people like using it for privacy-related reasons, but others are investing in it and using it to diversify their portfolios because you can make a lot of money from Bitcoin or lose a lot too.
Basically, cryptoassets are different from other types of digital currency because they are decentralised. Countries like the USA and Japan have already created their own digital currencies like bitcoin or Ethereum, while central banks may also start issuing their own coins in the future. Private companies also want to break the mold, with money that can be sent using mobile phones, popular in East Africa & China and stablecoins whose value depends on safety & liquidity of backing assets.
Crypto assets as legal tender ?
Bitcoins have been mostly relegated to people on the fringe of finances, but some nations are considering legalizing crypto and giving it legal tender status. Even if they only used Bitcoin as their second (or one and only) national currency, it would be a huge breakthrough.
If a cryptoasset were to be legally recognized or classified as legal tender, it would have to be accepted by creditors in payment of monetary obligations, including taxes. For example, if the Bank of Canada made bitcoin legal tender under Canadian law, then people would need to accept it for taxes such as their income tax. Countries can even go one step further by passing laws to make use of cryptocurrencies as a national currency (in which monetary obligations can be expressed), and mandatory means of payment for everyday purchases.
Cryptoassets are unlikely to catch on in countries with stable inflation & exchange rates and credible institutions. This is because there would not be any need to go digital when the conventional system works well, so there would be very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it is cheaper than the fiat currency. Bitcoin is a high-risk investment due to the fluctuating value and lack of connection to the real economy.
Even in less stable economies, a globally recognizable currency such as the euro or dollar would likely be more tempting to adopt. But with cryptoassets being still in their infancy, it remains to be seen whether they will become a viable alternative.
I think that cryptoassets may catch on as an easy way for the unbanked to make payments with the more you use it. However, they won’t be able to form a good store of value because they would convert any cryptoassets received into real currency right away.
Furthermore, Credit is not always easy to come by, and this can make it difficult to get through everyday life. Which means that Real Currency may not always be the answer. And in some countries companies are even restricted from paying their employees in other forms of currency. This could push people towards cryptoassets as the better option
Proceeding with caution is important.
One major consequence of widespread adoption of a cryptoasset such as Bitcoin is instability in the macroeconomy. If goods & services were exchanged in multiple currencies, people would still have to spend a significant amount of time & resources deciding which currency was best for them, instead of spending this time on more productive activities. Governments also need to be cautious of the risk of a mismatch between how they collect input data and how they spend it. For example, if taxes were quoted in the cryptoasset while expenditures remained mostly in the local currency, or vice versa, then any change in their exchange rate would expose their revenues to exchange rate risk.
The currency’s monetary policy would also become less effective. Central banks cannot set the interest rates on a foreign currency. Usually, when a country adopts a foreign currency as its own, they hope to import the credibility of its monetary policy and bring their economy and interest rates in line with the foreign business cycle. Neither of these is possible in such cases where a country doesn’t have control over its own currency.
The result is an extremely volatile domestic market. Even if prices were quoted in Bitcoin instead of traditional currencies, the prices of imported goods and services would still fluctuate based on the whims of global markets.
Financial integrity can suffer without sufficient AML and CFT regulations. Cryptoassets could be used as a vehicle to launder money, support terrorism or evade taxes if efforts are not made to regulate them. This new trend could intensify the risks of a country’s financial system, such as fluctuations, instability and dependency on foreign countries. This could affect their tax and fiscal positions as well as relationships with other foreign banks.
The Financial Action Task Force has released guidelines that help to regulate the use of virtual assets and related services. This means people are less vulnerable when doing business with these entities because there are also standards to help protect their finances. Countries often have to take into account different standards when it comes to enforcement, but this is a problem as people can cross the border which can lead to problems with enforcement.
Some countries may still not have the infrastructure to transfer cryptocurrency, which could make it unreliable for payments. The status of legal tender typically requires a form of currency to be widely accessible and accepted, but this just isn’t the case with crypto. Governments usually link the value of their official currency to the country’s economic status, and changes to their legal tender status and monetary unit may require a number of different processes.
A lot of banks also have a stake in cryptoassets and when the market is booming, they enjoy a strong flow of profits. However, fluctuations in cryptocurrencies’ prices are outpacing their fiat equivalent exponentially. Despite the benefits of Bitcoin being given legal tender status, there are a number of concerns that need to be addressed. For example, it is not clear how prudential regulation against exposures to foreign currency can be implemented if this were the case
One important thing to consider is that widespread cryptoasset use could endanger consumer protection. Households and businesses may lose money through large price swings, fraud or cyber attacks. Cryptoassets are a new and very creative take on money. They have so far proved to be robust, but technical glitches can still occur. When this happens, it can be very hard to get a response because there is no central issuer for Bitcoin.
It’s no secret that the continued existence of cryptoassets is dependent on how much electricity they consume. Even though they might seem like a good idea in theory, we should take care not to overlook their ecological impacts.
Striking a balance between several different factors
We see a variety of risks arise whenever we talk about crypto assets—including that the volatile price fluctuations may potentially impact macro-financial stability, the security of transactions, and environmental concerns. At the same time, the benefits of AI-driven technologies should not be ignored. These innovations hold a great deal of promise for more affordable and accessible financial services. The government needs to step in and provide these services, while also embracing new digital forms of money. They need to make sure that this system is stable, efficient, as well as environmentally sustainable. Attempting to make Crypto assets a national currency may not be wise.