The on-going pandemic continues to severe the global economic crisis. In many countries, the high uncertainty combined with the constant health threat, result in traditional currencies plunging down. We have seen it with the Venezuelan Bolivar, Brazilian Real and Turkish lira to mention a few.
According to Banque Du Liban (Central Bank of Lebanon) inflation in Lebanon recorded 2.9% in 2019, and projected earlier to reach 17% in 2020. However due to economic crisis, the average inflation rate this year was about 65% until September 2020. Currency hyperinflation puts citizens expenditure power at check, but how can governments mitigate it? An alternative to regain control over currency inflation is by going digital.
How does inflation affect cryptos and digital currency?
The value of money links directly with its supply and demand. To maintain balance, central banks “print” more currency. Whenever there is financial turmoil, the pace at which fiat money is printed increases exponentially. This leads to an enormous inflation rise in a short period of time or put simply, hyperinflation.
Traditional currency is not finite, which means this process repeats perpetually. On the contrary, cryptocurrency is scarce, and the way inflation is taken into consideration is by halving.
For crypto transactions to take place, somebody must solve a mathematical problem through blockchain technology. The incentive in return, is a reward in the form of crypto coins. This process is known as mining. Every four years, the awarded amount that miners get is halved, resulting in cryptocurrency value appreciation.
As opposed to fiat inflation, we know when crypto halving takes place for certain. And since there is a limited amount of it, the underlying value of cryptocurrency will not be affected by any external financial inflation. The key feature of cryptocurrency is decentralized in nature, where as digital currency is centralized in nature that can be regulated.
Lebanon’s own fiat currency, the Lebanese lira, has been plunging down with a volatile behavior. Therefore, it is not surprising that the Lebanese have opted for entering the digital currency market, where transactions of this nature are having an upswing.
As a response, the Central Bank of Lebanon plans to issue its own digital currency in 2021, in an effort to offset the undergoing financial distress and the possibility of a parallel digital economy.
Why do central banks want to introduce their own digital currency?
Cryptocurrency transactions reflect a decentralized finance, where in theory banks and other “middlemen” are no longer needed. This would disrupt finance as we know it by interfering with the way banks issue or “print” traditional currency. In practice, current monetary policies would be impractical in many countries across the world. And Lebanon is not an exception.
By launching their own digital currency, the Central Bank of Lebanon expects to regain control on the country’s monetary policy. However, it will pose certain risks that crypto stands against, such as digital surveillance by the government or sub zero rates in citizen’s deposits by traditional banks.
Riad Salameh, governor of the Lebanese Central Bank, states that there are about $ 10 billion stored inside homes. For the time being, Lebanon will maintain its gold reserves to backup its currency in case of a more severe market crisis.
As we already saw with the Swedish e-Krona, some nations across the globe are on the verge of launching their own digital currency to stand against a parallel economy. Whether we will see a Lebanese digital currency any time soon is uncertain. Nevertheless, it is interesting to see how governments and central banks are stepping into the digital scene and how they plan to integrate it.
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— Fyggex (@fyggexchange) August 12, 2020
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