digital currency

Is Digital Currency the New Normal During the Time of COVID-19?

Spread the love

The coronavirus (COVID-19) has changed life as we know it. Gone are the days when we can go out with a sense of normalcy. Loved watching events in the flesh or on big screens? There are now regulations for that. The people who used to enjoy watching in dome theaters built by COSM and other trusted companies will now have to be one (or two!) seat apart, wear a mask at all times, and of course, sanitize every now and then. In fact, even the way we pay has changed. No more talking face-to-face with the cashier because, most likely, you are encouraged to buy tickets online and pay with your card or be ready with a contactless payment method.

The pandemic has accelerated the shift from regular banknotes to a more convenient and “safer” form of legal tender, digital currencies. From ordering something to eat on food delivery sites like DoorDash and GrabHub to finding a means of entertainment from companies such as Amazon, the Internet gives seemingly limitless possibilities and it looks like digitalization is here to stay.

The Rise of Digital Currency

Governments and citizens have seen digital currencies as an effective means to make purchases and conduct transactions while limiting the spread of the virus. The Oxford Business Group reported that the pandemic has seen a rise in transactions in online delivery platforms. As a result, many private e-commerce companies accelerated the improvements in their digital and online offerings.

According to Kenneth Rogoff of Harvard University, the official discussions for the long-term shift to digital currencies are already heating up. The launch of Facebook’s Libra and China’s proposed central-bank digital currency are guaranteed to reshape the global economy as we know it.

As a result of this change, global financial stability, as well as control of information, is at stake. Christine Lagarde, president of the European Central Bank said that digitalization and technological advances are hastening the change in all areas of society including dematerialization. Central banks from across the world are looking at central bank digital currencies (CBDCs) as an alternative means to conduct transactions in an ever-evolving digital world.

Lagarde further said that in the European side of the world, the total number of non-cash payments increased by 8.1% to 98 billion. Half of these transactions were made by card, credit transfers, and direct debits. These numbers are expected to rise in the coming years.

CBDCs have seen development in recent years. With social media Giant Facebook launching Libra and China issuing RMB10m ($1.5m) worth of digital currency to 50,000 people in the Shenzhen region via a lottery, the pandemic has urged policymakers to pursue CBDC research and development.

China is no stranger to digital currencies, as 80% of all its payments were made through mobile platforms in 2020. In late October last year, the Bank of International Settlements (BIS), along with the central banks of Canada, England, Japan, Sweden, Switzerland, and the United States, released their first report on CBDCs.


The Growing Interest in Cryptocurrency

The rise in development has also seen a rise in the demand for non-central digital currencies, such as cryptocurrencies. These, unlike CBDCs, are decentralized and their value is determined by the market and not as a direct result of the influences of monetary policy or trade balance.

The pandemic has prompted central banks to further investigate the public’s sudden demand for, digital payment options like cryptocurrencies.

Bitcoin, the most controversial cryptocurrency, was reported to fall by 50% during the start of the pandemic in mid-March. However, it has recovered to a value of around $11,900 as of late October, which is above its pre-pandemic benchmark of $10,000.

Lagarde, however, warned consumers to exercise caution when dealing with these crypto-assets such as bitcoin, stressing the potential new opportunities and risks that it would bring.

“Transactions between peers occur directly, with no need for a trusted third-party intermediary,” Lagarde said. The main risk of crypto-assets is that it relies solely on technology and the concept of having no identifiable issuer or claim.

She added that users cannot rely on cryptocurrencies because of their high volatility and their inability to maintain a stable value, as such they cannot fulfill all the functions of money.

Financial innovation has to be carefully managed, as these are often the root of these crises. In order to do so, Rogoff says that central banks from around the world should take three approaches: Firstly, significant improvements to their existing system, such as reducing fees for credit and debit card usage, ensure universal financial inclusion and make upgrades to systems so that digital payments can be made real-time.

With the rise of opportunities, there are also added risks brought about by the development of digital currencies, such as security concerns over such payment systems.

The International Monetary Fund (IMF) said that, without “proper safeguards,” CBDCs could “erode” the central bank’s influence from across the globe. This, in turn, would weaken the impact of monetary policy and could possibly lead to greater currency instability.

They added that should CBDCs be improperly regulated, it could result in an increase in illicit finance, making it difficult for authorities to enforce checks on capital flows.

These days, the only thing thing that is certain in this world is change. Cash may become obsolete as we know it. It’s important that we learn to adapt to the times and anticipate whatever consequences these changes would give us.

Scroll to Top