As plans to coexist with COVID-19 set in, the “new normal” will bring many changes. One is that people may continue to use digital payment methods such as paying online, payment cards, and smartphones as they are convenient and limit close contact with others. Nigel Green, chief executive of deVere Group, a consultancy, sees COVID-19 as a “once-in-a-generation boost” to digital payments. “Without question, this is a major turning point,” he told Raconteur, a special-interest publication.
The shift away from face-to-face payments may require a new currency. Currently, when using a payment card between 1 percent and 5 percent of the sale value goes to the facilitator (VISA or MasterCard). That cost depends on where the transaction takes place, and it takes time to settle buyers’ and sellers’ accounts even though approval is instant.
That inflexibility is giving rise to digital money, where each virtual currency is developed by a computer program that uses blockchain technology to prevent fraud or unauthorized access. The process of creating digital money is known as “mining.” The main advantage is the algorithm instantly approves transactions and settles accounts with no added cost. Meanwhile, the full history of all sales is traceable. The initial value of the currency is arbitrary, then supply and demand determine its worth in the digital space.
The Egyptian government and Central Bank (CBE) have long resisted virtual currencies. However, they may have no choice but to accommodate that type of money as the state continues to push digital transformation. Delaying such a step could have dire consequences for Egypt’s financial system as part of it would no longer be regulated by CBE.
Individuals and companies have been using a version of digital currency whenever they pay for goods and services online or with credit or debit cards. “Further, much of the money that central banks (bank reserves) issue exists only in electronic form,” wrote David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy, in a note published by the Brookings Institution. “So in some sense, the idea of digital currencies is not completely new.”
Paper money is already being phased out of most advanced economies and in some emerging ones. “When we’re referring to cash, that’s … a tiny, tiny fraction of what’s going on in the system,” Stefan Ingves, governor of the Swedish Royal Bank, wrote in a blog in May 2018.
In 2009, Bitcoin became one of the world’s first peer-to-peer digital currencies, unregulated by any central bank and with no underlying value. However, on June 19 one Bitcoin was worth $9,285, a value solely based on global supply and demand. The currency’s runaway success and lack of oversight led other developers to create their own versions of virtual currency.
Facebook developed Libra in 2017 as a digital currency to pay for ad space on the social media platform. Buyers also could use it to purchase goods from formal and informal businesses with Facebook accounts. Libra gained a lot of media attention, thanks to Facebook complying with Securities and Exchange Commission regulations. Kaushik Basu, a former chief economist at the World Bank, has high hopes for Libra. With 2.6 billion active users of Facebook as of April, according to Statistica, Libra “would quickly gain wide acceptance … even if a fraction of them begin to use Libra to carry out financial transactions, buy and sell products, and transfer money,” Basu wrote in a blog on Project Syndicate in 2019.
Other digital currencies are issued and backed by central banks. “Very few central banks are seriously considering issuing their own digital currencies — that is, allowing the public to have electronic deposits,” wrote Wessel of Hutchins Center on Fiscal and Monetary Policy. “But many central banks are talking about this option.”
In 2015, Ecuador was the first country to issue a central bank-backed digital currency. Tunisia, Senegal, Venezuela, and the Marshall Islands have issued their own currencies over the past two years.
Best of all worlds
The advantage of a sovereign digital currency is the issuing central bank sets its initial underlying value and adjusts the supply to support its value. Bitcoin, whose source code was developed by unknown parties, went from more than $12,000 in July 2019 to $5,000 on March 16. It has since recovered to about $9,000. Stability “is something everyone wants, including the government,” Urjit Patel, governor of the Reserve Bank of India, told Brookings.
Another advantage for central banks is that having a digital currency allows more flexibility when setting monetary policy, especially during a crisis. “The central bank could gain greater control over the transmission of interest rates to households and businesses,” said Benoit Coeure, executive board member of the European Central Bank, to Brookings. “In a deep recession, it could reduce interest rates by more than is currently possible and stabilize economic activity more quickly, reducing the need for other non-conventional measures.” It also helps during an upswing. “The ability to pay positive interest rates on digital currency would put increased upward pressure on deposit rates provided by banks,” he added.
Additionally, because all such transactions leave a digital footprint, evading taxes would be nearly impossible, said Alex Axelrod, CEO of Aximetria, a cryptocurrency trading platform. “It can increase and simplify tax collection up to 100 percent,” he wrote in his Finxtra blog in April. Jeremy Millar, a partner with Magister Advisors, noted in a PubAffairs Bruxelles blog that “it’s easier to detect crime on [digital currencies] that it is on cash.”
The U.S. Federal Reserve proposed a “digital dollar” in its COVID-19 stimulus package sent to Congress in March. The Fed would only issue it if conventional tools didn’t do enough to help the economy recover. It would effectively be “a means to make payments to people and businesses hit by coronavirus-induced economic turmoil,” wrote Billy Bambrough, founding editor of Verdict.co.uk, a tech portal, in Forbes in April.
Supporting the introduction of a virtual currency is the Digital Dollar Project, founded in January by Accenture and the Digital Dollar Foundation. It aims to “advance exploration of a United States Central Bank Digital Currency (CBDC),” according to the project’s website.
Central banks in Japan, China, the U.K., France and South Korea have announced they are looking into issuing a backed digital-currency. In an April report published by Finextra, a fintech think tank, 20 percent of 66 central banks surveyed said they plan to issue a sovereign digital currency by 2026.
Since rumors surfaced in January 2018 that Egyptian companies were using Bitcoin in their international transactions, the government and CBE have condemned its use. “In light of its monitoring of the recently circulated news about cryptocurrencies, such as Bitcoin and others, the Central Bank reiterates its stern warning against trading in all kinds of cryptocurrencies, mainly Bitcoin, due to the extremely high risk associated with them,” said CBE in a statement.
That, however, failed to stem the currency’s presence in the country. A quick search on Facebook for “bitcoin Egypt” returns around a dozen groups that illegally trade Bitcoin in Egypt.
That, coupled with the need to quickly capitalize on the fast-growing digital economy, makes government acknowledgment of such currencies essential to prevent that part of the economy from staying underground or controlled by a foreign private-sector party outside Egypt.
Using digital currencies “could change the way the world works, bringing greater, more secure and seamless economic activity directly to every household and business,” wrote Pawel Kushaowski, CEO and co-founder of Coinfirm, in his Forbes blog in June. “As such, the right CBDC approach could help central banks unlock the vital economic activity needed to restart national economies in the wake of the COVID-19 pandemic.”