- Digital currencies could boost economic growth in developing countries, although their adoption is not without risks, Bank of America said.
- The company said digital currencies could lower transaction costs and enable more economic activity in emerging market economies.
- However, BofA warns that the rise of digital currencies could lead to inflation and dollarization.
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Digital currencies could boost economic growth in developing countries, although their adoption is not without risks, according to Bank of America.
In a research report released last week, BofA’s Head of Emerging Market Cross-Asset Strategy and Economics for the EMEA region explained that central bank digital currencies (CBDCs) and private digital currencies hold “a lot of potential” to increase financial inclusion, a major problem. in emerging countries.
“Digital currencies have the potential to address many practical constraints on financial services in poor countries,” said David Hauner. “More than 50% of adults in developing countries do not have a bank account. Digital currencies could significantly reduce transaction costs and enable more economic activity. It would be a major boost to economic growth. ”
Hauner found that already, emerging countries where fewer people have bank accounts tend to be more active in bitcoin trading, showing that one of the uses of cryptocurrencies tends to substitute for bank accounts. Relative to GDP, the most important countries in terms of bitcoin trading volumes are all emerging markets: Kenya, Nigeria, Colombia, South Africa, Russia and Peru.
Digital currencies could also lower the costs of cross-border payments, he said. The use of central bank digital currencies could formalize the economy, increase tax revenue, and reduce corruption and other illegal activities that often depend on the use of cash payments, Hauner added.
However, BofA warns that the rise of digital currencies could undermine a country’s physical currency through dollarization and inflation. Hauner warns that digital currencies are more likely to increase than decrease inflation.
“Easier access to alternative digital currencies is also likely to increase domestic money supply and exchange rate volatility. Easier access to alternatives also increases the risks of rapid transfers of liquidity out of (or into) the currency and banks, which can increase macro volatility in countries that are already less stable. Higher macro volatility would then reduce the effectiveness of policies and undermine the growth rate in the long run, ”he added.
Despite the risks, many countries may soon adopt a digital currency. Central banks representing one-fifth of the world’s population are likely to issue a general-purpose CBDC within the next three years, Hauner said, citing the latest Bank for International Settlements survey.
Last week, El Salvador voted to establish bitcoin as legal tender alongside the US dollar, the country’s national currency.
Hauner also said concerns about currency substitution, disintermediation, monetary policy effectiveness and inflation are lower for a central bank digital currency than a private digital currency.
“A CBDC is a direct claim on the central bank rather than a private financial liability. Thus, a CBDC would have the same credibility (or lack of credibility) attached to traditional currency,” Hauner said.