Digital currencies, such as Bitcoin and Ethereum, have created a significant impact on the global economy. In particular, they have gained substantial popularity in India, where over 7% of the population owned digital currency in 2021, according to a recent study by the United Nations Trade and Development Body (UNCTAD). This ranking placed India seventh on the list of top 20 global economies for digital currency ownership as a share of the population.
Insights from UNCTAD’s Study
The study highlighted that developing countries accounted for 15 out of the top 20 economies in terms of the share of the population owning cryptocurrencies. The list was topped by Ukraine and followed by Russia, Venezuela, Singapore, Kenya, and the US. It further noted that the use of cryptocurrencies worldwide has increased exponentially during the Covid-19 pandemic.
Challenges with Digital Currencies
Despite the benefits of digital currencies, such as facilitating remittances and acting as a hedge against inflation, several challenges were identified in the study. These include their role as an unstable financial asset, which can lead to social risks and costs. Being unregulated has led to a rapid rise in the demand for these currencies, especially in developing countries. Furthermore, the volatile nature of digital currencies poses private risks, which could potentially become public if central banks intervene to protect financial stability.
Risks to Sovereignty and Domestic Policies
If cryptocurrencies become a widespread means of payment, even unofficially replacing domestic currencies (a process known as cryptoisation), this could jeopardize the monetary sovereignty of countries. The study also warned that cryptocurrencies could undermine domestic resource mobilization in developing countries.
Suggestions for Managing Digital Currencies
The study suggested that authorities take steps to limit the expansion of cryptocurrencies in developing countries. These measures may include regulating crypto exchanges, digital wallets, decentralized finance, and prohibiting regulated financial institutions from holding cryptocurrencies. Additionally, the study emphasised the importance of advertising restrictions related to digital currencies, similar to other high-risk financial assets.
About Digital Currency
Digital currency is a form of currency available only in digital or electronic form, differing from physical currencies like banknotes and minted coins which are tangible. Digital currencies can be traced back to computers or electronic wallets connected to the internet or designated networks.
Features and Types of Digital Currencies
Depending on their structure, digital currencies can be either centralized or decentralized. Fiat currency, for example, is centralized and monitored by a central bank and government agencies. On the other hand, Bitcoin and Ethereum are examples of decentralized digital currency systems. There are generally three types of digital currencies: cryptocurrencies, virtual currencies, and central bank digital currencies.
Advantages and Disadvantages of Digital Currencies
Digital currencies offer several benefits, such as fast transaction times, cost savings due to no physical manufacturing requirements, ease of implementing monetary and fiscal policies, and cheaper transaction costs. However, they also pose risks, including susceptibility to hacking and volatile value fluctuations.
A Look at Blockchain Technology
Blockchain technology underpins many digital currencies. This public ledger can be viewed by everyone but controlled by no single user. This technology not only supports cryptocurrency but also has various applications that can be developed without anyone’s permission. For instance, it can be used for property exchanges, banking transactions, healthcare, smart contracts, supply chains, and even voting.
While digital currencies have potential advantages and contribute to economic growth, they come with considerable challenges and risks. Therefore, comprehensive regulation is essential to mitigate these issues and ensure financial stability.
