How Are Digital Currencies Changing the Face of Global Economy & Trade?
In recent years, technologically advanced nations have moved towards an increasingly cashless system to avoid thefts and decrease risks. Digital currencies play a vital role in this. These currencies come with numerous benefits, from lower transaction costs to accessibility. However, there are several drawbacks as well, such as volatility and monetary stability.
Are you willing to learn more about how digital currencies are impacting modern global trade? Keep reading!
Impacts of Digital Currencies on Global Trade & Economy
Increased Risk of Financial Instability
The adoption of digital currencies jeopardises financial stability to a great extent as they are more volatile. Their pricing has been observed to vary a lot, and the fluctuations pose a risk of substantial losses.
For instance, a sudden surge in prices can cause the financial system’s stability to go down as well. That said, the total value and usage of digital currencies aren’t sufficient to pose a substantial threat to the financial stability of the global economy at this point.
However, according to the Bank of England, there are a variety of scenarios that could increase the risk of digital currency compromising financial stability.
Participation of SMEs in Global Trade
The global trade financing gap that reaches up to 2 trillion dollars disproportionately impacts SMEs (Small and Medium-Sized Enterprises). The major reason that this happens is that these businesses lack a solid financial history. Digital currencies could help resolve this problem.
For instance, digital currency public ledgers could be used to communicate payment and financial history when these SMEs apply for import and export loans. This could increase their participation levels in global trade.
De-Risking & More Accessibility
De-risking places barriers on countries with significant Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) risks. These are the countries that are willing to participate in global trade but cannot do so due to FATF restrictions.
Such restrictions can raise transaction costs for buyers and sellers in these countries. While digital currencies will not help these countries to lessen AML and CTF issues, they may give alternative payment methods. These payment methods will allow consumers and businesses to reconnect with overseas buyers and sellers using digital currencies.
Demand & Supply of Forex
It is uncertain if digital currencies will boost trade in all countries, but they do have an impact on the demand and supply of international currencies.
The potential benefits may help certain nations increase their trade volume. However, the fundamentals of international trade, which are based on comparative advantages, will remain unaltered.
Countries that struggle with economic development or political stability may continue to confront similar problems even with digital currencies.
In a Nutshell
Digital currencies have transformed global trade and the economy to a certain extent. These currencies can increase financial instability to a certain extent, allow SMEs to participate in global trade, and increase accessibility for countries limited by FATF restrictions. The forex market has also experienced a boost as more people are now trading using digital currencies.