A new research study by Bank of America (BOA) found that both central bank digital currencies (CBDCs) and private digital currencies hold “great potential” for greater financial inclusion in developing countries. In the report, the bank also argues that such “digital currencies could lower transaction costs and enable more economic activity in emerging markets”.
Digital currencies and financial inclusion
Still, the results of the study show that while digital currencies are likely to stimulate economic growth in developing countries, their adoption carries some risk. In addition, the study also finds that the rise of digital currencies “could lead to inflation and dollarization”.
In a separate report, David Hauner, BOA’s Head of Emerging Market Cross Asset Strategy and Economics for EMEA, is quoted and explaining why digital currencies could be critical in emerging markets, where more than 50% of adults do not have a bank account.
“Digital currencies have the potential to remove many practical restrictions on financial services in poor countries,” said Hauner.
The report also lists reducing cross-border payment costs as well as reducing corruption and other illegal activities as some of the constraints that digital currencies can address.
Physical Currency Risks
However, the BOA research study found that the rise of digital currencies could potentially “undermine a country’s physical currency.” Based on these findings, Hauner explained:
Easier access to alternative digital currencies is also likely to increase the volatility of the domestic money supply and exchange rate. Easier access to alternatives also increases the risk of rapid liquidity shifts 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 the policy and undermine the long-term growth rate.
Despite these risks, Hauner assumes that “in the next three years, more central banks will likely issue a general CBDC”. As reported by Bitcoin.com News, several countries – including some in Africa – are currently at different stages of developing or testing their digital currencies. Several more countries are likely to join the race as more studies show the benefits of digital currency outweigh the risks.
What do you think of the latest BOA research report on digital currencies? You can share your views in the comments section below.
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