Will Cryptocurrencies Lower the Dollar’s Status as a World
“Critics of our international monetary system have questioned the role of central bank-managed currencies such as US dollar, the British pound, and the euro…For example, critics note that by creating too much money, the Federal Reserve has contributed to inflation and a decline in the dollar’s value. Is there a different type of money that better maintains its purchasing power?….In 2017, the head of the IMF, Christine Lagarde cautioned that cryptocurrencies could displace central banks, conventional banking, and national currencies in the years ahead.” by Robert J. Carbaugh, International Economics 17th. Edition, pp 370.
Your assignment is the following:
1. Watch the video on the following link and summarize it – 2 pages
2. Watch the video on the following link and summarize it – 2 pages
Search more on Cryptocurrencies as World Reserve Currency and discuss your own thoughts – 2 pages
Use 2-line space with 12-font in APA format. You should use additional page(s) for references. Your references might be books, journals, WSJ, FT, and other legitimate Internet sources. Wikipedia, Investopedia or Tutoring/Study type internet sources are not accepted.
ANSWER
Will Cryptocurrencies Lower the Dollar’s Status as a World Reserve Currency
Introduction
The popularity of digital currency and block-chain technology has skyrocketed over the years. Particularly, cryptocurrencies have threatened to disrupt the foundation through decentralization of the financial system over the control of the sovereign state (Raskin and Yermack, 2018). Cryptocurrency might dampen the domineering effect of the US dollar within the global trade. The existence of cryptocurrency might lead to the dollar facing competition since it has remained a dominant reserve currency. Cryptocurrency is a digital currency that seems to be like a logical continuation of this evolution which has created a new financial infrastructure that is reliable and transparent.
Winds of Change: The Case of New Digital Currency
The Case for New Digital Currency by Christine Lagarde has focused on three major things, the shifting nature of currency and fintech revolution, the responsibilities of central banks within the new financial setting in offering the new currency, and the downsides of digital currency and how they can be reduced (Christine, 2018). The wind of digitalization is blowing leading to the changing nature of money. Considerably, money in itself has continued to change since individuals expect it to be more user-friendly and convenient. Christine (2018) describes the changing nature of currency over the years. When the trade was centered in the town square and local, currencies were metal coins and tokens and was appropriate during that time. The transfer of currencies in form of coins and notes has been used to settle transactions as long as they are considered valid.
Christine (2018) discussed the role of the central banks within the novel monetary landscape. Considerably, the providers of e-money argue that this form of money has less risk as compared to banks since they fail to lend money but hold the funds of the client in custodian accounts. Cryptocurrencies have sought to anchor trust within technology as long as they ensure proper regulation of these digital currencies as a new form of the currency remains a trust (Carbaugh, 2017). The state needs to play a great role in the new form of currency since the digital currency ought to be a liability similar to the cash today. Ideally, different central banks within the world are seriously paying attention to the ideas of the new form of digital currency such as Sweden, China, Uruguay, and Canada (Engert and Fung, 2017). They are embracing new thinking and change as required by the International Monetary Fund. Ideally, there should be a duty of the state to supply digital money to the digital economy.
The digital currency might meet the public policy goals such as consumer protection and security, financial inclusion, and privacy in payments. Considerably, the digital currency will increase the capacity to carry out trades and reach individuals in the remote areas. The banks focus on the urban population and are reluctant in serving the rural and poor populations. The use of cash might be no longer necessary if the majority of people continue adapting to digital currency or the new forms of money. For instance, the status of a dollar as one of the major infrastructure in the current currency will degrade.
Another benefit of digital currency is consumer protection and security (Christine, 2018). Considerably, in the older days, paper notes and coins might have taken a dominant position of the global and large payment firms, network operators, and clearinghouses. The digital currency and outsized private payment providers might have more power if it can offer benefits as a back-up means of payment (Carbaugh, 2017). Additionally, this might boost competition by offering efficient and low-cost alternatives as compared to the paper note. The digital currency has been linked with privacy. Considerably, the current form of currency has allowed anonymous payment. However, people are focusing on forms of currency that will protect one’s privacy for several reasons such as customer profiling and avoid disclosures to hacking.
Christine (2018) has also focused on the shortcomings of digital currency. Some of the major limitations include financial stability and financial integrity. There are risks linked to financial integrity in the use of new forms of currency. For instance, although the digital currency is protecting from having personal information online, the currency is vulnerable to attacks at the hands of hackers (Carbaugh, 2017). Another risk relates to financial stability since the digital currency might lead to pressure on bank deposits. For instance, the fact that digital currencies are considerably similar to commercial bank deposits, there is no need to hold a bank account since the digital currencies are safe, allow payments for any amount, and can be withheld without any limits. Digital currency might lead to the risk of innovation. Ideally, when digital currency becomes very popular, it will influence innovation. For instance, the role of banks may be assumed by the digital currency which will lower the need for innovation and reduce the levels of competition.
Digital Currencies: Implications of Central Banks
The digital currency has received much attention from central banks and government as they focus on realizing the implications of the digital currency. The digital currencies such as Bitcoin have drawn large attention in the world. The rise of digital currencies poses opportunities and challenges to the central banks. With regard to the report, various questions are facing the central banks and what they do about it. The report has tried to frame the challenges that the central banks are encountering with regards to the digital currency. Therefore, the report has covered some of the ways through which the central bank is approaching the issues of digital currency (Brookings Institution, 2018).
Ideally, many central banks have been forced to think hard concerning digital currencies. Digital currencies have created a scenario where payment systems are very decentralized. The central bank is worried about decentralization and the fact that payment mechanisms are not anchored to any official foundation which might lead to crisis. This could impact not only the monetary stability as well as the economic activity generally. For instance, it is important to focus on what is basic money and the important role of banks in the creation of what is considered as money.
The financial markets will be improved by digital currencies. Cryptocurrencies will lower the inefficiencies and costs galore abound with regards to settlement mechanisms and terms of payment where certain transactions take days to be settled (Brookings Institution, 2018). Therefore, through adequate information flows, it is evident why financial markets will work better under new technologies. Digital currencies will make payment systems more efficient. For instance, in China, one can carry out micro transactions through the use of these payment systems that are intermediated and decentralized rather than the traditional banks and other platforms. Therefore, the increased decentralization of the payment mechanisms will act as the stability of the financial system.
Digital currencies will allow many aspects of the implementation of the monetary policy much easier (Brookings Institution, 2018). For instance, through the e-wallets, it is easy to enforce certain negative deposit rates which are challenging under the current circumstances. Therefore, monetary policy will become easier. Digital currencies will facilitate better information flows thus increasing the speed of transactions and broaden the access of the financial system to the rural and poor households (Fung and Halaburda, 2016). New technologies are making it easier for everyone to access money easily which means people are receiving better access to the financial system.
One of the challenges linked with digital currencies is the international monetary system. At some point, it will be challenging in terms of managing flows across borders. With the increased inefficiency in the payment system, it takes longer to carry out international financial transactions. Other issues include financial terrorism and anti-money laundering.
Cryptocurrencies as World Reserve Currency
Digital currencies such as cryptocurrencies are not only money in the usual form but also technology which is essential in offering the state with financial resources. There are speculations that the digital currencies might replace the traceable digital cash offering essential decentralization and greater internationalization (Raskin and Yermack, 2018). Currently, the growth in interest for digital currency is happening significantly over the past few years. The utilization of cryptocurrency in business and transaction is still emerging with the limited number of people and businesses accepting it as a method of payment.
The role of cash is being influenced by the digital currency since the demand for cash in many countries is decreasing. This means that in the next twenty to thirty years, very few people will be exchanging notes and coins. Relatively the banks are also feeling pressure due to the changing nature of the money into the digital form. For instance, new payment means through WeChat, Alipay, PayTM to M-Pesa. Considerably, these have been developed with a mind focused on digital technology and currency to respond to the demands and requirements of the people and country. Therefore, even cryptocurrencies such as Ethereum, Bitcoin, and Ripple are reinventing themselves in the digital currency in the hope that they will offer quicker, stable value as well as a cheaper settlement as compared to the U.S dollar.
The future of digital currency as the reserve currency has been speculated for the last few years. Cryptocurrencies have been considered as the next reserve currency due to the evolution and the changing nature of currencies. Cryptocurrency could weaken the U.S dollar as the world reserve currency due to the growth of economies such as China who are competing with the U.S economic growth. After the emergence of cryptocurrency, its value has increased. This is because the cryptocurrencies hare independent from the authorities and allows people to access money and instantly transfer at low transaction fees.
The implications of cryptocurrencies have been among the reasons why it’s growing fast with a great adaptation all over the world. Cryptocurrencies have great potential about offering accessible payment options, decentralization which have allowed people to exchange money all over the world. For instance, the immutable public ledger for the cryptocurrency has improved financial security. The value of cryptocurrency in the emerging markets is high since cryptocurrencies can be acquired through network participation and are fully accessible. The value of the cryptocurrency has been derived from a calculable and algorithmic value which has the potential of greatly reconstructing and revolutionizing the reserve currency. The gap between the poor and the rich has impacted the effectiveness of a reserve currency. Therefore, the ability of the cryptocurrency to solve financial inequality through enabling access of money to the poor and rural household and its decentralized network making it viable for the next reserve currency.
Conclusion
The changing nature of currency has led to new forms of currency which have different implications for the central banks. Some central banks are reconsidering investing in cryptocurrency to ensure that they ride in the wind of change. In the past few years, it is evident that cryptocurrency is aiming at weakening the U.S dollar to be the next reserve currency in the digital world.
References
Brookings Institution, (2018). Digital Currencies: Implications of Central Banks. Available at: https://www.youtube.com/watch?v=GnnpasGm9Hs&t=18s
Carbaugh, R. J. (2017). International Economics. 14. Aufl., South-Western (Cengage Learning).
Christine, L. (2018). Winds of Change: The Case of New Digital Currency. Available: https://www.youtube.com/watch?v=qvZ9ByRLX9U
Engert, W., & Fung, B. S. C. (2017). Central bank digital currency: Motivations and implications (No. 2017-16). Bank of Canada Staff Discussion Paper.
Fung, B. S., & Halaburda, H. (2016). Central bank digital currencies: a framework for assessing why and how. Available at SSRN 2994052.
Raskin, M., & Yermack, D. (2018). Digital currencies, decentralized ledgers, and the future of central banking. In Research Handbook on Central Banking. Edward Elgar Publishing.
