The boom in cryptocurrencies, particularly in regions like Latin America, has lead numerous governments to create legislation to take advantage of the benefits and mitigate the risks. And they are not the only new alternative to cash - several central banks, including the European Central Bank, are looking into the possibility of issuing their own digital currencies. During a BBVA Open Talks event, the speakers debated how these changes will define the future of money.
Bartering was born with the earliest civilisations. In later sedentary societies this turned into people giving certain goods, such as gold, silver, and other metals, to their rulers. During the Industrial Revolution, this happened with banknotes, as well as currencies, such as dollars. At the beginning of the 20th Century, credit cards came into use, and at the end of the century we began to see digital payments. In the 21st Century new formats have emerged, including mobile payments, the Euro - which has celebrated its twentieth birthday - and cryptocurrencies, which are virtual decentralised currencies based on blockchain.
Money has developed along with human beings and their needs in society, and currently digital versions are on the rise. "We have 1.0. cash money, 2.0. digital and bank money, and now version 3.0. is emerging, based on blockchain and tokens (units of value based on cryptography),” summarised Francisco Maroto, Head of Blockchain & Digital Assets at BBVA, during a BBVA Open Talks: The future of money event. The combined market capitalisation of the two leading cryptocurrencies, bitcoin and ether, from the corresponding blockchains Bitcoin and Ethereum, are evidence of this - they exceed €1 trillion, according to Coinbase. Will they prevail over traditional currencies? What are the challenges and how are they being addressed? What are the alternatives? The speakers who participated in the event organised by BBVA Open Innovation offered some thoughts on these topics.
The two faces of cryptocurrencies
Determining whether cryptocurrencies are money, in the strict sense of the word, is one of the first points of debate in this setting. "For a currency to fulfil such role, it should have three characteristics - it must hold its value for the purpose of saving, be a means of exchange accepted everywhere, and it should make it possible to compare the prices of different goods using a single unit,” explained Carlos Serrano, Chief Economist at BBVA Mexico. In his opinion, cryptocurrencies still do not fulfil those functions as it is not possible to use them to purchase products in most establishments.
"If we see it as a global network connected to the Internet, bitcoin may be the most widely accepted currency after the dollar or the Euro, since it can be transferred from one point to another without going through a central place. It’s as easy as sending an email,” stated Alejandro Beltrán, Country Manager at Buda.com, a platform that operates cryptocurrency markets in Chile, Colombia, Peru and Argentina. The platform has more than 500,000 users and it also plays an educational role.
"Bitcoin may be the most widely accepted currency after the dollar or the Euro"
Whether money or not, their popularisation is a reality, especially in regions such as Latin America where financial inclusion is still a challenge. According to Chainalysis, three countries (Venezuela, Argentina and Colombia) are among the top 20 in the cryptocurrency acceptance ranking, and the region represents 9% of global transactions. El Salvador also stands out for being the first country to adopt bitcoin as legal tender. "Bitcoin works better in emerging markets that are socio-economically and politically unstable - uncertainty and financial risk push investors to migrate towards assets that do not depend on the State or a ruler and hold their value in order to solve problems such as devaluation, inflation and political situations," Beltrán reasons.
Moving towards beneficial regularisation
Despite the advantages of cryptocurrencies, there are risks involved. One issue is that they can be volatile - the value of bitcoin, the pioneer, has increased and decreased dramatically several times over its short history. In order to solve this problem, stablecoins, such as Tether and DAI, have come to the fore. They are linked to the value of another currency or controlled by algorithms so that their price does not fluctuate.
Volatility is not the only challenge. "The traceability of transactions prevents money laundering, but there are other challenges that are impossible to remove from the financial world. If the risks are not managed properly, there may be other consequences such as terrorism, cyberattacks, theft and fraud,” Ljubica Vodanovic, founding partner at specialised firm Vodanovic Legal, stated during the BBVA Open Talks event. The expert predicts that countries will promote regularisation in order to mitigate the risks: "Governments need to ride this wave and laws must adapt to new developments".
Some countries are leading the way with legislation. One example is Switzerland, where legislation has allowed BBVA to offer a crypto asset trading and custody service, which has enabled transactions using ether. Meanwhile, the European Union is currently in the final phase of negotiations to propose a European regulation for crypto-assets known as MiCA, which will regulate the issuance and provision of services related to cryptocurrencies, including stablecoins. "The main benefit is for consumers, who will be able to operate in a more mature and secure market, and at the same times it allows for supervised entities like BBVA, which find it difficult to operate in non-regulated spaces, to enter the market” Francisco Maroto, Head of Blockchain at the bank, summarises.
"Governments need to ride this wave and laws must adapt to new developments"
The Fintech law in Mexico and the sandbox (a controlled testing environment) in Colombia show the progress being made in Latin America, but Maroto believes that they do not go far enough. For his part, US President Joe Biden has just signed an executive order that calls for the country’s federal agencies to adopt a single approach on cryptocurrency regulation.
From decentralisation to financial backing
Beyond regularisation, digital currencies issued by central banks are another means of digitising money. 86% of these entities are currently assessing this option, according to the Bank for International Settlements. Pioneers include China, which has successfully launched its digital yuan after a trial period, and The Bahamas with the sand dollar. In Latin America, Brazil, Chile and Uruguay, among other countries, are taking steps to issue their own digital currencies. "One of the benefits is the ability of a central bank to drive monetary policy in order to cope with recessions and combat inflation,” comments Carlos Serrano, Chief Economist at BBVA Mexico.
"The more alternatives that exist, the better it will be for consumers, as they’ll be able to choose the most efficient option or the one that provides the best value"
As for the European Central Bank, it is currently in a research phase on the digital euro, which would complement cash. Maroto believes that if it is designed "only as a new method for immediate and digital payment, it will not contribute much compared to existing solutions like Bizum,” although he is exercising caution until the results of the two-year research are released.
In this context, which digital currencies will survive - centralised or decentralised ones? Maroto believes that they will coexist: "The more alternatives that exist, the better it will be for consumers, as they’ll be able to choose the most efficient option or the one that provides the best value.” In any case, everything suggests that virtual currencies will gradually prevail over physical versions, thanks to innovation. "It’s inevitable that money will adapt to technological advances and cash will be used less and less,” concluded Serrano. The new chapter in the history of money will not only be written on paper or metal, but on an online platform.