Digital currency landscape: Balancing risks, opportunities

Digital currency, also referred to as digital money, electronic money, electronic currency, or cyber cash, is a form of currency solely available in digital or electronic form. Accessible solely through computers or mobile devices, digital currencies eliminate the need for intermediaries and often provide a cost-effective means of currency exchange. Serving as the overarching term encompassing various currency forms such as electronic, virtual, legal digital, stable or encrypted, digital currencies lack physical existence and are solely available in digital form. Despite their varied labels, their official status remains tied to their digital nature. While all cryptocurrencies fall under the umbrella of digital currencies, not all digital currencies are cryptocurrencies.

Cryptocurrencies operate on a sophisticated encrypted system and are acquired through blockchain technology and the mining process, which involves extracting cryptocurrency via complex algorithmic challenges. This necessitates specialised mining computers with high capabilities and consumes significant amounts of electricity due to the energy-intensive nature of solving these algorithmic problems.

There is often confusion between centralised official digital currencies and decentralised encrypted digital currencies. Centralised official digital currencies are electronic replicas of national banknote currencies. They are pre-existing currencies, do not require mining, lack encryption, and are directly tied to central banks, resembling traditional banknote currencies. Examples include China’s “digital yuan” and the Bahamas’ “sand dollar”. In contrast, decentralised encrypted digital currencies are not easily accessible, are not tied to banks, lack centralisation, and include examples like “Bitcoin”, “Ethereum”, and other cryptocurrencies.

According to data from Triple A, a cryptocurrency payment gateway, the total number of cryptocurrency users in Jordan reached 129,000. India surpassed 100 million users of cryptocurrency or digital currency, while the United States ranked second globally with over 27 million users. In the Arab world, Egypt boasted the largest number of cryptocurrency users, exceeding 1.7 million people, followed by Morocco with 878.1 thousand users, and Saudi Arabia with 452.7 thousand users, securing second and third place among Arab countries, respectively.

The statistics revealed that “Bitcoin” comprised 66 per cent of the overall market value of cryptocurrencies, with the total cryptocurrency market value reaching approximately $1.18 trillion as of September 6, 2023. Comparatively, global liquidity stands at around $90.4 trillion US dollars, indicating that cryptocurrencies represent just 1.3 per cent of total global liquidity.

Alternatively, Central Bank Digital Currencies (CBDCs) represent a digital currency issued by a nation’s central bank. They share similarities with cryptocurrencies but differ in that their value is pegged by the central bank to the country’s banknote currency, symbolising national sovereignty. While numerous countries are in the process of developing CBDCs, only a handful, no more than four, have actually issued their official digital currencies, indicating a delay in central banks’ adoption of this technology.

The widespread adoption of cryptocurrencies for facilitating commercial transactions undermines the dominance of national currencies in global trade, potentially disrupting the role of primary currencies, particularly if these digital assets remain unregulated and unmonitored by central banks. Furthermore, the proliferation of encrypted digital currencies complicates efforts to manage the money supply and, consequently, control short-term interest rates and the broader economy.

Cryptocurrencies pose various risks to traders and the economy, notably through their inherent price volatility, particularly among unstable currencies, which can experience substantial fluctuations in value within short timeframes, potentially resulting in significant investor losses. Additionally, digital currencies are susceptible to electronic breaches, which could jeopardise the funds of traders. However, regulated markets for encrypted digital currencies offer the potential to introduce new avenues of funding for economic growth and diverse projects.