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Bitcoin is a prime example of how currency and financial services can easily transcend borders; it’s also why central banks are considering whether they should adopt cryptocurrencies. As a result, there’s plenty of talk about incorporating these emerging technologies into our existing systems and structure. But what are the problems that need to be solved, and how?
What are cryptocurrencies?
You probably know at least a little bit about cryptocurrencies by now. If not, it’s worth brushing up on their basic mechanics before reading further. Crypto is gaining worldwide traction as an alternative form of payment and investment vehicle; the most famous example is Bitcoin, but there are hundreds of others for every taste.
Users can trade cryptocurrencies for money – or precious metals, or even consumer goods – through a peer-to-peer network of people who trust each other to complete a transaction without banks or credit card companies. But, of course, not everything needs to be as simple as Bitcoin.
For example, Litecoin founder Charlie Lee left Google to dedicate his time to creating a lighter cryptocurrency that may prove more viable for mainstream usage. Some of the other digital currencies are offshoots of Bitcoin or Litecoin; one such project is Ethereum, which raised over $200 million in its initial coin offering (ICO). Another example is Ripple, whose token XRP recently came under scrutiny as it’s considered a possible tool for banks to process international transactions.
Can central banks make use of digital currencies?
While it’s unlikely that central banks will ever stop finalizing their currencies, they must acknowledge that they cannot cut themselves off from the fast-changing economic environment. Thus, as of now, central banks can only speculate about cryptocurrencies.
For example, the Bank of Japan (BOJ) has made some laudable efforts towards using blockchain technology to enhance the efficiency and transparency of its domestic payment system. The BOJ’s recent introduction of a trial for domestic blockchain payments is part of a broader effort to explore how users can use this emerging technology to minimize operational costs and streamline processes. But central banks are not solely interested in improving the speed and efficiency of existing payment systems.
They’re also considering how a digital currency can help people without access to banks. For example, this is what the European Central Bank (ECB) has done since 2015, when it conducted a comprehensive analysis of the viability of implementing cryptocurrencies. The ECB’s research found that current payment networks are too tied up in legal frameworks, making it difficult for an alternative currency to surface. But more recently, the Bank of Canada expressed optimism about implementing cryptocurrency as a settlement between central banks.
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Developed countries classify bitcoin as a commodity:
In its official statement on cryptocurrencies, the United States classified bitcoin as a commodity that users can use for payment or exchange to purchase other goods and services. The inclusion of bitcoin as a commodity makes it subject to the same rules as any other foreign currency. For example, it may be exchanged for yen for transactions outside Japan.
What about non-developed nations?
Regions such as Africa, the Middle East, and Asia are also looking into how digital currencies can boost access to financial services. However, there are differences in how developed nations treat these currencies. For example, the US, Japan, and Canada have exempted cryptocurrencies from legislation governing the use of foreign currencies. It means that they’re not subject to any particular regulation. On the other hand, European and Asian nations treat bitcoin as a virtual currency subject to foreign exchange rules.
The legality of cryptocurrencies:
There are multiple issues to consider when deciding what legal status to grant these currencies. The first and most notable problem is the need for governments to regulate cryptocurrencies, mainly because there’s a lot of ambiguity about this emerging technology.
Once a cryptocurrency is regulated, it will be subject to laws that govern individual and commercial transactions. Therefore, governments must determine how cryptocurrencies fit with existing money-related laws.
For example, it could mean that users need only to be concerned about their transaction network and make sure that they use the currency of the country they’re located in. It would help decrease fraud and illegal activities associated with using cryptocurrencies while opening up more possibilities for central banks.
It may be tempting for central banks to look at cryptocurrencies as another emerging technology, but this should not come at the expense of financial stability. Instead, at this stage, central banks need to focus on how digital currencies can help individuals and businesses access financial services in developing countries.
