As we embark upon the third decade of the 21st century, technological advances are being made on a seemingly relentless basis. Internet connectivity speeds are getting faster, with the launch of 5G taking the global network to another level entirely, while the aviation industry is breaking down barriers thanks to the introduction of non-stop flights from the UK to Australia.
The financial sector has also seen multiple innovations dating back to the end of the previous millennium, when internet banking was first brought in. Since then, new technologies mean the face of the industry has changed almost beyond recognition, with cashless transactions fast becoming the norm. But what will be the next major development?
The digitization of currencies looks like it will be a significant milestone for the global economy, with major superpowers such as Japan, China and the United States taking steps towards its implementation. But how does it work, what are the reasons for it and what effect will it have?
How does it work?
China is one of the countries that is leading the way in terms of creating a digitalized currency and was reportedly set to trial payments in four major cities as of early May. The digital renminbi (e-RMB) has been launched by the People’s Bank of China and although not all the details have been published, it’s thought that consumers will be able to download a digital wallet onto their mobile device and load the e-RMB from the account they hold with a commercial bank. That digital cash can then be used for transactions with others who also have a wallet.
Why is the digitization of currency being introduced?
Although so many transactions around the world are now cashless in nature, creating a digital currency offers a number of security benefits for the central banks and the authorities. Being able to monitor money as it changes hands will reduce the risk of laundering and any other illegal activity, thus providing a greater level of protection for consumers and businesses alike.
It will ensure countries will not have to rely on an external standard such as Bitcoin, which would be outside of their control and could lead to regulatory problems further down the line. A digital currency could also benefit those who do not have access to banks for their accounting needs, and the US Congress has discussed creating a digital dollar regulated by the Federal Reserve to speed up stimulus payments to certain households in the States.
It has also been suggested that China’s push to launch the e-RMB was partly in response to Facebook’s plans for the creation of Libra, which it is thought could strengthen the US dollar’s position, so there are political factors at play, too.
What effect will digital currencies have?
Digitizing currency may mean fewer bank deposits if the digital wallets become widely used. Looking at the bigger picture, these new forms of currency may begin to shape the global economy and forex traders may start to explore the possibilities of trading in these currencies.
As a hugely volatile market with high liquidity, the forex sector could be significantly influenced if digitized currencies are introduced on a widespread scale. These digital currencies will add another dimension to the market alongside the major players that feature in the majority of trades such as the US dollar, the Euro and the Japanese yen. They could provide a wealth of alternative options for forex traders seeking to increase profitability and expand their portfolio.
Additionally, any countries that introduce a digital currency may see their position strengthened, which could lead to potentially significant power shifts and meaningful changes to the shape of the global economy.