The increase in value of cryptocurrency trading this year has caught the world’s attention. Bitcoin continues to appreciate, reaching US$4397.32 on 28 August, just 2.7% shy of its 52-week high of $4,522.13. Competitor Ethereum, is experiencing a similar rise, with some experts predicting it will increase another 100% by 2018. Investors and editors are not the only ones taking notice; Central Banks are looking to get in on the action, says FXTM’s senior writer, Nikola Grozdanovic.
A recent report by IMF (International Monetary Fund) suggested that banks should adjust their products to meet the changing needs of their consumers, by embracing financial technology. It’s a mandate some Central Banks needed no urging to adopt, with some already touting cryptocurrency as an alternative to physical money. Are we about to see the birth of the first fiat cryptocurrency?
The People’s Bank of China is at the front of the charge, and reportedly has a prototype digital currency already developed. In June, the Bank of Russia announced plans to follow suit, a move First Deputy Prime Minister Igor Shuvalov is highly supportive of. The Bank has been exploring the applications of blockchain for over a year now, and they are optimistic that a national cryptocurrency will improve trade opportunities with Europe. Deputy Chief of The Bank of Russia, Olga Skorobogatova, even went so far as to discuss her hopes for co-operating with the trading Bloc, to jointly test blockchain applications.
But these two world superpowers may yet lose the race to release a national currency, to an interesting contender in Estonia. The EU member state has been offering e-residency to foreign start-up founders since 2014. The result of this offering is a digital and legal infrastructure that spans the globe, it includes over 22,000 members, and it would readily support the introduction of a national cryptocurrency. The country even has a strategy in place to introduce the digital coinage. It has been suggested that ‘Estcoin’ could enter circulation via an ICO (initial coin offering) – a crowdfunding scheme that enables buyers to invest in cryptocurrency, buying coins rather than shares. Interestingly, The People’s Bank of China has recently declared ICO’s illegal and a threat to China’s fiscal stability.
The rise of national cryptocurrencies will do more than open up trading routes. Digital currencies offer a wealth of possibilities. In Kenya, rural populations have relied on M-PESA since 2007; this community was perhaps more primed than any other to embrace digital money, and a whopping one in three owned a Bitcoin wallet by 2016. For the estimated two billion plus people worldwide who have internet access but struggle to connect with traditional banking facilities, cryptocurrencies provide an essential service.
A national cryptocurrency would have implications for the transfer of assets such as property and business. Currently, Bitcoin contracts can be created quickly and don’t require third party approvals to implement. Similar agreements for a national cryptocurrency would mean asset transfers could be completed quickly and at a fraction of the cost. Blockchain also reduces the opportunity for identity theft. Unlike credit cards – where merchants are authorised to access a card holder’s full line of credit – most cryptocurrency transactions only provide access to the amount tendered and don’t, crucially, give merchants any personal information about the buyer.
Cryptocurrency is an increasingly popular trading asset, and the rise of fiat cryptocurrencies will offer investors an interesting alternative to trading Bitcoin. It is still unclear how digital currencies run by central banks will differ from the universally available Bitcoin and Ethereum – which remain detached from exchange rates, interest rates, and (for the most part) geopolitical tensions. Fiat cryptocurrencies are an entirely new ball game. They may not be as truly decentralized as their peer-to-peer predecessors, and they will likely be a more volatile trading instrument, but they will increase internationally accessibility to national currencies. This is good news for industries reliant on foreign imports, as well as central banks looking to maximise economic growth and trading opportunities.
Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
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