Investors and digital currency enthusiasts will have observed a prolonged cryptocurrency crash through 2022, with this embodies perfectly by the descent of Bitcoin (BTC).
After hitting a record high valuation above $69,000 in November 2021, BTC had crashed to just $16,000 per token, with the asset impacted adversely by rampant inflation fears, soaring interest rates and the impact of wider economic tumult.
Of course, BTC has stabilised through the first half of 2023, reaching $29,230.30 as it moves back towards the $30,000 mark.
It has also seen increased adoption rates and grown in influence despite enduring a turbulent 18 months, so there’s no doubt that crypto and digital currency is here to stay.
To this end, the central banks of the US and the UK are considering issuing stable coins that are backed by fiat currency reserves, similar to Nigeria’s eNaira token and China’s digital yuan.
But what will this mean for the current global banking system, and could it create a more inclusive financial future?
The Stubborn Rise Of Digital Cash
There’s no doubt that both the government and central banks have been slow to react to the exponential rise of digital currency, especially when you consider how cash has become increasingly moribund during the last decade.
This has caused them to be caught off-guard by a slew of withdrawals from high-street banks, with Covid-19 accelerating the shift towards digital currency and increasing the number of people who embraced such assets.
More specifically, recent studies have revealed that a fifth of UK households and businesses have moved their deposits and cash holdings into digital assets such as BTC, while so-called “stablecoins” (which are usually pegged to the value of the USD and considerably less volatile than typical crypto tokens) have also become increasingly popular in recent times.
If we imagine a scenario where this trend continues unabated and more people look to transfer their wealth into digital holdings, this could destabilise traditional high street banks and create the risk of wider financial and economic instability.
This is why governments and banks have begun to consider the merits of fiat-backed stablecoins, while the leaders in China and Nigeria have already rolled out this type of digital currency.
These combine the accessibility of crypto assets with pegged valuations within a robust government framework, drawing a mixed response from users and economists alike.
After all, the primary appeal of cryptocurrency is that it’s widely accessible and not controlled by a third party authority, but this also underpins each token’s volatility and a complete lack of regulation or protection in some parts of the world.
What About The Impact On Financial Inclusion?
Of course, the case for fiat-backed digital currencies in emerging economies such as China and Nigeria was already compelling, with assets such as the digital yuan and eNaira driving far higher levels of financial inclusion and helping traditional banks to target younger customers.
The lack of inclusion is a particular issue in Nigeria and Africa as a whole. In fact, 57% of the adult population in Sub-Saharan Africa remain without access to a bank account, and for all the recent rancour and faux outrage about Nigel Farage being denied a prestigious Coutts bank account, it’s individuals living in developing regions who really suffer as a result of financial inclusion.
In this respect, digital currencies could represent a huge boon for emerging market and low-income economies, so long as any transition is regulated and well-managed and they’re able to drive financial inclusion throughout society.
Even in established and developed economies like the UK, digital money has the potential to transform the financial sector and ensure that it’s fit for purpose in a tech-driven age.
Interestingly, this could also create a scenario where countries of all shapes and sizes will grow increasingly connected over time, facilitating far deeper market integration and global trade on a far larger and more lucrative scale.Of course, this would accelerate a trend that has taken hold in the digital age, while it has the potential to be highly beneficial for both individuals and economies alike.
The Last Word
On a final note, it’s fair to surmise that the rise of fiat-backed digital assets could also revolutionise the global forex market.
In addition to leveraging technology to identify and act on the best forex signals, for example, traders can now utilize crypto assets to transfer funds for nominal transaction fees (bypassing potentially costly FX exchange services available through banks) and incorporate them directly into their investment portfolio.
This makes the case for digital and cryptocurrency even more compelling, so long as governments are able to strike the balance between regulating such assets and maintaining an open and transparent marketplace.
This is undoubtedly where the biggest challenge will lie going forward, which is why questions remain about whether a centrally controlled digital currency is the best way to realise the potential of this technology in the future.
This concern is particularly valid in developed economies, where financial inclusion already exists on a broad scale and the notion of any central bank digital currency (CBDC) would potentially be viewed with cynicism.
Ella Marcotte
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