Digital Currencies Could Change Global Trade
National Association of Credit Management
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Over the past decade, technology has expanded and shaped the way we conduct business—all the way down to payments. In a recent eNews poll, we asked credit professionals to rank their customer payment methods from most to least common and digital currencies came in last. But the use of digital currencies is expected to grow in B2B trade.
In fact, the global digital currency market is set to surpass USD million by 2030 from USD million in 2020 in the coming years, per MarketWatch. “The digital currency market is anticipated to witness significant adoption owing to advantages such as low transaction fees, fraud protection and simple international payments,” reads the article. Popular digital currencies like Bitcoins and Litecoins are predicted to drive market growth.
What is Digital Currency?
Digital currency is a form of currency that is only available in digital or electronic form. It also is known as cryptocurrency, digital money, electronic money, electronic currency or cybercash. Transactions can be made via computers or electronic wallets connected to designated networks or the internet.
Centralized vs Decentralized
Digital currencies fall under two main categories: centralized and decentralized. Centralized digital currencies are distributed by a central bank and government agencies, otherwise known as central bank digital currencies (CBDC).
Decentralized digital currencies are based on blockchain technology; a distributed ledger enforced by a disparate network of computers. They are generally not issued or influenced by a central authority, such as the government or central bank.
Virtual Currencies
Virtual currencies are a subset of decentralized digital currencies, such as closed and open virtual currencies.
Closed virtual currencies function under a private ecosystem and cannot be converted into another virtual currency or into fiat currency, such as gaming network tokens. While open virtual currencies can be converted to other forms of money and operate in an open ecosystem. Examples of open virtual currencies are stablecoins and cryptocurrencies. The most prominent cryptocurrencies are Bitcoin (BTC) and Ethereum (ETH).
Pros of Digital Currencies
“The growth in digital currencies could make cross-border payments more efficient and help address the $1.7 trillion global trade financing gap,” reads an article from the World Economic Forum. “This gap heavily impacts SMEs who typically don’t have established financial records with banks. Public ledgers of digital currencies could be used to share payment and financial history to underwrite loans for import and export. At the same time, strong privacy protocols would need to be enforced in order to achieve this.”
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Cons of Digital Currencies
Vulnerability to hackers makes digital currencies a security risk for companies. Just last year, cryptocurrency hackers stole $3.8 billion, according to a report by Chainalysis—up from $3.3 billion in 2021. In October, they had the most crypto hacks in a single month with $775.7 million stolen in 32 separate attacks.
“I see digital currency as a speculative investment and not a useful tool in settling payables and receivables,” one international banking and trade finance expert explained. “Until these digital currencies are properly regulated, I don’t see them as having practical usage for B2B payments.”
Cryptocurrencies or CBDCs are not as stable if the value of currency fluctuates, especially in international transactions. “A lot of international companies insist on U.S. dollars because it's a more stable form of currency instead of the Chinese yuan, which is more volatile,” said Karen Hart , attorney and partner at Bell Nunnally & Martin LLP (Dallas, TX). “So, companies must protect themselves by accepting a more stable form of currency, which isn’t crypto.”
Not to mention, the cost of implementing digital currencies can be high on the front end. “You need an accounting process and mechanisms to accept digital currencies,” Hart said. “So, there’s lots of operating costs and a learning curve. I think you would have to have enough of your customer base demanding digital currencies as an alternative payment method. In B2B credit, there aren’t.”
Digital Currency Around the Globe
As of March 1, 64 countries are in the advanced stage of development and over 20 central banks have launched their CBDC pilots, including Brazil, Japan and Russia, per the Atlantic Council. “Despite only being three months into 2023, these 18 countries have made significant progress on central bank digital currencies,” reads the article.
Other countries conducting a CBDC pilot are Australia, Canada, China, India, Jordan, Kazakhstan, Laos, Montenegro, Philippines, Saudi Arabia, Turkey, United Arab Emirates, Ukraine and the U.K.
Future of Digital Currencies
U.S. Treasury Undersecretary for Domestic Finance Nellie Liang announced the creation of an interagency working group to explore the development of a CBDC during a speech at the Atlantic Council. She noted that this group will comprise representatives from the Treasury Department, the Federal Reserve, the National Security Council and other respective government agencies.
But Fed leaders argue that the agency needs congressional approval to implement a CBDC. There must be privacy and security measures set in place. They must also assess the potential impact on monetary policy and the operational management of converting cash to CBDC.