Digital Currencies and International Trade: An Opportunity
What exactly are digital currencies, and what are the different types? And what is their role in the global trade industry? Come take a look at our blog to find out.
Digital currencies have become part of the international monetary system over the past years. But what are they, and how do they affect trade? And most importantly, why?
Pitfalls of Bitcoin
The digital currency evolution started about ten years ago with the invention of Bitcoin, the most well-known cryptocurrency today. But Bitcoin is now far from being the only cryptocurrency on the market. And although it is the most popular one and the coin with the largest market cap, it doesn’t play much of a role in global trade.
To understand why, you must first understand Bitcoin's drawbacks as a currency. First, it's highly volatile, which means its price in US dollars fluctuates a lot. Price increases of 10% or more per day are not uncommon – in both directions. This makes it untrustworthy for global trade.
Second, its transaction speed is slow. The Bitcoin network can process only a tiny fraction of transactions per second compared to other payment systems such as Visa or Mastercard. That, too, makes it useless as a trading currency.
If Not Bitcoin, What Then?
Besides Bitcoin, some currencies were designed especially for cross-border transfers. The most prominent example is the Ripple network (XRP). The goal of this coin is to process international payments fast and at a low cost, and it does a good job at it.
Then, there are private payment networks that use digital currencies. One example is the payment network of the US bank JP Morgan. It is based on a blockchain and uses a JP Morgan Coin. The difference to public networks such as Ripple is that JP Morgan’s network is not accessible for outside users.
Stablecoins
Then there are so-called stablecoins. Those are digital currencies pegged to a fiat currency such as the US dollar or the Euro or against another asset such as gold. The goal of these stablecoins is to provide individuals and companies digital currencies that do not have the high volatility that Bitcoin, Ethereum, and others have. That makes them more suitable as a means of payment, although there is still the issue with the transaction speed.
CBDCs
A new development is central bank digital currencies, or CBDCs. These are digital currencies created by central banks that combine the advantages of fiat and cryptocurrencies. They are issued by central banks but are suitable for use in digital systems, meaning they provide convivence for internet-based transactions. The first major country to issue such a CBDC was China.
Digital currencies are still in their infancy, but the market has made huge progress over the past years. Today, it is clear that digital currencies are the future of international trade, although it’s not yet entirely clear what exactly these currencies will eventually look like.
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