It seems like the world is going crazy over digital currencies nowadays. The keyword in this term is “digital” as it has nothing to do with cryptocurrencies. Many governments say that they will be using the blockchain technology to usher in this new era of the digital economy, but have serious issues with calling it a cryptocurrency.
The reality is that almost everything that resembles a currency and is on a blockchain network is considered as a cryptocurrency, regardless if it has the capability to change its exchange rate based on market performance, or if it’s tied to a specific asset and retains its value no matter the demand or supply.
These are called stablecoins which the government is starting to form a liking for. However, this “good relationship” with the blockchain did not start from an altruistic approach. It stems from the government’s desire to limit the adoption of digital currencies like Libra. Banning would not bring the necessary result, therefore most focus on just thinking of their own digital currency to make Libra obsolete.
However, this clash of ideals between a government and Libra does not seem to affect the consumer too much. In fact, it goes hand in hand with consumer benefit, which is like a paradox in the modern world.
Regardless though, let’s try and figure out what implications does the digitalization of fiat currencies could entail for the financial sector.
Fewer costs and faster trade
The one key factor about digitalizing currencies is the reduction of costs for each payment. In most cases, whenever two companies from separate countries try to do business, they need to find some kind of intermediary, which is usually a bank.
The intermediary is actually two entities in this case. The bank where the funds are transacted from, and the bank where the funds are transacted to. Then we have the importance of exchange rates. A company could transfer let’s say USD from their account, but the receiving company would want to be given it in EUR. The banks agree on the exchange rate and charge some kind of fee for transacting a huge amount.
The fees add up the larger the transaction, which increases the costs of doing international business, thus raising the threshold of how many companies can actually go global.
With the help of digital currencies, the costs of having the staff to process the payment and agree on the exchange rate diminish significantly. The speed of the transaction then plays directly in the role of the fees as the intermediary job becomes almost effortless.
This is mostly classified in the institutional Forex trading category, which is mostly occupied by large investment companies and banks. But it could also affect the retail level. For example, according to some Forex brokers that mostly service retail clients, giving out their benefits will become much easier through banks which is much safer.
For example, if you read here how to claim XM bonus you will see that the company is going to be transferring the funds from their initial account to a segregated account of the customer. This takes time and commissions from most banks. However, should it move to a digital currency, the transfer of funds on the same network, even if its different accounts would be pretty much effortless, thus cost the transferer absolutely nothing.
What if the receiving bank doesn’t have sufficient reserves?
The first issue that most companies get when doing international business is that they need to agree on an intermediary currency. That’s right, if two companies from countries that don’t use major currencies agree on a deal, they need to agree on what kind of currency they will be used to make the transaction.
In most cases, it’s the USD or the EUR, but that also complicates the process even further without necessarily giving any health benefits.
With digital currencies, acquiring the reserve of a specific currency is going to be much easier.
For example, let’s imagine that companies from Turkey and India decided to strike a deal. The Turkish company insists on paying in Lira, while the Indian company wants to be paid in Rupees. They both approach their respective banks and agree on the transaction.
With fiat currencies, the banks would have to agree on intermediaries, because they don’t necessarily have the reserve of those specific currencies to exchange. In this case, it would be USD.
However, with digital currencies, the Turkish bank would be able to contact the Indian central bank, request an exchange of their digital Lira for digital Rupees, and have the transaction process within seconds. Once this is done, they can easily transfer these funds to the Indian bank and thus avoid any unnecessary overheads and agreements.
Better control and governance
Most blockchain enthusiasts hate the idea of centralized currencies, but in all honesty, that could be the only way we can see a global adoption of cryptos, even if they will just be a different type of stablecoins.
The amount of control and prevention of crime that will be possible through the complete removal of cash payments simply cannot be ignored.
I always follow the motto that if you have something to hide, that might not be the best decision you’ve made. Therefore, all of those people who think that the government is encroaching on their personal space, need to know that the level of control does not necessarily mean the government will know what you like to buy for breakfast every morning.
It’s about the level of control where large corporations, lobbyists, terrorists, financial criminals or criminals, in general, will always be leaving a trace when committing a crime. I don’t know about anybody else, but when billions of dollars are funneled outside of the country to finance some kind of terrorists abroad, I’d like that to be as easily traceable as possible, and people responsible for it to be sent behind bars.
With the adoption of digital currencies, huge transactions that would rank in the hundreds of thousands or the millions will be subject to some kind of oversight. Small retail payments will go through without too much hassle anyway.