The globe has been connected in terms of trade and commerce for a long time cryptocurrencies, and with the advent of the internet, this appears to be becoming more visible. Besides the import and export of raw commodities, average folks may now shop online at companies all over the world, further compressing the global economic domain.
The introduction and rise in popularity of cryptocurrencies over the last decade have also had massive ramifications for global trade and business, some of which may endanger the current system as we know it.
Cryptocurrency in Trade And Commerce
Every nation on the planet has some form of natural resource or another, as well as commodities. At the same time, no nation on the planet possesses every natural resource or product required to function, necessitating global commerce. When two countries trade, the resources or items in issue must be paid for, and this is done via fiat currency.
For a long period of time, fiat currency was the only way for countries to pay for foreign exchange. Then cryptocurrency came along. The use of centralized money, however, comes with a disadvantage endemic to centralized systems: the potential of sanctions from powerful players.
Consider Venezuela, which has been sanctioned by the US for several years. The country has endured hyperinflation as a result of these limitations, and its inhabitants have suffered economically. However, in recent years, the country has resorted to using cryptocurrencies to pay for imports from other countries in order to avoid the sanctions that have been imposed.
The nation also enhanced its usage of cryptocurrencies to enable commerce with nations like Turkey and Iran.
Similarly, North Korea has been suspected of utilizing a state-sanctioned hacking squad to steal cryptocurrencies in order to fund its nuclear weapons program. Prior to cryptocurrencies, it would have been practically impossible to get around sanctions imposed by countries such as the United States, but that period looks to be coming to an end. Venezuela even went so far as to develop its own national cryptocurrency, the petro, in order to retain economic autonomy.
If countries like Venezuela and North Korea are successful in circumventing sanctions by adopting cryptocurrency, the ramifications might be catastrophic.
What it means
It is no secret that the United States is a world power, and one of the reasons for this is the US dollar’s strength and the country’s capacity to sanction other countries. Cryptocurrencies pose a threat to this since they effectively take away the United States’ economic authority and give it to no one in particular.
What would happen if cryptocurrencies became extensively utilized and no country was terrified of being sanctioned by the US? In 2019, the Kennedy School of Harvard University performed a simulation in which the usage of the digital yuan allowed North Korea to test its nuclear missile programs with Chinese assistance.
The simulation depicts a scenario in which other countries may defy the US at will due to the effective circumvention of US sanctions attributable to cryptocurrencies. According to all indicators, the usage of cryptocurrencies will alter global trade by opening up the market in ways never seen before.
Countries and businesses will be able to trade more freely with one another, including with international giants like the United States. This autonomy and power that cryptocurrencies may provide nations will make it essentially irreplaceable and invaluable in the global arena, ensuring its adoption by countries across the globe for decades to come. We can expect to see the full impact of this in both international diplomacy and global trade and commerce.
But are bypassing sanctions the only advantage when using cryptocurrencies on an international level? Not at all. Here are just some of the benefits when cryptocurrencies are involved.
Cryptocurrencies may improve cross-border payment efficiency
Cross-border payments are settled within one to five business days. Human interaction is often necessary to verify sender and recipient information, for example, for AML and CTF purposes. Thus, the speed of payment is typically controlled by how closely the sending and receiving institutions’ work hours overlap and if they use the same communications protocols.
For digital currencies that rely on decentralized ledgers, money might be transmitted and received in a matter of seconds and at any time of day. It’s possible that future regulatory compliance requirements for digital currency service providers and foreign exchange regulations would slow down the speed of transactions.
Cryptocurrencies may provide an alternate source of credit information for trade finance
The $1.7 trillion global trade financing gap disproportionately affects SMEs that lack solid financial records with banks. To underwrite import and export loans, public ledgers of digital currencies can be employed. At the same time, strict privacy standards would need to be implemented.
Cryptocurrencies may help with de-risking
De-risking hinders nations with high AML and CTF risks from participating in global commerce and increases transaction costs for buyers and sellers. While digital currencies may not help minimize AML and CTF issues, they may help re-connect consumers and merchants from such nations with a global customer base.
The entry of cryptocurrencies into global trade and commerce will undoubtedly be interesting to watch. However, if we hope to see this happen, regulations will undoubtedly play a significant part. As cryptocurrencies gain traction, it may only be a matter of time until they take center stage.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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