The Covid-19 pandemic is having a far-reaching impact not only on global sentiment, but also on the economy and business processes. An important aspect of this is the gradual alienation of cash as more and more people use digital payments in an increasingly alienated world.
Economist Eswar Prasad
Along with the growth of contactless payment, another trend is afoot as the mainstream market accepts fiat alternatives such as cryptocurrencies, which economist Eswar Prasad says is likely to be long-lived.
“For many users and businesses that have moved to digital payments, there is likely no going back to cash, even though there are concerns about the pandemic about its exposed nature.”
Instead, he believes that “the era of central bank digital currencies has begun”. The combination of cryptocurrencies, stablecoins, central bank digital currencies (CBDCs) and other digital payment systems will result in a “cash collapse”.
“Cryptocurrency alone will probably not do that. Stablecoins have better effects, but may have a limited range. CBDCs need to be widespread and easily accessible. “
CBDCs are currently being implemented by many countries around the world with varying degrees of urgency. As these currencies are developed and supported by central banks, Prasad says one of their potential benefits is “providing easy access to digital payment systems and basic banking services even to the poor without a bank account”. The CBDC will also curb illegal activity through anonymous cash payments.
However, there are still some drawbacks like loss of privacy.
“Even with security safeguards to ensure confidentiality, no central bank will forego the audit and traceability of transactions necessary to restrict the use of digital currencies for legal purposes.”
In addition, he predicts that CBDCs issued by smaller economies will lose importance over time, which will “concentrate a lot of economic and financial power in the hands of large economies”.
Together with CBDC, the private cryptocurrency will make the payment system more efficient due to its high speed, transparency and lower transaction fees, optimized for cross-border payments.
However, the volatility can mean that they are no longer an effective medium of exchange, especially in day-to-day business.
The throne of cash is seriously threatened as more efficient and contactless payment systems emerge in the growing digital economy. In a recent survey of fintech experts, 54% of respondents predicted that Bitcoin will overtake the financial industry by 2050. However, many others also believe that crypto will lose to CBDCs.
Regardless of the outcome, it is becoming increasingly clear that blockchain-based currencies are likely to dominate the global financial sector in the near future.
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