Interest in digital (crypto) currency has risen in the last year, due in part to the interest in touch-free financial transactions caused by the pandemic, rising mainstream business interest in cryptocurrency potential, and the momentum of private initiatives like bitcoin and Facebook’s Diem (previously known as Libra).
At the same time, this rise has also caused more concern by government officials around the world regarding the overall stability of cryptocurrency, fraud potential and whether the foray of private companies into digital currencies could affect the valuation of a country’s fiat money. Add to that the recent announcement by Visa, MasterCard, PayPal, Goldman Sachs, Blackrock, and others that they’re supporting digital currencies, and it’s clear that digital currencies are entering a new phase.
Currently, about 80 percent of central banks in 66 countries – including 21 advanced nations – are exploring the issuance of digital currencies. Some 40 percent have evolved into pilot programs or experiments.
A big challenge being posed by digital currencies is putting into place enough security measures that can guard against fraudulent activities, such as money laundering. While cryptocurrency theft, hacks and fraud plunged 57 percent last year to $1.9 billion because of beefed up security measures, crime in the “decentralized finance services” are now a bigger target of criminals and hackers are always prowling for weaknesses in the cryptocurrency space.
China, which accounts for most of the world’s Bitcoin mining, has moved aggressively to crack down on cryptocurrencies. A handful of other countries, including Bolivia, Nigeria, and Russia, have also moved to limit the use of crypto, and others are considering restrictions.
To assert sovereignty, many central banks, including the U.S. Federal Reserve, are considering introducing their own digital cash, known as central bank digital currency (CBDC). For proponents, CBDC promises the speed and other benefits of cryptocurrency without the associated risks. Dozens of countries—together representing more than 90 percent of the global economy—are exploring CBDC.
Some experts say the potential for CBDC to cut out commercial banks as intermediaries carries risks, because these banks perform a critical economic role by creating and allocating credit (i.e., making loans). If people chose to bank directly with the Fed, that would require the central bank to either facilitate consumer borrowing, which it might not be equipped to do, or find new ways of injecting credit. For these reasons, some experts say private, regulated digital currencies are preferable to CBDC. Governments have so far taken a relatively limited approach.
The pandemic has wrought many changes in the global economy, and that includes digital currencies. Big tech’s currency offerings and the skyrocketing of cryptocurrencies are running into government concerns over security and currency valuation control.
So, while technology will be the key behind the success – and critical reliability – of digital currencies, it is likely to be leading nations such as the U.S., the EU and China that determine how and when the average consumer can use digital currencies.
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