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How Digital Currencies Can Help Small Businesses

  • 4 mths ago

Over the last few years, the development of blockchain technology brought us new types of digital assets such as stablecoins and cryptocurrencies. These innovations offer the foundations for building new payment rails that can move value across the globe not only in real-time but also at a much lower cost. Unlike cryptocurrencies such as Bitcoin or Ethereum, stablecoins are significantly less volatile as they are typically pegged to a fiat currency such as the U.S. dollar. Stablecoins also pushed governments to accelerate their exploration of central bank digital currencies (CBDCs). While cryptocurrencies rely on decentralized networks for their operations, CBDCs would run on public sector infrastructure and represent a direct liability of the central bank — essentially “digital cash.”

There’s major potential here: digital assets and cryptocurrencies can support new services and create more competition in financial services. For one, they promise lower-cost payments for both domestic and cross-border transfers. They can also facilitate real-time payments, overcoming a significant shortcoming of the U.S. payment system. Moreover, these new assets support programmability, which can be used for conditional payments and more complex applications such as escrow.

At the same time, these technologies — and how they threaten traditional financial intermediaries — has ignited a heated debate. For example, a recent, widely anticipated paper by the Federal Reserve Board acknowledges the significant benefits of digital currencies, but also raises concerns around privacy, operational, cybersecurity, and financial stability risks. Similarly, Gary Gensler, Chair of the U.S. Securities and Exchange Commission, recently nearly doubled his crypto enforcement staff to crack down on what he calls the “wrongdoing in the crypto markets.” The recent collapse of UST, Terra’s Stablecoin — one of the largest stablecoins — illustrates how a failure in one of these systems can cascade throughout the crypto ecosystem. While many stablecoins derive their value from being fully backed by reserves, that was not the case for UST, which instead relied on an algorithm and a second currency, Luna, for stability.

Continue reading: https://hbr.org/2022/05/how-digital-currencies-can-help-small-businesses

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