globalEDGE Blog: Difficulty in the Globalization of Digital Currencies

Difficulty in the Globalization of Digital Currencies

In recent years, the financial markets have seen the introduction of a digital currency called bitcoin. Bitcoin is a digital currency that is called cryptocurrency, making it very difficult to replicate. Currently there are about 21 million bitcoins in circulation, each one being valued at about $500 today. In recent months, a bitcoin was valued at $1,200, but new regulations in China made it difficult to exchange the yuan for bitcoins. Some global trends in digital currencies include regulations, buying goods with digital currencies, and using it as an alternative to national currencies. One question many economist ponder is if digital currencies could one day replace national currencies.

Digital currencies such as bitcoins have been under scrutiny by agencies such as the FBI, and most recently China’s central bank. In September, the FBI shut down what was called the “Silk Road,” known for being a black market for illegal drugs, and seized $28.5 million in bitcoins. In December of 2013, the Chinese Central Bank issued a warning about the risk of bitcoins and warned financial institutions that they shouldn’t deal with companies in bitcoins. After this announcement, the world’s largest bitcoin exchange, BTC China, announced they will no longer accept Yuan deposits. This caused bitcoin prices to plummet, affecting investors across the world. As other countries try to regulate the use of digital currencies, bitcoins could continue to see devaluation.

Could digital currencies one day be used to connect the business world? In order for digital currencies to become national currencies, they would need to be accepted, regulated, and backed by the government. In recent months, it seems as if bitcoins have been replacing gold as a safe haven for investors during turbulent market conditions. Could the same be seen for the dollar and other currencies? If a digital currency was the official national currency, it would most likely globalize many of the products, creating a more accessible market of exchange.

Before a digital currency can became a national currency, it needs to be accepted and backed by the government. On top of that, regulators would need to understand the effect that a digital currency could have on international trade. As global trade continues to advance, the role of digital currency can continue to play a controversial role.

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