Digital Assets Update: Use case and pushback galore

The digital assets space remains characterised by a frenzy of activity. Cryptocurrencies have been extremely volatile. Stablecoins have gained momentum, so have CBDCs.
Taimur Baig, Chang Wei Liang, Duncan Tan, Radhika Rao06 Oct 2021
  • Scale and scope of cryptocurrencies are now large enough to have systemic implications
  • China and India have taken tough steps on crypto mining and transactions
  • Stablecoins have gained momentum
  • Digital tokens continue to take root in areas from carbon trading to art
  • Central bank digital currency-related pilots and soft rollout continue in DM and EM alike
Photo credit: Unsplash - fabio

A late-September rebound saw cryptocurrencies reach a total market value of USD2.2trln, a ten-fold increase since the beginning of last year. This is a remarkable outcome given the plethora of restrictions related to usage and mining imposed by China and India during the same period. The launch of several digital asset exchanges, the rollout of innovative wallets, changes in mining technology, and wide issuance of stablecoins have kept the momentum going for cryptocurrencies.

Country regulators and multilateral institutions are taking a hard look at this area, as the scale and scope of cryptocurrencies are now large enough to have systemic implications. Below we highlight some of the key concerns:

• Security and governance. Thousands of cryptocurrencies have come into existence in recent years, with no globally unified reporting structure to discern their operational, governance, and risk practices. Information on liquidity, safeguards, and stability of the underlying technology is unclear for many such currencies. There have been cases of hacking and disappearance of customer funds, with little recourse available in many cases, worrying the authorities.

• Consumer protection. If a cryptocurrency is characterised by limited disclosure and oversight, then what prevents developers from walking away, with no customer protection available? Compared to the multiple layers of protection available to customers of conventional financial assets, holders of cryptocurrencies have a fraction.

• Surveillance gap. Global and local regulators continue to struggle to track crypto transactions and identify the parties involved, owing to data gaps. There is mounting concern some users exploit these gaps for illegal activities like money laundering, ransomware, and financing of terrorism. There is scant international collaboration in place to monitor cross-border crypto transactions, making the surveillance gap nearly impossible to fill at the current juncture.

• Monetary policy efficacy. It has become evident that in developing countries with weak monetary stability, the population may find the motivation to trade in cryptocurrencies, especially stablecoins. This can lead to problems like loss of capital controls, currency mismatch, a weakening of the monetary policy transmission mechanism, and tax avoidance. There is also concern about the ability of stablecoins to withstand high volatility.

Concerns are not only being expressed regarding cryptocurrencies; there are also some risks associated with central bank digital currencies. Could they increase the intensity of bank runs? Could they undermine the traditional banking system-based transmission of monetary policy? Could they blur the line between fiscal and monetary policy? Such considerations will shape the brave new world of digital currencies in the coming years. At a minimum, the challenges ahead call for establishing global standards for reporting and forming the architecture of digital currencies.

In the rest of this report, we examine the latest developments in crypto and CBDCs around the world. On the latter, the subsequent discussions will show that an extensive range of pilots and soft rollouts is underway

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - Global


Chang Wei Liang

FX & Credit Strategist, Global

Radhika Rao

Senior Economist – Eurozone, India, Indonesia

Duncan Tan

Rates Strategist - Asia

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