Digitalization of the global economy has increased reliance on assets like cryptocurrency and NFTs. However, though cryptocurrency has become popular in the last decade, there are reservations regarding its impact on the global economy.
Thanks to the advancement of fintech, digital assets have shaped how the global economy functions. Unlike traditional financial assets, digital assets have higher liquidity (ease of transferability into cash). Higher liquidity means the asset is more accessible, yields greater utility and value, and is thus credible for investment. While some are discovering cryptocurrencies, others have explored new assets like decentralized applications (dapps) and DeFi. Though still in the budding phase, digital assets hold immense importance for the global economy, and this article will explore that.
1. Transformation of the financial marketplace
One of the significant benefits of digital assets is in the financial marketplace for settling and clearing transactions. Previously, where a firm exchanged financial securities for cash is now trading digital assets for clearing transactions. Where business transactions involved fiat currency decades ago now include transactions based on stablecoins, non-fungible tokens (NFTs), digital currencies, and digital tokens. Since these assets are created and stored on a decentralized network, they are more secure. Companies like Widen help manage digital assets efficiently as this digital asset management resource makes sure that your assets are safe and you have control over data flows.
2. Greater utility
As mentioned earlier, users can derive greater utility with digital assets. For instance, cryptocurrencies can be included in investment portfolios. Previously for investment, now the blockchain world incorporates smart contract platforms for trading, borrowing, and lending. It is convenient for users to purchase cryptocurrencies or use them in gaming applications. Apart from that, the government and real estate sectors have also adopted digital assets.
3. Financial Inclusion
Many still question the credibility of digital assets and are skeptical about their decentralized nature, while others appreciate them for their financial inclusivity. However, greater financial inclusion implies the inclusivity linked with affordable and valuable financial services and products that facilitate payments, credit creation, transactions, and savings in a sustainable manner.
The Harvard Business Review cited an example of how digital assets foster financial inclusivity. During the first year of the COVID-19 pandemic, the American government launched financial bailout packages for the economy. However, since more than 6% of the American population doesn’t own a bank account, they couldn’t receive a penny of those financial packages. This sparked discussions amongst the officials to formally launch digital currency to foster financial inclusion and enable better payments during an economic crisis.
4. Energy-efficient usage
In 2021, when Elon Musk, the founder of Tesla, stated that customers could no longer purchase Tesla through Bitcoin, debates regarding energy efficiency and digital assets sparked. Musk’s statement was regarding the impact of blockchain technology, specifically cryptocurrency mining, on the environment as it used fossil fuels. While digital assets are commended at one end for their ease of access and high liquidity features, on the other end, they are held against “green energy policies.” While it isn’t false that Bitcoin has a carbon-intensive approach with complications for the environment, the current financial system and gold mining cause more significant environmental damage. If digital assets replace the current financial system, the overall environmental impact would be relatively less.
5. State Regulations
Up until 2021, China was the hub of crypto mining. However, the blockchain industry suffered enormously due to the country’s ban on cryptocurrency mining. Mining takes place on large computer networks that work with cryptographs. Solving the cryptographs validates transactions made with cryptocurrency. The mining industry requires huge capital, power, infrastructure, and land to set up warehouses for mining. Following the ban, miners in China moved to other countries where rules are relatively lax, like the USA. After the USA, the most mining occurs in Kazakhstan, Russia, and Canada, followed by others. The power rationing system in Kazakhstan has also driven out miners while incurring a loss of 1.5 billion USD to the economy as crypto mining brought in large sums of revenue.
6. Facilitate cross-border payments
In 2021, El Salvador opened its arms to Bitcoin as a legal currency. While Nigeria, the Bahamas, and Cambodia have introduced central bank digital currencies (CBDCs). Like fiat currency, digital assets like crypto hold immense importance for economic trade across nations and commerce. One of the main benefits is how digital assets facilitate cross-border payments. Cross-border payments often require human interaction and a processing duration of one to five days to counter money laundering and suspicion of terrorist activities. If digital currencies facilitated the same transactions, the process would take seconds, perhaps minutes, but not days. Because of the decentralized nature of crypto, sender and receiver verification is far more convenient and accessible.
7. An alternative credit for trade financing
Most small and medium enterprises (SMEs) around the globe don’t have a registered business bank account, accounting for a 1.7 trillion USD trade financing deficit. In that regard, digital currencies could be beneficial for facilitating credit transactions.
8. De-risking in the financial sector
When financial institutions terminate business contracts with specific clients to avoid risk rather than face it, it’s called de-risking. Unfortunately, de-risking is prone to create issues for nations with high counter-terror financing and anti-money laundering risks seeking participation in global trade. Although digital currencies don’t reduce counter-terror financing or help with anti-money laundering, they provide a safer route for traders and buyers in different countries to interact and conduct transactions.
Despite the positive impacts of digital assets like cryptocurrency, NFTs, and DeFi, among others, there are certain reservations about their safety and implication for the global economy. While it increases financial inclusion and provides greater credit creation opportunities, there is also the case of countries with high political and economic instability. For such countries, there are even more challenges with adopting a digital currency as their trading activities are already limited. Nonetheless, the world is moving forward, and digitalization is taking place at a rapid pace. Therefore, policy-makers and technical experts must collaborate to come up with better usage of digital assets.
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