A New Way to Facilitate Trade…
Inefficiencies between trading nations and urgencies to replace existing currencies as a medium for exchange poses a threat to the existing SWIFT regime. Blockchain adoption among approved nations fosters increased collaboration, reduced costs, increased productivity and accountability. However, leaders need to come to terms with regulations and governance before reaping its benefits.
Cryptocurrency adoption amongst nations has been under consideration since its introduction in 2008. There is no doubt that during its infancy, widespread adoption fostered a wave of illegal transactions using cryptocurrencies, prompting many countries to take quick action to ban its activities (Saiedi, Broström and Ruiz, 2020). In April 2018, The Central Bank of Iran barred Iranian banks from utilizing cryptocurrencies, citing concerns about money laundering. Similarly, President Vladimir Putin called for a ban on cryptocurrency in October 2017, noting the possibility for the instrument to be devised toward criminal activities, tax evasion and financing of terrorism (RT.com, 2017).
However, frequent United States sanctions have since urged targeted countries to consider alternatives to the existing SWIFT payment system. In November 2018, President Donald Trump announced that the United States would withdraw from the Joint Comprehensive Plan of Action, fearing US sanctions, SWIFT removed some Iranian banks from the system and Iran was unable to use one of its key instruments to make foreign payments (Kirkpatrick, Savage, Johnston and Hanson, 2019). This has driven Iran as well as many other sanctioned nations to turn towards alternative forms of international payment systems as a strategic workaround.
The adoption of a cryptocurrency strategy would allow nations to decrease its reliance on the US dollar, fabricating an added layer of security between themselves and the US financial system, facilitate money transfers amongst interested parties and open up new avenues for commerce (Kirkpatrick, Savage, Johnston and Hanson, 2019). The Central Bank of Russia proposes creating the first joint multinational cryptocurrency for the BRICS and EEC nations. Advocating for increased investments in blockchain and smart contract technology, will set in motion the move towards a cashless society and facilitate trade liquidity (Chudinovskikh and Sevryugin, 2019).
Successful adoption of the initiative will cause drastic shifts to international trade relations, it would be the first multinational cryptocurrency that would be used by more than 40% of the world’s population (Chudinovskikh and Sevryugin, 2019). Increasing trade efficiencies between participating states and replacing existing currencies as a medium for trade, limiting the impact of the SWIFT system.
Blockchain adoption amongst sanctioned nations foster increased cooperation, reduced costs, increased efficiency and transparency, but a number of challenges have to be tackled before its benefits can be adopted. For instance, while Bitcoin has a theoretical limit of 4,000 transactions per second, an average of around 7 transactions per second are processed by the Bitcoin network (Blockchain.com, 2020). By contrast, conventional payment processors such as Visa can process an average 1,700 transactions per second. Systems such as the ‘Lightning Network’ could help mitigate these issues.
CBDCs…
The term “Central Bank Digital Currency” refers to the issuance of a digital payment instrument by a nation’s central banks directly to individuals (BIS, 2020). A recent survey showed that 80% of central banks are interested in CBDC research and half have progressed to experimenting and operating pilots past conceptual research. Motives for widespread consideration vary, but common factors include: CBDCs provides an alternative to cash and allow public access to state-backed means of payments, reducing the cost of handling in countries with inaccessible territories, banking the unbanked population, and improving the efficiency and safety of cross-border payments (IMF, 2020).
The proliferation of technology-driven innovation has shifted customer preferences towards technology-based digital business models. Today, financial technology (fintech) stresses the significance of personalisation, immediacy and convenience. Traditional banking is exposed to risks set by disruptive innovation, such as services from Google, Apple Pay, PayPal and Square (Pollari, 2016). Like any other infrastructure, payment systems thrives under strong network effects within individual closed-looped systems. This fragmentation of payment systems would lead to inefficiencies. CBDCs will provide a common ground to facilitate transfers between the various systems (BIS, 2020).
Financial inclusion is a crucial step in raising the collective socio-economic standards of a nation. Large nations with geographic inaccessibility increase the need for precautionary savings. The inadequate availability of financial resources can be accounted for as a factor for wealth disparity and poverty. Therefore, the accessibility to credit at a low cost to vulnerable groups in disadvantageous locations can be recognized as a method to accelerate growth and development (Varghese and Viswanathan, 2018). More recently, the COVID-19 pandemic has highlighted the need for governments to accelerate CBDCs as a simple and direct way to provide vulnerable communities, particularly the unbanked, with fiscal assistance during emergencies (IMF, 2020).
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References:
Saiedi, E., Broström, A. and Ruiz, F., 2020. Global drivers of cryptocurrency infrastructure adoption. Small Business Economics,.
RT International. 2017. Putin: Cryptocurrencies Bear Serious Risks, Including Financing Of Terrorism. [online] Available at: <https://www.rt.com/news/406269-cryptocurrency-risks-terrorism-putin/>
Kirkpatrick, K., Savage, C., Johnston, R. and Hanson, M., 2019. Virtual currency in sanctioned jurisdictions: stepping outside of SWIFT. Journal of Investment Compliance, 20(2), pp.39–44.
Chudinovskikh, M. and Sevryugin, V., 2019. Cryptocurrency regulation in the BriCs Countries and the eurasian economic union. BRICS Law Journal, 6(1), pp.63–81.
Blockchain.com. 2020. Transactions-Per-Second?Timespan=1Year. [online] Available at: https://www.blockchain.com/de/charts/transactions-per-second?timespan=1year
Bank for International Settlements, 2020. Central Bank Digital Currencies: Foundational Principles And Core Features. Bank for International Settlements.
International Monetary Fund, 2020. DIGITAL MONEY ACROSS BORDERS: MACRO- FINANCIAL IMPLICATIONS. International Monetary Fund.
Pollari, I., 2016. The Rise of FinTech: opportunities and challenges. The Finsia Journal of Applied Finance,.
Varghese, G. and Viswanathan, L., 2018. Normative perspectives on financial inclusion: Facts beyond statistics. Journal of Public Affairs, 18(4), p.e1829.
