A digital currency is a form of money that can be used at any time, anywhere. Its lower transaction costs benefit businesses, as they can accept payments anytime. However, companies are still wary of using cryptocurrencies. While these digital currencies can help enterprises reduce costs, they pose certain risks. Businesses may use these currencies to settle inter-company transactions or to transport goods.
Small Businesses Benefit from Lower Transaction Costs
The low transaction costs of digital currencies are a great benefit for small businesses. Since small businesses make up a large part of the U.S. economy, they benefit significantly from more competitive payment systems. Furthermore, these new payment methods facilitate real-time transactions, an essential benefit for small businesses. In addition, digital assets offer programmability, which can be helpful for more complex applications.
Digital currencies offer small businesses the opportunity to extend their reach to global customers. By accepting cryptocurrency as a form of payment, a small business can sell its products and services worldwide, significantly boosting its sales. Furthermore, the global logistics of e-commerce allow small companies to sell their products in many countries without incurring any currency conversion costs. Furthermore, as digital currencies are decentralized, they enable instantaneous global transactions.
Small businesses often face challenges in accessing credit and maintaining healthy cash buffers. Additionally, they often need more funding options due to the high cost of traditional credit card processing. In addition, small businesses often need help to deliver quantifiable metrics to lenders. Traditionally, these businesses have relied on community banks and have been impacted by consolidations.
In addition to their low transaction costs, cryptocurrency can be an effective alternative to cash. This new form of payment also eliminates the risk of chargebacks and fraud. Furthermore, crypto-based transactions are final and avoid human errors. Small businesses can also benefit from a higher rate of customer conversions, thus boosting revenue.
CBDC Could Encourage Other Nations to Create Their Own Digital Currencies
As interest in digital currencies grows, there is a real concern that it will eventually threaten national currencies. Indeed, nearly every central bank has published a white paper about the dangers of cryptocurrencies, citing the high transaction fees, scalability issues, and volatility of many cryptocurrencies. Central banks are exploring the possibility of issuing their digital currencies to counter the threat of cryptocurrencies.
While CBDCs could make a difference to our financial system, they also have some drawbacks. First, they may trigger a run on banks, which could hamper lending and negatively impact the economy. Furthermore, they could be vulnerable to cyber-attacks and require a complex regulatory framework and anti-money-laundering standards.
The CBDC could also lead to an increase in financial inclusion. But it is unclear if it will achieve this goal. Some unbanked individuals may still not trust the government and continue using alternative non-bank payment services. Further, it is still being determined if the CBDC would be cost-effective or justify the government’s subsidies. Further research will help answer this question and more.
In the meantime, CBDCs still need to be mature, and the future models may vary widely. However, the central banks must keep up with their international currency peers. This means that they are increasingly focusing on building a digital wallet and facilitating digital payments that don’t require a bank account. Hence, the CBDC model offers a good template for these efforts.
Governments Have Essential Roles to Play in Ensuring Financial Stability
The introduction of digital assets has created new challenges for governments and regulators. While much of what is happening is within the purview of domestic law, regulators must continue to evolve their approach to the new technologies to ensure financial stability. The goals of governments and regulators include expanding financial access to all citizens and reducing the cost of cross-border funds transfers.
The United States has several important roles to play. It is working with the Federal Reserve to develop regulatory and payment policies for new technologies. It also works with the BIS Innovation Hub to develop and validate new financial products and services. It also engages in technical standards forums to establish standards for digital assets and payment technologies.
The United States has been leading in international engagement on digital asset issues. It led FATF to develop the first global standards for digital assets. It also set up the G7 Digital Payments Experts Group during its 2020 G7 presidency. From this work, the G7 published a set of shared policy principles for retail CBDCs in 2021.
The United States must continue to lead by setting standards for digital assets. It must engage with significant economies to develop policies for the responsible development of these assets. These policies must consider consumer protection, business risks, money laundering, and proliferation financing.