In this article, we discussed the future of digital currencies, history of currency, and its potentials impacts on global economies.
Definition
Currency futures are futures contracts for currencies that specify the price of exchanging one currency for another at a future date. The rate for currency futures contracts is derived from spot rates of the currency pair. Currency futures are used to border the risk of receiving payments in a foreign currency.
History of Currency
The concept of money has undergone important changes over the millennia. In ancient times, societies relied on exchange system where goods and services were exchanged directly. The limitations of barter led to the use of goods money such as grains, livestock, and eventually precious metals like gold and silver, which had intrinsic value and were widely accepted.
The invention of coinage around 600 BCE in Lydia (modern-day Turkey) marked a pivotal moment in monetary history, as it provided a consistent medium of exchange. This was followed by the introduction of paper money in China during the Tang Dynasty (618-907 CE) as promissory notes, allowing merchants to deposit their coins with a trustworthy agent who would issue a paper certificate that could be redeemed elsewhere, facilitating transactions without the need to carry heavy coins.
The significant development and widespread use of paper money as a government-issued currency occurred during the Song Dynasty (960-1279 CE). The Song government began to standardize and issue paper money in the early 11th century. The earliest government-issued paper currency was known as ‘jiaozi’, and later, during the Southern Song period, another type called ‘huizi’ was introduced. These innovations made the Song Dynasty the first in history to use government-backed paper money on a large scale, which eventually replaced the earlier promissory notes, became a cornerstone of the economy, and spread to become the dominant form of currency.
The Rise of Digital Currencies
The fast-growing popularity of digital currency can be attributed to multiple factors, such as seeking a reduction in operational costs involved in physical cash management, embracing financial inclusion, faster payments, 24×7 availability, improving the efficiency of the settlement system, and facilitating cross-border payments.
Enhancing financial inclusion is a key benefit of applying digital currency. It removes socio-economic barriers and addresses challenges associated with connectivity and physical banking infrastructure, helping facilitate increased participation of the hitherto underserved in the financial system. Digital currencies typically come with the added advantage of conditional anonymity, just like physical cash, and are controlled to boost a rise in cashless transactions. This shift towards a cashless economy is expected to act as a catalyst for payment innovation, offering consumers a range of diverse options.
India’s CBDC, called the Digital Rupee (e₹), is a sovereign currency issued by the Reserve Bank of India that holds the distinctive advantage of trust, liquidity, settlement finality, and integrity. Launched in November 2022 for wholesale and December 2022 for retail, India’s CBDC is the next-generation seamless, ubiquitous and anonymous payment mode that delivers value to its customers.
As per the International Monetary Fund, India is among the few countries globally at the forefront of developing CDBC. Beyond the advancements in the financial landscape, embracing CBDC will help ease India’s financial burden in printing, distribution, and currency storage. For instance, India incurred a substantial cost of INR 4,984 Cr from April 2021 to March 2022 for currency printing, which can be reduced by adopting digital currency. Not only will digital currency reduce pressure on the government in terms of printing, distribution, and storage, but it also aligns with India’s Environmental, Social, and Governance (ESG) goals for reducing carbon footprint.
Creator of Economic Opportunities for Countries
Given their digital format, CBDCs can improve the efficiency of transactions by allowing for reduced settlement times. Reducing settlement time can lead to faster and more efficient payments, promoting economic activity and growth.
BFSI – FINTECH & FINANCIAL SERVICES
The history of money spans thousands of years, evolving from barter systems to precious coins, transitioning through paper currency, now advancing in the era of digital currencies and impacting how society functions. Whether it is coins, paper or digital currency, money performs three primary functions:
It is a medium of exchange for buying or selling any goods or services
It is a unit of account used to value goods or services
It can be stored for future purposes
Innovation in finance and currency are interlinked; hence, digital currency is gaining popularity globally, mirroring the pre-existing private company-operated electronic wallets while incorporating a sovereign-backed facility. Three major kinds of digital currencies exist: stablecoins, cryptocurrency, and central bank digital currency (CBDCs). While stablecoins and cryptocurrencies are digital currencies exchanged between people and various entities, CBDCs, as the name suggests, are issued and backed by a central bank. Central banks and private entities worldwide are exploring digital currencies in various capacities, but what drives the adoption of digital currencies?
The Rise of Digital Currencies
The fast-growing popularity of digital currency can be attributed to multiple factors, such as seeking a reduction in operational costs involved in physical cash management, embracing financial inclusion, faster payments, 24×7 availability, improving the efficiency of the settlement system, and facilitating cross-border payments.
Enhancing financial inclusion is a key benefit of implementing digital currency. It eliminates socio-economic barriers and addresses challenges associated with connectivity and physical banking infrastructure, helping facilitate increased participation of the hitherto underserved in the financial system. Digital currencies typically come with the added advantage of conditional anonymity, just like physical cash, and are poised to boost a rise in cashless transactions. This shift towards a cashless economy is expected to act as a catalyst for payment innovation, offering consumers a range of diverse options.
India’s CBDC, called the Digital Rupee (e₹), is a sovereign currency issued by the Reserve Bank of India that holds the distinctive advantage of trust, liquidity, settlement finality, and integrity. Launched in November 2022 for wholesale and December 2022 for retail, India’s CBDC is the next-generation seamless, ubiquitous and anonymous payment mode that delivers value to its customers.
As per the International Monetary Fund, India is among the few countries globally at the forefront of developing CDBC. Beyond the advancements in the financial landscape, embracing CBDC will help ease India’s financial burden in printing, distribution, and currency storage. For instance, India incurred a substantial cost of INR 4,984 Cr from April 2021 to March 2022 for currency printing, which can be reduced by adopting digital currency. Not only will digital currency reduce pressure on the government in terms of printing, distribution, and storage, but it also aligns with India’s Environmental, Social, and Governance (ESG) goals for reducing carbon footprint.
From financial inclusion to reduced cost of cash management, there’s a lot that digital currencies such as CBDCs can offer to economies. Let’s dive deep into the economic avenues it creates for countries.
Creator of Economic Opportunities for Countries
Given their digital format, CBDCs can improve the efficiency of transactions by allowing for reduced settlement times. Reducing settlement time can lead to faster and more efficient payments, promoting economic activity and growth.
Additionally, CBDCs can streamline costs and provide a cheaper alternative to conducting international transactions.
Cross-border payments have emerged as a key focus area for the G20. The Financial Stability Board (FSB), in its ‘G20 Roadmap for Enhancing Cross-Border Payments’, has acknowledged that many central banks are developing a CBDC to explore promising solutions to tackle international transactions that are plagued by time-consuming procedures and strict compliance checks, constrained by their dependency on the correspondent bank’s availability and time-zones.
The use of CBDC by financial institutions identified by the RBI can help streamline processes and make it easier to reduce counterparty risks. Overall, a successful use-case of CBDC is expected to further accelerate the method of transaction and settlement.
Additionally, CBDC holds promise in simplifying transactions in government securities and facilitating international forex trade.
With the acceleration of economies globally, central banks worldwide are developing CBDCs to embrace the rapidly changing digital environment. Over 93% of central banks globally are experimenting with the implementation of CBDC.
Nearly 114 countries are exploring the viability of CBDCs, with several central banks launching pilot projects or introducing a digital currency. Bahamas, Jamaica, and Nigeria are the few countries that have already issued CBDCs.
The first retail CBDC, Sand Dollar in Bahamas, came into existence in 2019. It is pegged to the US$ and intended to provide banking access to the 18% of the Bahamian unbanked population that is unbanked.
Digital currencies are shaping how economies will function in the future, but what is the role of technology in its evolution?
Role of Blockchain in Shaping the Future of Digital Currencies
New technologies, such as blockchain, can help streamline the process of recording transactions and tracking assets across a business network. Blockchain, also known as Distributed Ledger Technology (DLT), converts & stores currency in a digital format to make transactions secure.
India’s fintech sector is projected to reach $6.2 Tn by 2025. This growth is inclusive of areas such as digital payments, digital lending, peer-to-peer (P2P) lending, crowdfunding, blockchain technology, distributed ledger technology, big data, etc.
Financial Innovations Like Cryptocurrencies Impacting Economies
Cryptocurrencies are an innovative payment infrastructure that aims to serve as an alternative to existing payment systems. This digital currency adds to the evolution of money as well as a viable substitute for traditional currencies.
It also allows users to diversify their asset holdings and explore it as a mode of transaction. Distributed Ledger Technology can help cut the cost of international transfers and bring more people into the formal financial fold. Payment services are increasingly leveraging this technology for quick overseas transfers and reduced processing time from days to a few hours.
Conclusion
Digital currency undoubtedly has the potential to transform the financial sector and bridge the existing geographical boundaries. By seamlessly integrating with legacy systems and offering interoperability, they can extensively assist in facilitating trade and economic opportunities for countries. While its real-world impact is significant, it must be balanced with a facilitative governance that ensures the benefits reach all.
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