A lot of central banks have launched their own digital currencies, especially after the Facebook currency ‘Libra’ gained great attention even before its launch. It’s another matter that it was postponed due to the strict requirements imposed by the US administration.
Washington believes the launch of digital currencies, especially Libra, will cause the US to gradually lose its dominance and management of global stocks and money markets, as well as central bank issued currencies.
The US is not the only country worried about Facebook and other organisations’ issuance of digital currencies. All countries share the same concern, especially since the monetary system has a direct say on the performance of all economic sectors. It is because digital currencies may not only come under the control of central banks - in fact they could be outside the remit of state institutions as a whole.
And hence, they can be used in illegal channels and for activities such as drug trafficking and financing acts of terrorism, and hurting the writ of sovereign states. Given these considerations, the People’s Bank of China, the country’s central bank, launched its own digital currency, totalling $1.5 million and limited to 500 users. More users can join in future.
On the other hand, major central banks - the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank - are considering the possibility of issuing digital currencies with controls, but remaining within the legal and legislative frameworks.
Prepare for a flood
This means the issuance of digital currencies will intensify, not only by central banks but also by the private sector and social media behemoths. They may provide transactions at a lower cost than central banks, but who will still set the legislative controls.
In addition to central banks, multilateral institutions such as the International Monetary Fund will also feel the pressure from a profligation of digital currencies, and which prompted the IMF to warn against their issuance, including those from central banks.
The IMF cautioned these moves could lead to trans-border “currencies” displacing national ones, and making it easier to “facilitate illicit flows”. It will also be harder for regulatory authorities to enforce exchange restrictions and capital flow.
A major say
In principle, digital currencies will take up much of the deal flow in the next decade, and everyone will have to deal with them in one way or another. This is a foregone conclusion given the advances in digital economy. However, there should be mechanisms created to guarantee rights in case of data breaches and fund diversions, as well as curb financing of illegal activities.
It is widely known that many entities exploit the Bitcoin for illegal deals and far removed from official oversight. Many Bitcoin traders have been duped and suffered great losses. Investors had no option but to accept the status quo due to the absence of a competent regulatory authority to call on to guarantee their rights.
It is simply because these are “ghost” currencies that remain unregulated as far as their trading is concerned.
It can be said that the world is going to face vague - and dangerous - changes to the monetary regime. This is a matter that must be taken care of by governments and private sector entities to find ways that can protect assets from fraud. That’s something issuers of digital currencies will have to offer reassurances about.
- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.