As a growing number of countries around the world face economic hardships amidst political turmoil, central banks find themselves with little to no power or resources. With federal entities unreliable many turn to digital currencies.
Central Banks Crumble
Over the last year many countries around the world saw an increase in economic hardship. Such austerities resulted from the ongoing COVID-19 pandemic, corrupt regimes, war, natural disasters, or lingering financial degradation. In some cases such as Lebanon, all of the above are applicable.
Lebanon is a country with ever-heightening waves of economic, political, and societal uncertainty. Another said wave appeared in 2019 with the depletion of the Lebanese financial system. The national currency of Lebanon, the Lebanese pound (LBP) is pegged to the dollar around 1,500, though black market rates soared over 17,000 last week.
In a more “typical” situation, the central bank has the reins of economic policy, as it too feels the fluctuations of the market. However, in Lebanon, the centralized financial institutions are no longer available for reorienting the country’s economy. Recent on-the-ground footage shows Lebanese citizens defacing local banks after they collectively decided on the withholding and freeze of savings.
Another example of a scrambling central bank is in Venezuela. Following continuous economic decline, the country’s GDP suffered a massive drop over the last eight years. According to stats from Al Jazeera the country’s national currency lost 73% of its value this year alone.
As a potential fix, the central bank decided on a currency change for the purpose of lessening the load for “simpler monetary scale”. Prior the country had a one-million bolivar note with the equivalent worth of only $.25.
However, it’s not only that central banks vie for economic power and stability within the country. Countries like Lebanon and Venezuela often find themselves with restrictions and sanctions on an international level. In the case of Lebanon, bank accounts and credit cards have been practically useless for months outside of the country.
Crypto to Rescue
While central banks plunder and even disappear, individuals and sometimes even countries turn to crypto for saving. In Lebanon the bank crash encouraged crypto holders to start their own P2P markets, like Mario Awad.
“I have (security) officers, politicians, media personalities, everyone is buying crypto,” he told Reuters in an interview. “Increasingly, it’s also your average person who is trying to get out of the collapsed banks and cut their losses.”
Another Lebanese interviewee said that crypto, more specifically Bitcoin is, “100 times more real than the dollars we have in the bank.”
Moreover these crypto exchanges in financially desperate countries such as Lebanon often take place in person-to-person (P2P) situations. WhatsApp, Telegram, and Twitter are rife with crypto and bitcoin centric accounts which provide market information. A similar trend can be seen in India. In addition, P2P bitcoin transactions were at their highest in mid-2021 in Africa with a 50% increase over the last year.
In Taliban-controlled Afghanistan, the case for crypto strengthened as traditional financial institutions faltered. During the months following the government takeover, crypto usage surged and bumped Afghanistan into the top 20 of the 154 countries in the 2021 Global Crypto Adoption Index. According to reports, early crypto adopters used digital currencies for support and assistance during recent uncertainty.
However, there are questions over the risk of crypto in unstable places. For example, if the Taliban decide on a cryptocurrency policy which allows them to capitalize on anonymous transactions and avoid Western financial systems.
Central Bank Digital Currency Questions
While the question of cryptocurrencies vs central banks remains, a combination of both is on the horizon. Currently under development in various countries are central bank digital currencies (CBDCs). A recent report revealed that around 80% of global central banks have research on CBDCs.
Essentially these assets are digital versions of central bank fiat. An electronic record or virtual token which holds an electronic record of the currency of a particular region. Although digital tokens, CBDCs have notable differences to more traditional cryptocurrencies. This is primarily through the centralization of CBDCs.
Despite the utilization of blockchain technology, the underlying network would be under control of the issuing financial authority. While this distributed-ledger technology is innovative, the hyper centralization of CBDCs gives central banks more power and authority over the average citizen’s financial abilities. It may also lend to increased political and private influence.
As mentioned, many countries have CBDCs trials like China, others like the U.S. have ongoing research on the topic. There is little denying of the changing financial landscape of the world. In such change, it remains to be seen how traditional institutions like central banks reposition themselves.
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