Crypto assets and central bank digital currencies potential implications for developing countries
Monetary and financial systems have become exposed to privately issued digital representations of value with monetary characteristics that rely on encryption, such as distributed ledger technology (DLT), and are generally known as crypto assets.1
The rapidly expanding crypto asset sphere comes mainly in two forms:
cryptocurrencies (e.g., Bitcoin) and stablecoins (e.g., USD Tether).2
Advocates of crypto assets promise an emancipation from State control and financial institutions, combined with solving the long-standing problems of monetary and financial systems in ensuring efficient, secure, and affordable monetary transfers, and fostering financial inclusion, while preserving cash-like privacy.
The use of crypto assets has been driven by low trust in State regulation and banks following the Global Financial Crisis of 2008 (GFC), the development of digital technology (such as cloud computing and blockchain), and an expansion of digital payment systems and related infrastructure (e.g., pre-paid cards, e-wallets, or web-based services).
Expected rapid high returns on crypto asset holdings and increased online shopping and contactless payment during the Covid-19 pandemic further pushed their use. Although ultimately not realized (e.g., Pistor, 2021; Prasad, 2021: 168–175), the announcement in June 2019 by Facebook (now Meta) and its partners to launch a payments system based on a global stablecoin (Libra, then Diem) provoked steeply increased interest by central banks in considering Central Bank Digital Currencies (CBDCs). CBDCs (e.g., Sand Dollar, e-Naira) are digital forms of sovereign currencies, which can help to improve financial inclusion, address risks posed by crypto assets, and help safeguard consumer protection, financial stability, and monetary sovereignty (e.g., Powell, 2020; BIS 2022a).
The collapse of various crypto assets in May 2022 and crypto exchanges in November 20223 triggered a sizeable reduction in crypto asset valuation. These events shared characteristics of the GFC, such as speculative bubbles based on supposedly high-yielding low-risk assets, and sizable losses by retail investors (Cornelli et al., 2023).
However, financial turmoil remained of a much smaller scale, probably because of the still relatively small size of the crypto world and limited interoperability between individual crypto assets. At the same time, it dampened beliefs in the promises of crypto ecosystems and bolstered the view that crypto assets are inherently unviable because they lack sovereign backing and stringent regulation.