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Will national currencies be replaced by cryptocurrencies?

12.01.2023
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According to Jerry Haar

The fiasco with the FTX cryptocurrency has received a lot of publicity, but the verdict on the cryptocurrency has not yet been issued. Its advantages are undeniable: inflation protection, security and privacy, self-governance, decentralization and cost-effectiveness for transactions and transfer of funds. However, the downsides are significant: cryptocurrency can be used for illegal transactions, such as drug and arms trafficking, money laundering and terrorist financing; loss of data can lead to financial losses; the adverse impact of its extraction on the environment (due to the huge amount of energy required); hackable and no return or cancellation policy.

In general, the recent times have not been favorable for cryptocurrencies. They have lost over $2 trillion in the past year. In the second week of November alone, the cryptocurrency fell by 21 percent. Large companies are not optimistic about cryptocurrencies, such as Tesla, which will no longer accept it for payment, and Facebook (Meta), which has sold its intellectual property and assets in cryptocurrencies.

While individuals should be free to invest in any financial instrument they choose, the same cannot be said for states. However, exposing millions of citizens to financial risk by accepting cryptocurrency as legal tender is exactly what El Salvador and the Central African Republic have done.

El Salvador became the first country in the world to use bitcoin as legal tender in 2021. A year later, the CAR did the same. Currently, countries that can accept bitcoin as legal tender include Saint Kitts and Nevis, Paraguay, Venezuela, Ukraine, Russia, and Argentina.

However, a close examination of El Salvador's experiment with cryptocurrencies should give food for thought. The country has a debt-to-GDP ratio of 87 percent, is vulnerable to default, and is projected to grow at less than 2 percent in 2023. With so many Salvadorans living and working abroad, it's no surprise that remittances account for over 20 percent of the country's GDP, but less than 2 percent of remittances are sent through digital wallets. Perhaps part of the reason is related to the complexity and cost of converting cryptocurrencies into local currencies. The fees charged by money providers, along with the need to open a bank account, are a clear deterrent. In terms of businesses, over 85 percent have never made a sale in bitcoin, and only 20 percent of businesses accept the digital currency.

Those who advocate crypto as legal national tender believe that the global financial system is designed to benefit wealthy countries, so these crypto advocates seek to reform financial services to make them more inclusive and accessible. They attack the International Monetary Fund, the World Bank, and central banks for resisting reform initiatives, even though these institutions rightly argue that the use of cryptocurrencies as a national currency can facilitate money laundering, undermine capital controls, and expose citizens to significant price volatility.

 

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