Rising Popularity Of Cryptocurrency, Its Risks And Opportunities
Decentralized cryptocurrency has gained a lot of importance in past few years and earned its value as digital gold. During pandemic period when mainstream industries were incurring huge losses, stock exchange market was crumpled. The investors turned their attention towards the cryptocurrency.
The cryptocurrency gained popularity due to its decentralized transactions and lack of regulation. Digitalized currency is becoming a threat to traditional banking system because the cryptocurrency is not central bank regulated payment method. It is an anonymous digitized payment method that could be potentially used for terror financing, money laundering, drug & human trafficking and other corruption related activities. Decentralized cryptocurrency does not have the risk of high depreciation and inflation will not affect its value same like cash currency, which is kept in federal reserves and circulated among the banks to supply further in the economy. If we look at our current global business transactions, physical money is diminishing and 92% of global transactions are digitized instead of cash transactions.
As per Deutsche Bank research team, the cash will be replaced by central bank digital currency (CBDC) in future. Currently, 70% of central banks are exploring the idea of launching CBDC for public use. These banks will digitize their national currency in virtual form and CBDC would be accepted globally as a payment method. If central banks wouldn’t allow similar features of investor protection and freedom of payment for their national digital currency that decentralized digitized currencies are offering, it will be very difficult to woo their customer base. There is a possibility of modification in international financial transactions because CBDC could possibly allow payments to sanctioned countries. Decentralized financing has proved that it is more innovative, faster and adaptive of technological trends comparatively to traditional central banking system.
Considering the massive change in the business transactions from cash to digitized currency, I mention one of the major challenges for Pakistani economy. According to the report issued in 2017 by Global Findex database, Pakistan has 100 million unbanked population. Approx. 45% population of Pakistan do not have bank accounts and they run their households and transactions cash based. Pakistani consumers have higher trust on cash payments than on online/ digital payment methods. Since the IMF issued the statement that CBDC will be the future of the traditional banking system, in November 2020, Pakistan security and exchange commission issued a report to introduce the digital currency system by 2025. For Pakistani economy, CBDC will be a positive change because Pakistani entrepreneurs do not have many digital payment channels available for international business transactions. Also, CBDC will reduce the cost of printing cash for different denominations to cover the demand. The digitized method would strengthen the efficiency of payment method.
There would be a few challenges for the public, while using the digitize currency. Digital currency individual accounts can be hacked similarly to hackings of credit cards or online banking accounts. Although, cryptocurrency is created by blockchain technology and is very complicated and sensitive information and thus cannot be hacked easily. However, there have been some incidents in the past, while the individual accounts of cryptocurrency were been hacked.
According to the State Bank of Pakistan, they are trying to sort out the risk of cyber attacks before issuing the digitized currency for the economy. Since cryptocurrency is a faster and anonymous method of money transfer, Pakistani government would need to create a framework of monitoring and control over CBDC transactions to mitigate risks. Pakistani government and authorities would face a couple of challenges while launching CBDC. Pakistani general public needs awareness and trust to use digital banking and digitized currency for payments. It will be difficult to instill awareness among the illiterate and unbanked population in the country for considering CBDC as payment method. On the other hand, Pakistani digital infrastructure needs support policies to further develop our IT industry and fiber cable network. Cybersecurity and technological awareness among Pakistani population are the basic necessities of Pakistani economy in current times.
Name – Kiran Mahnaz