State-backed cryptocurrencies could materialize in Central America, South America, and Asia, without passing through Europe. In this last case, the European Central Bank intends to tighten controls and calls for caution with respect to the spread of cryptocurrencies.
The starting point of our examination concerns the data concerning the adoption of digital currencies, which, since last year, has become increasingly widespread internationally, such that it has prompted a refinement of market regulation. Chainalysis found that from 2019 to 2021 the use of cryptocurrencies increased by 2,500% with small emerging economies leading the special ranking of national economies. Vietnam leads the way, followed by India, Pakistan, Ukraine, and Kenya. The United States, among advanced economies, ranks 8th and China 13th. Prior to the outbreak of war, Ukraine had a set of regulations designed to regulate cryptocurrency markets.
What is the reason for the heightened prevalence of digital currencies in developing countries? The answer lies in the poor spread of banking and financial infrastructure. Cryptocurrencies are a substitute for deposit accounts, and in developing countries, stablecoins are the most suitable tool for transferring currency to and from abroad at an affordable cost, without the constraints of limitations imposed by monetary authorities. In South America, like in Venezuela and Argentina, cryptocurrencies aim to protect, not without risks and flaws, savings from very high inflation rates and the devaluation of the domestic currency.
The case of El Salvador
A few weeks ago Galoy, the banking platform in El Salvador that has been active since November 2020 with the launch of the Bitcoin Beach Wallet, said it was ready to introduce a new stablecoin linked to the dollar. An approach whose primary goal is to reduce volatility compared to non-pegged cryptocurrencies such as Bitcoin. Stablecoins were created to cope with the risks of uncollateralized crypto assets. Their value is tied to a low-risk asset or portfolio. This scenario, however, requires appropriate regulation in order to prevent stablecoins from being stable only on paper and in name only. The new coins, Stablesats, do not need tokens to function and would have the advantage of being easily spendable.
Galoy to support this new project has made a capital increase of $4 million. The project intends to be self-sufficient as much as possible. For this reason, Central America has the ambitious goal of becoming a real laboratory for crypto assets. The platform has been launched not only in Costa Rica but also in Panama, with an increasingly interested look at other South American countries. Galoy’s pivot is the Lightning Network, with which there is a disengagement from third parties to carry out controls, with the possibility for countries with high inflation and large exposure in US dollars to have an instrument manageable only by them and the possibility of having a synthetic dollar that can maintain its value beyond the reference exchange rate.
Regarding the interest around cryptocurrencies, last May central bank representatives from 44 emerging countries met in El Salvador at the meeting of the “Sme Finance working group.” The meeting in El Salvador was not coincidental, since here, not even a year ago, Bitcoin was adopted as legal tender for the first time and consequently equated with the US dollar.
Watching the Salvadoran turnaround with interest are Paraguay, Argentina, Brazil, Nicaragua, Panama and Mexico even though there are no central-level measures in these countries yet. Certainly, one political party is winking at state-backed cryptocurrencies.
Cryptocurrencies under the Caribbean sun
Remaining in Central America, the Bahamas has opened to payments with digital currencies for tax payments. It is a start. The Central Bank of the Bahamas has issued the Sand Dollar and the government has authorized its use. The Bahamas’ example has been called a “progressive and forward-looking cryptocurrency design.” Thus, a full-fledged crypto hub could be realized under the Caribbean sun, as desired by Bahamian banking and financial authorities.
The international regulatory approach
While some states are showing interest in cryptocurrencies, the regulatory approach changes from country to country. Bans on cryptocurrency use by Egypt, Morocco, Algeria, Bolivia, Bangladesh, Nepal. We will turn to China later. A kind of “mixed” system, on the other hand, concerns Nigeria, Namibia, Colombia, Ecuador, Saudi Arabia, Jordan, Turkey, Iran, Indonesia, Vietnam, and Russia. In these countries the ability of banks to operate cryptocurrencies is limited or their use to make payments is prohibited.
“This situation,” comments Fabio Panetta of the ECB board, “is unsatisfactory, as crypto-assets represent a global phenomenon and the underlying technologies can play an important role, even outside the financial sector. Regulatory action needs to be coordinated internationally in order to address problems such as the use of crypto-assets for cross-border illicit transactions or their environmental impact. In this area, regulation must seek a delicate balance between risks and benefits, avoiding stifling innovations that can raise efficiency both in payments and in other industries.”
The regulatory work on crypto assets in Europe is in full swing. Consider the entry into force of the EU regulation, called MiCA (Markets in Crypto Assets).
The global scenario
The changes taking place are causing central banks to run for cover considering that there is no shortage of risks around the corner. Let’s see which ones.
A banknote constitutes a claim against a central bank and is, therefore, the safest form of money. However, it must be remembered that only commercial banks can access the central bank’s reserves. Hence, here is the first risk: a Central Bank digital currency would allow access to all. The consequence would be that the public could hold accounts with the Central Bank. Another consequence would involve the possibility of holding Central Bank money in privately issued wallets.
Hence, a neutral attitude – of forceful indifference we might say – on the part of the Central Banks with respect to the issue. An approach, in good measure, aimed at not advocating the use of “electronic money” so as not to destabilize the supremacy of Central Banks in world markets. This is compounded by other concerns related to security, privacy of transactions and, to take the argument to extremes, the existence and role of central banks themselves.
In 2021, the US Federal reserve conducted an in-depth study to outline future scenarios and identify tools to intervene in various contexts. The European Central Bank has also been busy with the approval of the launch of “the research phase of a digital euro project.” Brussels has given itself a short-term time perspective for the implementation of the digital euro, making it coincide with the year 2026.
China seems to have equipped itself better than most. The electronic version of the yuan has been tested in some regions, and several initiatives have been put in place to bring citizens closer to the digital currency. Think of lottery prizes and the creation of a digital wallet (e-CNY).
The United States has made no secret of its concern provoked by the creation, already a few years ago, of China’s digital currency-the e-yuan-which aims to internationalize the yuan and at the same time defend its monetary sovereignty. The need is to protect themselves from US tech companies, which in turn will leverage the dollar. But there is no shortage of initiatives to stem the spread of cryptocurrencies itself in China. The People’s Bank of China in 2021 declared cryptocurrency transactions, mining and advertising related to cryptocurrency illegal. Given the love match with China, Russia and India are also taking a cautious stance.
And in Europe? In Spain, at the end of last spring, the Internal Revenue Service issued a binding opinion that NFTs will be taxed at 21% in relation to the activities of creating and buying and selling them by companies or artists. The future will certainly be characterized by the spread and use of digital currency. However, this does not make the central financial authorities sleep soundly, as they are gearing up to create a Central Bank Digital Currency (CBDC) with the primary objective of countering the volatility experienced by decentralized cryptocurrencies such as Bitcoin and Ethereum or stablecoins. The ECB continues to reassure and assert that the digital currency will not replace cash. Also at stake, some experts say, is national sovereignty.
In the next five to six years, many people will surely have digital wallets diversified with money in traditional bank accounts and stablecoins managed by private companies. Making long-term predictions, however, might be foolhardy given what is happening these days. Thoughts immediately turn to some stalled programs. Meta (formerly Facebook) intended to launch its own stablecoin; it had to deal with US regulators, who blocked its project. Of concern are Meta’s goals and the possibility that stablecoin could be used to finance illicit transactions within and outside national borders.
That is why the Central Bank Digital Currencies (CBDC) backed directly by Central Banks is simultaneously a bulwark and a springboard for governments to defend and recover lost sovereignty. With the addition of blocking the threat to state monopoly presented by cryptocurrencies or that related to operations such as those set up by Facebook. In short, the scenario is in flux and the facts of the present will be invaluable for any future initiatives and strategies.