The Pros and Cons of Digital Coins
Digital Coins are a way to buy, sell, and transfer value. Although there is a great deal of controversy surrounding them, the industry is attempting to emphasize the advantages they bring to the table. The most notable controversy surrounds e-CNY, short for “electronic yuan”. This digital currency is a potential vector for global surveillance, and it has raised concerns in the western world. The UK spy chief warned of the risks, and U.S. senators like Pat Toomey have written to the Biden administration to voice their concerns. In response to this, China’s ministry of foreign affairs chided U.S. legislators for creating trouble over the digital coin.
The National Science Foundation is also taking steps to support research into digital currency. In addition to examining the technological advancements involved, the agency plans to fund research into how digital currencies affect the environment and the economy. It also plans to create performance standards for digital assets. Finally, the agency will explore the feasibility of establishing a standing forum for research and technical assistance.
One major problem with digital coins is volatility. The value of the digital coin may go up or down, and the owner must accept this risk before using the currency. For example, if the value doubled, a $5 sandwich would now cost $10. This volatility is what makes digital coins such an interesting investment, but there are also some downsides. The biggest downside is the lack of security. In the event of a hack, the digital coin could be stolen or lost.
Despite the challenges associated with digital coins, many countries are considering them as legal tender. El Salvador made bitcoin legal tender last year, and Panama followed suit. The US may be next. The recent report from the Federal Reserve opens up the door to a debate on whether digital coins will become the digital dollar. It is important to note that digital coins are not backed by a centralized bank or monetary authority.
Another challenge with digital currency is regulatory compliance. Fortunately, some cryptocurrency exchanges are allowing people to exchange digital coins through their wallets. SoFi Securities LLC is a member of FINRA/SIPC and a registered investment adviser. APEX Clearing Corporation provides custody of securities. Its subsidiary, SoFi Digital Assets, LLC, is a FinCEN Money Service Business.
While digital assets are becoming increasingly intertwined with the mainstream financial system, they also pose real risks to businesses, consumers, and investors. Without appropriate regulation, digital assets could create disruptive runs that wipe out billions of dollars in wealth. For example, the crash of the TerraUSD cryptocurrency in early October 2017 illustrated the potential for instability. Almost $600 billion in wealth was lost during that crash. In October, the Financial Stability Oversight Council is planning to publish a report on digital assets to identify regulatory gaps and suggest measures that promote financial stability. The Treasury Department and other financial institutions are also working to mitigate the cyber vulnerabilities associated with digital assets.
There are a number of digital currency-based banking services that are designed to make it easy for people to spend their digital currency. Coinbase, for instance, offers a special debit card that lets people spend their cryptocurrency and earn cryptocurrency rewards. Other firms like BitPay also offer prepaid Mastercard debit cards that help users use cryptocurrency. Unfortunately, these services are not widely available yet.