What are the benefits of a digital currency? by David Goodman Digital currencies and the future of money. The analysis by David Goodman, Investment Manager of GAM Investments

In September 2021, China's central bank outlawed decentralized digital currencies and banned cryptocurrency operations, officially outlawing all activities related to digital currencies. The institute stated that "business activities related to virtual currencies are illegal financial activities", adding that "there are legal risks for individuals and organizations" participating in exchange activities that involve the use of virtual currencies. Interestingly, in conjunction with the ban on decentralized cryptocurrencies, China has launched the central bank's digital currency (CBDC). The Chinese central bank explained that the launch of the digital yuan was its response to the threat from the spread of decentralized cryptocurrencies, such as Bitcoin, and that a centralized digital currency would contribute to the efficiency of transactions in China. The system expects the digital yuan to expire after a certain period of time in order to encourage spending and stimulate economic demand. The central bank has already rolled out DCNY in several cities through successful pilot programs. In 2014, when China began advertising its digital currency plan, other countries followed the initiative with interest and began exploring this solution. Based on a survey conducted by the Bank for International Settlements, 86% of central banks are evaluating the advantages and disadvantages of launching CBDCs, but only 14% are in an advanced stage of development, with the introduction of pilot plans. . In a recent report, the Bank of England specified: "A central bank digital currency or CBDC would allow households and businesses to directly make electronic payments using the currency issued by the Bank of England." Currently, only commercial banks have a direct link to the central bank, but a CBDC currency could for the first time allow consumers and businesses to access it directly. Generally speaking, CBDC is a digital form of fiat money that uses blockchain technology to manage its ledger. Unlike cryptocurrencies, a CBDC is administered by a centralized body, in most cases a country's central bank. For the end user, the value that the digital unit represents, for example a digital pound, remains unchanged.

What are the benefits of a digital currency?

Bank of America's digital tools research division, in an October report, revealed that 221 million people bought or sold cryptocurrency in June 2021, up from 66 million in May 2020. With the rapid spread of payments, contactless and online transactions, we are less and less dependent on physical currency. Digital currencies can be seen as an upgrade to the internet money management protocols we already know and use in our online operations. And like any upgrade, new features will be added that improve speed, effectiveness and the user experience in general. What these functions will be will depend on the decisions that will be made on the individual projects; however, settlement times will generally be reduced and payment network monitoring systems will be improved.

Private cryptocurrencies or stablecoins today

Numerous private cryptocurrencies collateralized with a reserve asset, called a stablecoin, have already been created. They are the private sector's solution to digital fiat money, a type of cryptocurrency issued by a private company with a mechanism to reduce price swings and stabilize its value. The goal of stablecoins is to offer a risk-free alternative version of the digital currency, managed independently by commercial banks and which can be used directly by the consumer, regardless of his banking situation. Stablecoins make it easy to trade billions of dollars and today represent more than $ 100 billion of capital invested in the cryptocurrency ecosystem. Given that this industry will exceed $ 2 trillion, it is no surprise that central banks are showing growing interest in a very attractive opportunity. While it is still too early to understand how this solution will materialize or how governments will manage digital currencies, the megatrend is that the process of digitizing currencies will continue, no matter who the stakeholders are. While central banks have made it clear that CBDCs will be used in addition to cash and will not replace it, regardless of form, digital or not, it is still fiat money that loses value with inflation. It should also be considered that governments take more control over citizens. Meanwhile, our conclusion is that "hard assets" such as stocks, bitcoin, gold bars or real estate are a useful tool for investors who want to fight inflation.