Ways In Which Digital Currencies May Alter World Trade
All forms of money, from precious metals to banknotes, are forms of currency. What are the implications for international trade as we enter the digital era and many digital currencies battle for virality?
The rise of digital currencies like Bitcoin, Ethereum and other digital currencies has been observed in recent years. It has the potential to induce a significant impact on financial institutions and central bank operations. Will paper money eventually be phased out? What are the benefits of digital currencies? What are the changes?
The following are some of the ways that digital currencies may influence global commerce:
1. Digital currency pairs: A boost in cross-border payment efficiency.
It can take anywhere from one business day to more than five business days to settle a cross-border payment. Human involvement is frequently necessary in the process of verifying the source and recipient details, such as for AML and CTF functions. Payment timing is therefore largely determined by how closely the business hours of sending and receiving institutions coincide. As well as whether the institutions delivering and receiving the message are using identical messaging protocols.
Digital currencies based on decentralized ledgers can be used to send and receive money instantly and continuously. Regulations for digital currency telecom providers and foreign exchange controls could slow things down in the future.
2. Digital currencies can serve as an alternative credit information source for trade finance.
There is a $1.7 trillion funding gap in global trade, and it disproportionately affects small and medium-sized enterprises (SMEs) who do not have bank accounts. To ensure import and export loans, digital currency public ledgers could be utilized to transmit payment and financial information. To do so, however, rigorous confidentiality regulations would have to be implemented.
3. Introducing Digital Currencies as a Solution to the Problems of De-Risking
When countries with high AML and CTF risks try to participate in global trade, they may face increased transaction costs as a result of the practice known as “de-risking.” But despite the fact that digital currencies won’t help to reduce AML and CTF dangers, they may enable alternative payment methods that allow businesses and consumers to connect with worldwide buyers and sellers.
Is Digital Currency Different from Traditional Modes of Payment Systems
Debit cards, credit cards, and digital wallets or mobile payment methods like Apple Pay, Venmo, Google Pay and Amazon Pay) operate in a very different way compared to digital currencies. Conventional digital payment methods include transferring a specific quantity of money into an account for products or services. Traditional money transactions do not take place in real-time; instead, transactions are tallied and settled after a period varying from a few minutes to a few days.
The Bottom Line:
Digital currencies, like all technology, are neither good nor harmful inherently. How systems are built, regulated, and accepted will determine whether they are utilised to improve or worsen the current economic order. However, one thing is sure: individuals, governments, and companies who move rapidly will benefit the most. Also, this may play a crucial role in shaping this modern electronic reality.