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Are Digital Currencies a Part of a Centralized Financial Future?

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4th May 2021

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With the rise of cryptocurrencies and decentralized finance over the last few years, you might be wondering what the existing financial institutions are making of the changing landscape of finance. Well, Central Banks around the world are taking note and are starting to modernize their monetary systems in all aspects of their operations, including the introduction of a digital version of their currencies. While this may have happened anyway, it is not a stretch of the imagination to wonder if the digitalization of existing currencies is being introduced due to the rise of cryptocurrencies. 

These new digital currencies should not be confused with cryptocurrencies or any other form of decentralized finance. These digital currencies are very much centralized as they are legal tender of their respective Central Banks. The digital versions will be valued the same as the cash currency on a one-to-one ratio ensuring that this is an extension of the current monetary system and not a new revolutionary idea. The main advantages of a digital currency are that they allow for more flexibility and improved efficiency in payment systems or any other transactions. This will benefit businesses and consumers in the economy, as a more efficient system that will cut costs and save time. Additionally, many Central Banks feel that the new digital currency will allow for more people to have access to online bank accounts, which is a barrier to economic growth in many developing countries. A digital currency will make it easier for individuals and businesses to store their money in online bank accounts in a safe manner. Online banking already exists, but with the addition of a digital currency, all financial operations will be more easily and efficiently available in a digital format. 

The advantages of these digital currencies sound pretty similar to some of those of cryptocurrencies, so what is the difference? Are Central Banks simply creating their own in order to compete? Well not necessarily. There is a big difference in the operation of the two types of currencies. The majority of the proposed digital currencies are issued by Central Banks and are essentially the existing currencies but in an online format. So while they will share the same advantages of an online currency just like any crypto, they lack the decentralized aspect that makes cryptocurrencies unique. 

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In the case of Jamaica, the digital currency will be called Central Bank Digital Currencies (CBDC) and will be issued by the Central Bank in a similar way as the Jamaican dollar (JMD) except that instead of cash it is completely digital. This allows anybody to have JMD on a virtual wallet on their smartphone or any other capable device. With more people involved in the financial sector, the economy can grow and more people can see the benefits of having their money stored securely and accruing interest. This is especially targeted at the poorest members of the economy who are often in the informal sector and are most at risk of the dangers of inflation. 

Jamaica is not the only country introducing some form of digital currency in the next few years; the Central Bank of Thailand, the Eastern Caribbean Central Bank, and the Bank of Japan are all looking to modernize and digitize their currencies or monetary systems. While this has been part of the ongoing plan for many of these Central Banks, the rise of decentralized finance and cryptocurrencies are undoubtedly a factor in expediting this process. One of the principal benefits of cryptocurrencies is their ability to be easily accessed by anyone, even the poorest individuals and businesses. These can greatly benefit from the ease and efficiency of digital transactions and blockchain technology. Central Banks have come to realize this new reality and are now trying to bring some of these improved digital technologies into their existing currency frameworks and under their centralized control. This could be seen as an attempt by Central Banks to stay ahead of the rise of other digital currencies and ensure that the demand for their currency stays high in order to avoid any downward pressure on the exchange rate for their domestic currency. In a way, this will help stem some of the current trends of investors and financial actors exchanging their assets held in popular currencies like the Dollar, to those of cryptocurrencies such as Bitcoin. 

Digital currencies will also be beneficial to all cross-border payments such as remittances, tourism, and e-commerce. As the world has become more globalized, these types of transactions have increased tremendously and are now a vital part of many economies. In the current system, many of these are slow and incur many fees and costs that hinder the growth of these sectors of the economy. Additionally, it tends to affect the lowest income individuals in the economy the most, especially remittances. These tend to go hand in hand with migration trends and the growth of multinational organizations and companies that need to be sending money to different countries. With an increase in countries implementing digital currencies and a global effort to improve these transaction systems, the movement of money across borders will become more efficient and attractive.