CRYPTO CURRENCY AND CBDC - ECONOMY
News: Explained
| IMF’s view on cryptocurrency in Latin America
What's in the news?
● On
June 22, the International Monetary Fund (IMF) issued a statement on the use of
cryptocurrency in the Latin America and Caribbean market, and about the rising
interest in blockchain-based Central Bank Digital Currencies (CBDCs).
Key takeaways:
● The
global monetary authority ended its statement noting that a ban on crypto “may not be effective in the
long run” in the region. This has raised eyebrows due to the international
organization’s change in stance on crypto in the LatAm market.
Why is Latin America’s crypto economy so significant?
● Brazil, Argentina,
Colombia, and Ecuador are among the top 20 in
Chainalysis’ 2022 Global Crypto Adoption Index.
● Separately,
a number of central banks in the Latin American market are also considering
CBDCs, meaning that more people could soon be exposed to blockchain-based
infrastructure.
Why have people moved towards crypto currencies?
● Countries
like Argentina, Chile, and Columbia have experienced devaluation of their currency against the U.S. dollar.
● To preserve the value of
their savings, some residents have explored
converting their funds to U.S. dollars. Others have chosen to convert their
assets to stablecoins - cryptocurrencies designed to reflect the value of fiat
currencies such as the U.S dollar.
El Salvador and crypto currency:
● El
Salvador is the first country in the world to adopt Bitcoin - the largest
cryptocurrency by market capitalization - as its legal tender.
● The
country with a population of 6.5 million adopted Bitcoin on September 7, 2021
under the leadership of President Nayib Bukele, who is an ardent crypto
supporter.
● El
Salvador uses a digital wallet known as
Chivo to regulate users crypto transactions. However, there have been
complaints about the wallet causing funds to disappear and enabling identity
fraud.
IMF's reaction towards El Salvador’s Bitcoin adoption:
● The
IMF said it was against El Salvador’s move, citing fiscal risks and consumer
protection issues.
Recent change of stance from IMF:
● Recent
IMF post said that a few countries have completely banned crypto assets given
their risks, this approach may not be effective in the long run.
● The
post also called for regulation of
cryptocurrency and recording crypto transactions for transparency.
What is the difference between cryptocurrency and
CBDCs?
Cryptocurrencies
and CBDCs are both blockchain-based digital currencies. In layman's terms, a
CBDC is simply digital fiat, whereas cryptocurrencies are digital assets on a
decentralised network.
|
CBDCs |
Cryptocurrency |
|
Will
be issued by central banks or monetary
authority. |
Decentralized
creation by private individuals
and organizations. |
|
Will
be a legal tender. |
Not a legal tender. |
|
It
will be a fiat currency in digital
form, i.e. it will be exchangeable with other fiat currencies. |
Not fiat currency
but assets created privately to facilitate transactions. |
|
It
will have intrinsic guarantee by the
Central banks for payment to the holder. |
No such guarantee or claim. |
|
Not volatile. |
Cryptocurrencies
are highly volatile in nature |
|
Example:
● eNaira
- issued by the Central Bank of Nigeria ● Sand Dollar CBDC
- Bahamas ● digital renminbi
(e-RMB) - China |
Example:
Bitcoins |
Advantages of Crypto currency:
1.
They include cheaper and faster
money transfers.
2.
They are decentralized systems that
do not collapse at a single point of failure.
3.
They enable secure online payments without
the use of third-party intermediaries.
4.
One can do away with the charges on transactions.
5.
Facilitate cross border financial
transactions.
6.
Based on block chain technology which is not prone to counterfeit and ensures transparency.
Concerns of Crypto currency:
1.
They include price volatility.
2.
They include high energy consumption
for mining activities. Crypto mining led to huge energy consumption.
3.
They can be used in criminal activities.
Eg. Terror financing and many ransomware attacks ask to settle in crypto
currency.
4.
It is believed that cryptocurrency will disrupt
many industries, including finance and law.
5.
Not a legal tender because It is not
issued by any centralized authority and doesn't backed by any asset
6.
No exchange value. It's value is
based on the speculation only
7.
It Isn't regulated by Government. Hence it will make the present monetary tools ineffective and will lead to inflationary
pressures.