The growth in digital currencies could make cross-border payments more efficient and help address the $1.7 trillion global trade financing gap.
These burgeoning currencies may not solve all trade issues, however, and could further complicate the supply and demand of foreign exchange, especially for countries with limited existing international trade.
To realise their full potential, the advancement of payments technology needs to be accompanied by the digitization of trade
Digital currencies are growing: the market is valued at more than $2 trillion and involves more than 15,000 varieties. In 2021, El Salvador even adopted Bitcoin as its legal currency.
While private digital currencies are blooming, central banks are catching up. In October 2021, Nigeria joined the Bahamas, the Eastern Caribbean States and Cambodia as one of the first jurisdictions to officially launch central bank digital currencies (CBDCs). Based on the Atlantic Council’s CBDC tracker, 14 countries have launched CBDC pilots while 16 countries are developing CBDCs and 41 are conducting research.
From precious metals to paper money, currencies are crucial for global trade and commerce. As society enters the digital age and more forms of digital currency compete for virality, what does it mean for international trade?
There are three potential ways digital currencies could change international trade:
1. Digital currencies could cause an increase in efficiency for cross-border payments
The speed of settlement for cross-border payments varies from the same business day to five business days. Human interaction is often required in the process of verifying the sender and recipient's information, for example for anti-money laundering and combatting terrorism financing (AML and CTF) purposes. As a result, the speed of payment is often determined by how much the business hours of the sending institution and the receiving institution overlap; and whether the sending and receiving institutions rely on the same messaging standards.
For digital currencies that rely on decentralized ledgers, money could be sent and received within seconds and around the clock. Future regulatory compliance requirements on digital currency service providers and foreign exchange controls may have an impact on the speed.
2. Digital currencies could provide alternative credit information for trade finance
There’s a $1.7 trillion global trade financing gap, which heavily impacts SMEs who typically don’t have established financial records with banks. Public ledgers of digital currencies could be used to share payment and financial history to underwrite loans for import and export. At the same time, strong privacy protocols would need to be enforced in order to achieve this.