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Crypto enthusiasts will have noted yet another digital currency crash at the end of last week, with this wiping billions of the crypto market as Bitcoin (BTC) plunged to a five-month low below $40,000 (£29,484).
This highlights a growing challenge for national governments across the globe, who are keen to leverage cryptocurrency but wary of the marketplace and its innate volatility.
To this end, the central banks of the US and the UK are considering issuing stable coins that are backed by fiat currency reserves, similar to Nigeria’s eNaira token and China’s digital yuan. But how will this impact the current banking system and forex trading across the globe, and will it introduce a positive and more inclusive fiscal future?
The Rise and Rise of Digital Money
There’s no doubt that both the government and central banks have been slow to react to the exponential rise of digital currency, causing them to be caught off-guard by a slew of withdrawals from high-street banks.
More specifically, recent data has suggested that a fifth of UK households and businesses have sought to move their deposits and cash holdings into digital assets such as BTC or stablecoins like USDC.
If this trend continues, it will begin to make smaller, high street banks increasingly unsustainable due to reducing funding, while risking wider financial stability and the economy as a whole.
In order to tackle this issue, governments and banks have begun to consider the merits of fiat-backed stablecoins, which are pegged to a traditional currency and can be effectively regulated by banks while enabling them to remain a viable option in the digital age.
Appraising the Future of the Financial System
Of course, the case for fiat-backed digital currencies in emerging economies such as China and Nigeria has already prompted action, with assets such as the digital yuan and eNaira driving far higher levels of financial inclusion and helping traditional banks to target younger customers.
In this respect, digital currencies could represent a huge boon for emerging market and low-income economies, so long as any transition is regulated and well-managed.
Even in established and developed economies like the UK, digital money has the potential to transform the financial sector and ensure that it’s fit for purpose in a tech-driven age.
Interestingly, this could also create a scenario where countries of all shapes and sizes will grow increasingly connected over time, facilitating far deeper market integration and global trade on a far larger and more lucrative scale.
The Last Word
On a final note, it’s fair to surmise that the rise of fiat-backed digital assets could also revolutionise the global forex market.
For example, traders can already use a digital currency such as BTC to transfer funds for nominal transaction fees, bypassing potentially costly FX exchange services available through banks and trading platforms.
In the new fiscal landscape, fiat-backed crypto assets would also become tradeable entities in their own right, creating greater diversity and flexibility for investors throughout the marketplace.
