What Do Cryptocurrencies and Digital Money Mean for the Global Financial Markets?

Key Insights

• The Global Financial Market has shifted with the introduction of CBDCs and Stablecoins.
• Cryptocurrencies such as Bitcoin (BTC) are becoming legal tender in some countries, it’s now more important than ever to look at how crypto has shaped financial markets.
• There is still the need for regulators to address the operational resilience standards and the protection of customer information.

Cryptocurrencies have re-shaped the way a lot of us think about finance.

What originated as a concept eventually became something that would reimagine an entire industry and fundamentally shift people’s perspectives on how they manage and handle their finances.

Cryptocurrencies, and digital money, have given control back to people, have enhanced their overall privacy, and have bypassed all and any borders when it comes to making global payments.

Because this industry is still in its infancy and is only just starting to get adopted by the mainstream, where cryptocurrencies such as Bitcoin (BTC) are becoming legal tender in specific countries, it is now more important than ever before to go over what they mean for the global financial markets.

Diving Into Digital Money

Digital money refers to just about any means of payment that exists only through an electronic form. This means that these currencies are not physically tangible, such as the case might be for the dollar bill or the euro, or any coin out there.

Digital money was developed as a means of streamlining the current financial infrastructure and making it a lot cheaper and quicker to transfer money globally.

Some of the most notable examples of digital money are cryptocurrencies, central bank digital currencies (CBDS), and stablecoins.

However, historically, digital money has been susceptible to hacks, and could potentially compromise user privacy if mismanaged, which has led to a high level of concerns regarding it.

That said, there are a few sectors within the cryptocurrency sphere where things have taken a turn in the right direction.

Central Bank Digital Currency (CBDC) vs. Stablecoins

Central Bank Digital Currencies (BDCSs) are essentially digital currencies similar in their functionality to cryptocurrencies; however, they are exclusively released by a central bank.

While they are a lot more centralized, they typically do have the added benefit of being pegged to the value of a country’s FIAT currency.

These coins are typically issued and regulated by a nation’s monetary authority or central bank.

They can promote financial inclusion and simplify the overall implementation of a monetary or fiscal policy.

Throughout the last few years, we have seen numerous countries start exploring how these CBDCs can affect their economies and financial networks and contribute to their overall level of stability.

The main danger surrounding CBDC is citizen tracking or full control of the money by the central authority. This could lead to a lot of risks within these systems.

They are structured as follows:

• The Central Bank Core Ledger – this is the fast and highly-secure platform that provides simple payment functionality. It is dubbed the “Core Ledger.”
• Then there’s the API access that enables private sector payment interface providers to connect to the ledger mentioned above and block unauthorized access. This means that only regulated entities can connect.
• Then there are the payment interface providers, which are authorized and regulated companies that provide user-friendly interfaces through which they can interact with the ledger.
• Last, the users can register with the payment interface providers and gain access to these CBDCs.

Then there are stablecoins, which are not considered the main competitor to CBDCs; however, they will likely get utilized more by privacy-conscious cryptocurrency enthusiasts.

These are cryptocurrencies that attempt to have their value pegged to the value of an external currency, the most common one being the U.S. Dollar (USD).

However, they are not just limited to this peg.

They can also be pegged to gold or even be algorithmic stablecoins that are, theoretically, supposed to control the supply.

As the most advanced economies are taking a shift towards a cashless system, with the recent surge of cryptocurrencies, the main thought in everyone’s mind is what these could contribute to the ​​global financial markets.

The Impact Digital Money Will Have on the Global Financial Markets

Digital currencies can contribute to an increase in efficiency when it comes to cross-border payments.

One of the main issues surrounding global payments for years has been the settlement time when it comes to the payments.

This could range from the same business day to up to five business days in some cases.

Furthermore, there has always been a requirement for human interaction to verify the sender and the recipient’s information.

An example of this includes anti-money laundering (AML) and combatting terrorism financing (CTF).

Because these digital currencies rely on decentralized ledgers, they can move money within seconds, 24/7, 365, as the digital ledger never sleeps.

Specifically, when we discuss CBDCs, there are numerous ways through which they can contribute to a healthy global financial market.

The main reason why control is required is that they insulate economies, facilitate real-time payments, fight dollarization, improve inclusion, and cut cross-border costs.

However, on the flip side, they can also create unfair competition and have less to lend.

The Regulation of Stablecoins As Part of a Bigger Change in the Global Banking Landscape

Due to the rapid growth in market capitalization regarding stablecoins and their potential impact on the financial systems, they face consistent regulatory scrutiny.

As one of the leading central banks globally, the U.S. Federal Reserve r calls for a comprehensive regulatory framework regarding stablecoins.

While it is good to see that financial regulators aim to reduce the risks surrounding stablecoins, it is important to understand that regulating them is not just about avoiding destabilizing runs that could impact financial stability.

Still, these regulators will also need to address the operational resilience standards and the protection of customer information.

Moving Forward with Payments

By essentially bypassing any global restrictions, digital money promises flexibility and economic growth.

The future of payments will likely be inexpensive, easy, and fast.

There are specific issues and limitations that blockchain networks need to solve first, such as scalability and throughput (transactions per second) to put stablecoins and CBDCs in front of the apps of billions of people.

However, with the Central Bank Digital Currency (CBDC) and Stablecoin variety currently available, or in development, we will be spoiled for choice.