How cryptocurrencies can contribute or affect sovereign debt crisis? Cryptocurrencies have had a huge social and financial impact since its launch in 2009 with Bitcoin being the first crypto coin, followed by the launch of a host of other types of tokens over the time.
It has taken the world by storm and a lot of people showed interest in it in different ways.
Some accepted it and appreciated it while some were concerned about the impact it would have on the traditional financial system, the debt situations, and the life of the people in general.
Cryptocurrencies have disrupted the traditional financial system and have provided people with a much safer and a faster payment system to make peer to peer transactions, within the border or beyond it.
They can now do this without the need to hire the services of traditional banks or any other third party brokers and pay any fees to them but to the dedicated online crypto exchanges.
This reduces the cost involved in making such transactions as well.
The merchants that accept crypto, though there are not many of them as of now, find it easy to operate their business and make transactions on a global scale.
However, along with all these benefits come a few specific concerns that are worrying the regulators, the governments, the financial policymakers and others alike, though everything about crypto is not bad.
One such concern is the effect of crypto on the sovereign debt crisis and the relation between the two.
This is an article that will help you a lot on this specific subject.
When you go through the article you will come to know about the impacts on the economy and its slowdown, the effects on and of crypto.
How Cryptocurrencies Can Contribute or Affect Sovereign Debt Crisis?
There is no doubt that cryptocurrencies have really helped the individuals in investing and transferring funds and the businesses at large in their operation in general.
Most people think that crypto can act as an effective hedge against inflation but how far it can help in or affect debt management is the question.
When it comes to crypto, a lot of things are happening in this circuit, some of which are good for the public in general and some are quite concerning.
For example, when you consider the price prediction aspect of crypto, especially of Bitcoin which is considered to be the basic parameter of all different types of crypto coins when it comes to pricing theory, it seems to be very promising.
Crypto experts believe that the likelihood of Bitcoin reaching the $100,000 mark is a reality and may happen even sooner than it is expected.
It is also expected that Ethereum will lead the way with Ethereum 2.0. This however could be a warning for Bitcoin, majors like JPMorgan believes.
They warn that investors may suddenly dump Bitcoin and grab Ethereum if and when there is a price crash.
It is also believed that the main idea of China behind their Bitcoin ban may not be as successful as expected.
There may not be a significant effect in the price of Bitcoin because Twitter has added crypto payments, which the financial experts believe to be a historic movement, and a large number of organizations and business merchants are also following suit.
Still, there are a few other specific concerns that need to be looked into seriously and immediately.
This is a complex economic concept that needs a better understanding of the fundamentals and beyond.
Few financial experts believe that apart from disrupting the traditional financial system, cryptocurrencies will also have a major role to play when it comes to the economy of a country.
Management of money will have an entirely new concept that will affect debt and credit management as well.
On the other hand, a particular segment of financial experts and economists believe that the sovereign debt crisis, which is in the making, will boost cryptocurrencies to a large extent.
This belief is however based on the economics behind it.
The experts believe that a sovereign debt crisis is emerging and the economics behind it are supposed to devolve it into a race where people want to take on more debt.
The speed of debt accumulations seems to be further expedited by the cryptocurrencies.
Looking at the present scenario and the stats of different survey reports and studies it is expected that there will be more than a hundred countries all over the world that are expected to carry a total debt interest of about $130 billion, if not more, at the beginning of 2022.
What is even more concerning is the fact that more than a half of that debt amount will be held by the private investors all over the world.
The accumulation of debt all over the world also had a reasonable cause for such a huge increment – the COVID 19 pandemic which forced shutdowns for about two years.
This specific situation has affected the entire economy of the world very badly with the tax revenues for states going down by a significant margin.
Providing free food and healthcare services affected the system even further and forced the economy to go down south even more.
There was a notable slowdown in the growth of the global economy with all businesses and economies shut down.
Quite naturally, the income of the governments decreased by a significant margin with the tax revenues decreased dramatically.
However, looking at the situation from a different perspective, there was an increase in the demand for financial stimulus from governments.
This helped to stimulate which resulted in an economic recovery.
The reduced income and purchasing power of the consumers during this period has compelled the financial policymakers to reduce the nominal interest rate and this was the situation all over the world.
In theory, this was done to boost up and make debt easier to service.
Even then, the IMF or the International Monetary Fund has been warning the governments of different nations that such a move will not be good to retain and restore economic or financial stability.
Therefore, the IMF continuously warned against taking on more debt.
This may seem to be an unnecessary concern of the IMF but when you look at the economics and complex math behind it, it will be easier for you to understand.
It is true that due to the COVID 19 pandemic the rate of economic growth of the entire world has been affected which has slowed it down by a significant extent.
However, looking at it in the other way, it has also pushed down the rate of interest.
However, this interest rate and growth differentials, r-g as it is commonly described in terms of economic, has threatened dramatic wings after the pandemic situation especially for those particular countries that took on more public debt during the pandemic situation.
This is in spite of the r-g being very low and even negative in some countries.
Such a situation is quite worrying for the authorities, regulators, and the financial policymakers because it can quickly affect a country and push it into a very unstable condition with their debt when the demand for the interest rates from them starts to increase.
Now all these need an in-depth study which is the basic idea of this article.
Apart from money management and effect in crypto, you will also need to know about the IMF deal as well as its effect on crypto along with the challenges that the financial policymakers are facing right now.
With such knowledge you will be able to know what would be the scenario of the financial world when crypto becomes mainstream, which is highly likely, and plan your trading and investing moves accordingly.
Effects of Economic Slowdown
In a situation when the economy of a country is experiencing a slowdown it will have significant and unique effects on different aspects of business as well as in the financial sector.
There is a high possibility that such economic slowdown will propel sovereign bankruptcies.
This will have a significant effect on those particular countries that have a significantly high debt obligation.
There is a high likelihood that they will see their yield being affected adversely.
In such a situation there are all possibilities that the investors will demand for higher returns on their investments in order to hold definite forms of sovereign debt.
This will eventually cause a lot of difficulty for the country to service the debt.
In a worst case scenario the country with a huge debt obligation may also have to go to the extent of negotiating deals with the investors that are pretty much similar to a bankruptcy situation.
This type of situation is not far-fetched and also nothing new for the economy and the financial system of those specific countries that have a high debt obligation.
Historically, a similar type of sovereign debt situation was experienced by the world after the recession in 2008.
This was the time when sovereign debt crises affected all countries of the world which included the renowned EuroZone sovereign debt crisis.
It occurred in 2009 and has continued since then.
Drastic and austere measures were taken by countries like Greece in order to satisfy the private creditors as well as the supervisory bodies of international agencies such as the European Central Bank and the International Monetary Fund.
The debt dynamics of the world were further aggravated once again when the world experienced the COVID 19 pandemic.
The effects spread all over the countries and covered a wider section of the business and expanse of the finance industry.
The immediate effect of such a grave situation of economic slowdown is seen in the countries especially struggling to create new and better fiscal policies.
These policies are recommended to restart and ensure economic growth.
However, these countries could not ensure it simply due to lack of money in their hands.
You can take the example of Lebanon to understand this aspect in a much better way.
The country was able to restructure some of its debt but could not sustain till the end.
It had to go to the IMF after the slow debt dynamics resulted in a complete forced financial ruin for the country.
The Lebanese pound, their domestic currency, experienced a significant bout of hyperinflation which destroyed the ability of the national currency of the country to provide the desired benefits to the Lebanese people for their savings.
The effect was so severe that the country was forced to acquire US dollars for their high store of value.
Knock on Crypto
The effects of economic slowdown due to too much debt and other unavoidable situations seem to be experienced most by cryptocurrency. The coins seem to take the blow right on their faces.
Several nations declared these currencies default because these are known to be unstable.
Therefore, the possibilities of the stablecoins acting as an innate bridge for adoption of crypto coins at large will become a reality.
These stablecoins are much safer since they are tied to different denominated currencies and assets as compared to the other currencies that are more chaotic.
The major crypto coins such as Bitcoin are also adopted and accepted at large by different countries such as Venezuela.
This country is known to have an unstable currency and a lot of sanctions that creates a barrier.
Therefore, it is not surprising that the country has one of the highest adoption rates of Bitcoin in the world.
The financial experts think that a fast eroding local currency combined with the inability of people to access a safe haven investment asset will become a globally distributed issue soon.
This will swamp different economies, countries, and their citizens. Quite naturally, they will look for isolated solutions.
While a few countries may take the route taken by Lebanon to get the US dollars as a store of value against their domestic currencies of lower value, all may not find this approach to be feasible.
This is because the US dollar is considered to be relatively weaker.
This may change the entire dynamic pretty soon when the position of the US dollars is weighed up against the balance of currencies across the globe.
In such a situation, if the cryptocurrencies can find a way to step into the scenario in a big way and retain their position, then it will be affected by the macroeconomic movement of sovereign debt.
This will provide it the necessary support along with a very strong reason to be a useful and effective new asset class that will be adopted all across the globe.
IMF Debt Deal
However, the utility and effectiveness of cryptocurrencies are not well accepted by all the countries in the world and a few even do whatever they can do and extend their support to dampen cryptocurrency.
For example, the support of the Argentine Congress to favor the IMF debt deals. According to a report, the Argentine Senate has accepted a deal worth $45 billion from the International Monetary Fund which includes a rider that dampens cryptocurrencies.
Though this deal is a part of the $57 billion restructure program that Argentina received four years back, the intentions are very clear.
The support of the Argentine Senate also received the vote of the Chamber of Deputies which is the lower level of Congress which typically gave the green signal to the measure.
The Minister of Economy Martin Guzman and the president of Central Bank of the Republic of Argentina Miguel Pesce in fact wrote a letter to the IMF, the international financial institution located in Washington DC, recommending their view and supporting against the adoption of crypto coins.
They said that they believed that it would certainly put an end to money laundering.
They also said that they are very serious about safeguarding the general interest of their citizens along with ensuring the financial stability of the country.
They further added that they are themselves taking a few significant steps to discourage the use of crypto coins in their country. Therefore, everything is on paper and on record.
However, this letter also noted their intentions to digitize payments further with an intention to develop the efficiency of their payment systems, reduce the cost of transactions, as well as augment their cash management abilities.
As a result, this major South American destination has become one of the leading centers for cryptocurrency in this particular part of the world.
According to some reports of the local exchanges, the purchase of stablecoins in the country has increased six times, and these are the reports of 2020!
When it comes to the debt situation of Europe, the IMF chief thinks that it is an avoidable situation but it is not yet time to think of Bitcoin as money.
A few specific steps suggested by the IMF to avoid the debt crisis, especially in Europe, include financial consolidation and growth for medium terms.
These will be good enough to put the European nations a strong foothold on the financial space and steer clear of another sovereign debt crisis irrespective of the increase in the debt levels due to and after the COVID 19 pandemic.
The current Managing Director of the IMF Kristalina Georgieva ventilated her regards for digital assets while speaking remotely to an occasion arranged by Bocconi University in Italy.
She said that digital assets do have the potential to become the most dependable form of money if these are backed by the central banks.
However, she added that it is quite difficult to consider these digital assets, whether it is Bitcoin or any other type of crypto coin, as money.
It is true that Bitcoin in particular among all different types of crypto coins are considered to be a de-facto asset but the fact that it is not backed by a denominated asset makes it unstable.
Therefore, its value rises and falls sharply which makes it difficult to think of it as money.
The effects of the debt deal are also experienced by the United States and it is reflected by the executive order signed by President Joe Biden.
This executive order directs all the government agencies to study and have a close look at crypto.
It also recommends a government-wide move towards regulating these digital currencies.
It is said that the rise in the adoption and use of crypto coins will create further opportunities to strengthen American leadership in the financial system as well as at the technological sector on the global scale.
However, Biden said that his action is intended to establish a clearly defined and a single policy on all different digital assets including cryptocurrencies.
This is thought to be important for America because it needs to uphold its leadership in this particular digital space, as it has in all other sectors.
This is because, according to a fact sheet released by the White House, there are about 16% of the entire American population, which is equal to 40 million Americans, who either use crypto coins or have used them sometime or the other.
After the announcement made by Joe Biden, the value of Bitcoin went up by 8%.
This signifies the widespread belief in the people that there is a need for a single, effective, and government-wide policy to regulate the crypto industry.
Such an initiative will not only be good for the country and its economy but also be good news for the investors in crypto.
Considerations for Policymakers of Digital Currencies
Considering all that is said above, the policymakers of digital currencies face a lot of challenges that they need to overcome as well as consider a lot of different important things.
Most SMBs believe that there is an immediate need for a more effective, faster, and all-in-one payment system.
This will save a lot of time while making a transaction or transfer of funds and at the same time will ensure speed and safety.
It is also believed that such a payment platform will improve the visibility into the flow of funds from the source to the destination, which if effectively tracked during needs, can help in detecting fraudulent monetary transactions.
All SMBs, whether their revenue ranges between $500,000 and $100 million, will be able to explore newer and better avenues to transfer and receive funds.
These solutions will also help them to make their businesses future proof and also expect a lot from tem as and when these solutions become even more developed and effective.
However, there is also a significant number of SMBs that do not believe in the same way.
Instead, they think that such a platform or a solution will make things all the more complicated.
They believe that the solution will be very difficult to navigate and it will also be very hard, if not impossible, to integrate it with the existing AP and AR systems.
Therefore it is required by the policymakers of the digital currencies to plan every move very carefully when it comes to eliminating the debt burden created by the COVID 19 pandemic by shifting their focus to medium-term fiscal consolidation.
According to the report of the IMF, almost 110 countries among their members are seriously considering moving into CBDCs or Central Bank Digital Currencies. Several of these countries are indifferent stages of creating it.
However, one of the most significant challenges faced by the policymakers of the digital currencies is to find the best ways to warrant interoperability of the CBDCs.
Another significant challenge faced by the policymakers while exploring the possibilities of the digital currencies is whether or not it can become a medium of exchange that will be fast, safe, and more reliable enough for people to trust and use.
Add to that, there are also some other considerations that these policymakers need to make. One major consideration is whether or not these digital currencies will contribute to the stability of the domestic economy.
It is also required to consider how this new form of currency will fit into the regulatory structures on the international scale.
Typically, these regulatory frameworks are designed by the Bank for International Settlements or BIS.
With the international community, institutions, and the central banks actively engaged to step into digitalization, it is important to ensure that people have confidence in the functions of the economy.
Therefore, the policymakers should make sure that it proves to be beneficial rather than being a risk to the people and their investments.
Only then it will be possible for the country to come out of the sovereign debt crisis.
Therefore, as you can see after reading this article, crypto and sovereign debt have a distinct relationship and one affects the other in different ways.
The policymakers of digital currencies as well as the regulators need to do a lot to deal with the challenges.
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