What is the news?

• The emergence of Private digital currencies presents a challenge to central banks’ control and can disrupt the established order by introducing new dynamics and possibilities.

Central idea

• The control over money supply, circulation, and value holds significant influence over economic systems and national trajectories. Governments and central banks play a crucial role in managing currency, shaping economic policies, and ensuring macroeconomic stability. However, the rise of private digital currencies introduces new dynamics and challenges to this control, potentially disrupting the established order.

What are Private digital currencies?

• Private digital currencies, also known as cryptocurrencies, are digital or virtual currencies that utilize cryptographic technology to secure transactions and control the creation of new units.
• They operate independently of traditional financial institutions and are typically decentralized, meaning they are not controlled or regulated by a central authority like a government or central bank.
• Some of the most well-known private digital currencies include Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC)

What are stable coins?

• Stablecoins are a type of cryptocurrency that are designed to maintain a stable value relative to a specific asset or a basket of assets.
• Unlike many other cryptocurrencies that experience significant price volatility, stablecoins aim to provide stability and minimize price fluctuations.
• They achieve this stability by pegging their value to an underlying asset, such as a fiat currency (like the U.S. dollar), commodities (like gold), or a combination of assets.

What is mean by monetary sovereignty?

• Monetary sovereignty is the country’s ability to exercise control over its own currency and monetary policy without external interference.
• It is the authority of a nation’s government and central bank to determine and manage the value, supply, and circulation of its currency, as well as to shape and implement monetary policies that promote economic stability and growth.

Challenges posed by Private digital currencies to monetary sovereignty

• Private digital currencies- utilizes blockchain technology– bypasses the need for central intermediaries like banks and central banks
• Alternative systems of value transfer- peer-to-peer transactions – diminish the relevance of banks and other financial institutions.
• Operate outside the regulatory frameworks– challenges in terms of enforcing financial regulations- Anti Money Laundering and KYC requirements, which are designed to prevent illicit activities.
• The volatility and speculative nature– risks to financial stability.
• Sharp price fluctuations and market instability- adverse effects on investors, consumers, and the broader economy- particularly developing economies– less robust financial systems.
• Facilitate illicit activities- money laundering, tax evasion, and terrorist financing

Case study 1: Myanmar’s digital dynamics of power

• In Myanmar, the National Union Government (NUG) has utilized- cryptocurrency to – circumvent the military controlled economy- raise funds for the resistance.
• The NUG issued- Digital Myanmar Kyat (DMMK) -evade military oversight-independent determination of exchange rates.
• The DMMK- cross-border payments – easier to collect donations from diaspora communities.
• Serves as- means of fundraising- challenges the legitimacy of the military-issued kyat.
• The split financial system in Myanmar highlights the risks and consequences of digital currencies on sovereign legitimacy.

Case study 2: China’s Cautious Monetary Security Approach

• Contrasting views on cryptocurrencies and central bank digital currencies (CBDCs)
• Cryptocurrencies- strict restrictions- not recognized as legal tender
• Actively promotes its digital yuan- internationalize the currency- reduce reliance on US-controlled financial networks.
• Acknowledges the potential of digital money to reshape the financial ecosystem and sees it as a catalyst for global monetary decentralization.
• China’s comprehensive ban- cryptocurrencies- commitment to safeguard monetary sovereignty.

Case study 3: India’s apprehensions

• The Reserve Bank of India (RBI) has underscored the need for decisive actions to address the escalating risks associated with the crypto-assets ecosystem.
• The primary concern- risks associated with stablecoins– susceptible to potential risks of redemptions and investor panics- necessitating careful mitigation measures.
• The RBI has further cautioned- private currencies, emphasising their historical propensity to generate instability– undermine sovereign control over money supply, interest rates, and macroeconomic stability- especially in developing economies.
• India’s own CBDC- Digital Rupee- perceived as a strategic response- counter the challenges- crypto-assets ecosystem.

Way forward

• Clear and comprehensive regulatory frameworks for private digital currencies- address consumer protection, investor safeguards, financial integrity, and risk management.
• International coordination and collaboration- engage in dialogue- information sharing- standardization efforts
• Continue exploring the potential of CBDCs as regulated digital currency alternatives
• Public education and awareness-building trust- benefits and risks- foster responsible usag
• Invest in research and development- development of solutions- enhance financial systems- increase efficiency.

Conclusion

• Private digital currencies present both opportunities and challenges to monetary sovereignty. The examples of Myanmar, China, and India demonstrate the complex interplay between currency control, legitimacy, and trust. As the world navigates the development of digital currencies, the balance between innovation and maintaining sovereign control will continue to shape the future of monetary systems

Also read:

India’s Central bank digital currency (CBDC) in detail

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