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ANALYSIS

Many EMs leading trading in digital currencies: BofA

DUBAI, June 10, 2021

Crypto currencies are being adopted even more rapidly in emerging markets (EM) than in developed markets (DM), said a new BofA Global Research report.

Outside the US, countries with the highest crypto currency adoption, the highest trading volume and the largest mining activity are all EM. The leaders include China, Colombia, India, Kazakhstan, Kenya, Nigeria, South Africa, Ukraine and Vietnam. Several EM are also likely leaders in the adoption of central bank digital currencies. This trend will likely have major implications for EM macro and investing in EM assets, the report said.

EM central banks are all over it

In the next three years, central banks representing a fifth of the global population plan to issue digital currencies. Many of the most advanced are in EM, according to the BIS (Bank of International Settlements): in retail, nine of the top 10; and in wholesale, five of the top 10, according to the BofA Global Research report.

The most advanced central bank digital currency projects are currently run in China, Korea, Singapore, South Africa, Thailand and the United Arab Emirates. In this report we also present case studies of the digital currency development in various EM.

EM face particular opportunities…

Central banks see digital currencies as a way of addressing the inefficiencies of the payments systems in EM where bank penetration is much below DM. Their use in small-scale trading and remittance transfers from workers abroad are among the main reasons for the popularity of crypto currencies in EM. Central bank digital currencies (CBDC) could also facilitate getting social transfers to the poor and improve transparency of the large informal economy. These channels could be positive for economic growth in EM.

…but also specific macro risks

Dollarization (= the use of foreign currencies) is a major problem for macro and financial stability in many EM, and it could worsen if digitalization facilitates access to foreign currencies. The root cause of dollarization is high local inflation, which could worsen, too, if digital currencies prove inflationary.

Moreover, digital currencies could disintermediate the banks which still enjoy high margins in EM. Lower profitability could be problematic for financial stability as EM banks need higher capital buffers against macro volatility.

Implications for EM asset prices

EM assets lean towards a positive correlation with crypto currencies as both tend to be negatively correlated with USD strength. Still, crypto currencies are even more volatile than EM assets and thus unlikely to be a substitute for them. Moreover, EM assets are positively correlated with DM inflation and may benefit if digital currencies raise inflation expectations, the report said. – TradeArabia News Service




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