Emerging countries have been pioneers in adopting digital currency projects, which could boost financial inclusion, according to a new report.

However, countries that embrace digital currencies face risks, such as increasing digital dollarization as they gain access to other countries, and a potential increase in local inflation rates, according to BofA Securities. .

“Central banks representing one-fifth of the world’s population are likely to issue a general purpose CBDC within the next three years, according to the latest Bank for International Settlements survey. Eighty-six percent of global central banks are exploring the pros and cons of CBDCs. About 60% are conducting experiments or proofs of concept, ”the bank said in a research note.

“The most advanced central bank digital currency projects are currently being carried out in China, [South] Korea, Singapore, South Africa, Thailand and United Arab Emirates.

CBDCs are digital forms of national currencies such as the dollar, euro, or dirham, backed by a country’s central bank.

A growing number of countries are testing CBDCs, and Group of Seven central bankers and finance ministers pledged last week to work together to understand “their wider public policy implications.”

“Our aim is to ensure that CBDCs are anchored in long-standing public sector commitments to transparency, rule of law and good economic governance,” policymakers said in a statement. joint press release.

The UAE has already completed Project Aber, a CBDC proof-of-concept trial with Saudi Arabia last year, which confirmed blockchain technology could be used to “reinvent domestic and cross-border payment systems. in new ways ”.

In February, the Central Bank of the United Arab Emirates also joined a multinational project with the Bank of Thailand, the Hong Kong Monetary Authority and the Digital Currency Institute of the People’s Bank of China to examine business use cases of the use of the blockchain for real. time, cross-border payments in domestic and foreign currencies.

Central banks in emerging markets are embracing CBDCs because they can deliver significant efficiencies in payment systems. They can also help boost financial inclusion, given that more than 50% of people in developing countries do not have a bank account.

Bitcoin trading is highest in emerging countries where fewer people have bank accounts, according to the BofA report, with nine of the top 10 countries in terms of cryptocurrency adoption being emerging markets, according to Chainalysis.

Digital currencies could also lower the cost of remittances, which is a major source of income for many emerging markets. Remittances represent 10 percent of the gross domestic product of the Philippines and Ukraine.

A BIS survey based on a sample of 112 countries found that the average cost of a $ 200 cross-border wire transfer was more than 10% of the transaction value.

“This cost to emerging markets is about $ 50 billion per year. If it can be saved, it would be a huge gain for the populations of many emerging countries, ”says the report.

British Chancellor of the Exchequer Rishi Sunak is hosting a meeting of G7 finance ministers and central bank governors who have agreed to work together on the “wider public policy implications” of the CBDCs. Reuters

However, a more widespread adoption of CBDCs by emerging countries also carries risks, especially in countries where fiscal or monetary policy is considered to be of little credibility and where citizens try to hold their savings in hard currencies such as the US dollar. .

In countries where dollarization rates are currently low, the adoption of CBDCs will not change much. But in countries where it is high, easier access will increase the process – a phenomenon known as “digital dollarization”.

It also risks disintermediation for emerging banks, which could lead to greater volatility in their banking systems.

The potential for central banks to more easily use digital currencies as stimulus also carries the risk of higher inflation and rising asset prices, according to the research note.

However, CBDCs also offer emerging countries an alternative to “unregulated cryptocurrencies offering an alternative medium of exchange or a store of value for high net worth individuals seeking to avoid their gaze”, Hasnain Malik, Managing Director of Investment Strategy. emerging and frontier markets at Tellimer Research, mentioned.

“It would be even worse than traditional ‘dollarization’ because capital would potentially permanently escape their control.”

The adoption of cryptocurrency has been strongest in countries with the lowest confidence in the local currency or the legal environment, he said.

“It is no coincidence that, at one extreme, El Salvador will accept Bitcoin as legal tender. He didn’t have his own money in the first place.



Source link

About The Author

Al Worden

Related Posts

Leave a Reply

Your email address will not be published.