The global financial system is constantly evolving, focusing on the pursuit of more transparency, efficiency, and agility in operations. One of the biggest revolutions in this regard is the rise of digital currencies, already adopted in several countries around the world.
But what are digital currencies?
Digital currencies are electronic versions of a country’s official currency, issued and regulated by its central banks. Known as Central Bank Digital Currency (CBDC), they are built on blockchain technology, ensuring secure transaction records, and use digital wallets for network access.
These currencies represent the digital version of traditional fiat currencies, maintaining the stability and regulation of the financial system. Unlike cryptocurrencies, digital currencies are centralized and have specific goals of facilitating transactions and financial inclusion.
In practice, digital currencies aim to simplify and speed up financial transactions, making them comparable to physical money but without the need to be tangible. Additionally, they contribute to the digitization of the economy, strengthening security in operations and including those without access to bank accounts. Therefore, they facilitate financial routines.
In contrast to payment via debit card, digital currencies present specific differences that go beyond simply using a plastic card on a machine or making an electronic transfer.
And what is the difference between digital currencies and cryptocurrencies?
The main difference between digital currency and cryptocurrency lies in regulation. While digital currencies are centralized and issued by the central banks of countries, cryptocurrencies are decentralized and not linked to governments or financial institutions. This distinction also influences price stability, with centralized digital currencies generally maintaining a more stable valuation, whereas cryptocurrencies tend to exhibit high volatility.
Although occasionally used interchangeably, it is essential to understand these differences, especially considering that both types of currencies use similar technologies, such as blockchain.
What countries already have an official digital currency?
Nigeria, Bahamas, Jamaica, and countries in the Eastern Caribbean (Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, Saint Lucia, Saint Kitts and Nevis, and Saint Vincent and the Grenadines). In other words, 11 countries already have this resource.
Nigeria stands out as one of the pioneering countries in the adoption of an official digital currency, the eNaira, launched in October 2021. As Africa’s only Central Bank Digital Currency (CBDC), the eNaira has been widely used for everyday transactions, driving the democratization of the banking system in the country.
Although well-received, the eNaira is not without controversy. In 2023, the Nigerian central bank imposed restrictions on cash withdrawals, sparking controversy among the population that still prefers the traditional model. The measure aimed to combat bribery and corruption, encouraging the use of eNaira. However, the Nigerian Supreme Court intervened, prohibiting the limitation of withdrawals.
Despite the challenges, the Nigerian digital currency continues to strengthen and is considered a success story in modernizing the country’s financial system.
The Bahamas stands out as pioneers in launching the world’s first digital currency, the Sand Dollar, in 2020. However, in 2023, the Central Bank Digital Currency (CBDC) is not fully integrated into the banking system, despite being widely used by the population.
The main goal behind the launch of the Sand Dollar was to increase financial inclusion and combat money laundering and other illicit activities. The results have been promising, as digital currencies are highly traceable due to the blockchain technology used in their implementation.
Jamaica, a country in Central America, launched its own digital currency in 2022, known as the Jamaican Digital Exchange, or JAM-DEX. Unlike some other CBDCs, JAM-DEX does not aim to replace physical money and cards but to offer an alternative for payments and purchases, aiming to reduce the costs of managing and storing cash.
An important feature of JAM-DEX is that it is stored in digital wallets but can be converted into notes and coins, providing flexibility to users. This approach reflects the strategy of the Jamaica central bank to offer a new option for financial transactions, complementing traditional payment methods.
The countries of the Eastern Caribbean, made up of eight island nations in the Caribbean region, introduced their own Central Bank Digital Currency (CBDC) called DCash. Launched in 2022, DCash functions as a virtual version of the dollar used in these nations.
The main goal of DCash is to facilitate purchases and payments within the region. Additionally, the digital currency introduces new features, such as integration with external providers’ digital wallets and the ability to make payments to the government. These additions aim to further improve the convenience and efficiency of financial transactions in the Eastern Caribbean region.
Efforts to develop digital currencies are underway worldwide, with 21 countries currently in the pilot project phase, 32 in the development stage, and 45 in the research phase. These countries represent all continents and include major nations such as Brazil, Australia, the United States, Canada, China, and Japan.
This widespread participation demonstrates the growing interest and global commitment to digitizing the financial system. Digital currencies are expected to play a significant role in the global economy, offering new opportunities and challenges for governments, financial institutions, and consumers worldwide.
Countries in the pilot project of digital currencies:
South Africa, Saudi Arabia, Australia, Kazakhstan, China, South Korea, United Arab Emirates, Ghana, Hong Kong, India, Iran, Israel, Japan, Malaysia, Russia, Singapore, Sweden, Thailand, Tunisia, Turkey, and Ukraine.
Countries in the development of digital currencies:
Germany, Austria, Bahrain, Belarus, Brazil, Bhutan, Cambodia, Canada, Colombia, Spain, United States, Estonia, Philippines, Finland, France, Haiti, Mauritius, Indonesia, Ireland, Italy, Laos, Lithuania, Luxembourg, Macau, Mexico, Montenegro, Norway, Netherlands, Palau, United Kingdom, Switzerland, and Taiwan. Thus, there are 32 countries, covering the entire euro area, according to the Atlantic Council.
What are the advantages and challenges of using digital currency?
Advantages:
- Efficiency in Transactions: Digital currency transactions can be faster and more efficient than traditional methods, especially in international transactions, due to the elimination of intermediaries and the speed of blockchain networks.
- Financial Access: Digital currency can offer access to financial services for people in areas where traditional banking services are limited or nonexistent, helping to reduce financial exclusion.
- Cost Reduction: For businesses, the use of digital currency can reduce transaction costs, such as payment processing fees and exchange rates, especially in international transactions.
- Transparency and Traceability: The underlying blockchain technology of most digital currencies provides a transparent and immutable record of all transactions, which can increase user trust and reduce fraud.
Challenges:
- Volatility: The value of digital currencies can be extremely volatile, subject to significant price fluctuations in short periods, which can make transactions and investments risky.
- Security: While blockchain technology is secure, digital wallets and cryptocurrency exchanges can be targets for hackers, resulting in fund theft and asset loss.
- Regulation: Lack of clear regulation in many jurisdictions can lead to legal and regulatory uncertainties, making widespread adoption difficult and increasing risk for users and investors.
- Privacy: While transactions with digital currency are pseudonymous, they are not necessarily anonymous, and some digital currencies may raise concerns about privacy and tracking users’ financial activities.
In summary, while digital currency offers significant benefits in terms of efficiency and financial access, it also presents significant challenges related to volatility, security, regulation, and privacy that need to be considered by users and regulators.
