The Risks and Benefits of Digital Coins
The digital world is bringing new financial technologies to the forefront, and governments are looking at how they can use these innovations for good. But digital currencies, and the technology behind them, are also posing risks for consumers and investors.
The term “digital currency” is often used to describe a variety of assets, including cryptocurrencies like bitcoin and stablecoins that are pegged to an underlying asset. Cryptocurrencies are issued on a distributed ledger called the blockchain, which uses smart contracts to regulate the tokens’ ownership and transaction.
While cryptocurrencies are a useful way to transfer money, they are highly volatile. Their value can change by the hour, and a cryptocurrency worth hundreds of dollars today could be worth just a few cents tomorrow.
There are a number of concerns about cryptocurrencies, from the volatility to the fact that they can be easily misused by bad actors. For example, cybercriminals have developed techniques to use ransomware attacks to steal crypto, or narcotics cartels and money launderers are increasingly using them.
Many countries are now considering issuing their own centralized digital currencies, which would work similar to cryptocurrencies but with the approval of a central bank. These would allow the central bank to issue and freeze a limited number of tokens without requiring the use of crypto wallets.
But there are concerns about the security and privacy of centralized digital currencies, says Brent McIntosh, senior fellow at CFR. He points to a recent paper by the Federal Reserve Board that acknowledges the significant benefits of these currencies but raises concerns about operational, cybersecurity, and financial stability issues.
Stablecoins, another form of digital currency, may offer a solution to some of these challenges. These currencies, which are typically pegged to gold or other valuables, can help bring millions of people into the payments system who do not have traditional bank accounts.
One of the most promising applications for a stablecoin is as a low-cost, high-speed payment platform. They can be used to send cash instantly and avoid the costly international transaction fees associated with credit cards and other remittance services.
These technologies are already being used by small businesses, which have traditionally found it difficult to reach customers outside their local communities. These digital platforms can boost their business by enabling them to connect with new markets and gain access to new audiences.
As the debate over digital currencies continues, it is important to consider how they can best be utilized by the world’s most vulnerable populations. This includes women, the poor, and other populations in need of more secure financial transactions.
In particular, digital currencies can be an important tool for helping governments better implement monetary and fiscal policies. They can make it easier for citizens to claim benefits, for example, and allow government officials to track spending with greater accuracy.
But they can also be used to evade economic sanctions. Sanctioned states, such as Iran and North Korea, have increasingly incorporated cryptocurrencies into their transactions, avoiding penalties that are often much higher in the U.S.