Digital financial assets are expected to replace traditional cross-border payment systems, Russian Minister of Finance Anton Siluanov said addressing the International Forum of the Financial University under the Russian Government. Invest Foresight asked Boris Kheifets, Chief Research Fellow at the Institute of Economics of the Russian Academy of Sciences, what the future holds for DFAs.
– There has been a lot of discussion about digital assets in recent years. Are they actually the next generation of finance?
– This is a complex issue that has been under discussion for years. Meanwhile, there is a strong expectation surrounding digital assets.
– What is the reason for this?
– One reason is that utilizing digital finance significantly lowers maintenance costs; additionally, the accounting process becomes simplified. And yet, we see substantial obstacles to its broader application at the moment.
– What are these hindrances?
– There are two types of digital assets: the first group involves assets controlled by state central banks, while the second one includes cryptocurrencies. With the latter already managed by communities, major companies and project pools, money circulation becomes uncontrolled by central banks, which presents a significant risk to the economic development and the entire financial system.
– What is this particular threat?
– The government can no longer oversee or regulate this system, which can provoke inflation, soaring prices, and economic disturbances such as debt crises in this digital currency.
As a result, many countries have negative attitudes towards cryptocurrencies – and not only towards currencies per se, but towards crypto mining and distribution as well.
Moreover, incidents on digital exchanges indicate significant abuses involving the theft of this currency, with criminal cases initiated.
– Will these two different worlds coexist alongside each other?
– Our world is still advancing towards a greater use of digital currencies, with numerous countries making attempts to agree on сommon approaches to regulating this segment, such as BRICS Plus.
While it is hard to predict what the future holds, we will see a greater use of digital assets in cross-border transactions, particularly as the world has become more interconnected and all monetary systems exhibit free circulation. Nonetheless, issues may still emerge similar to those encountered in transactions involving fiat money, including those related to sanctions.
– What other challenges might come up?
– Recalculation of exchange rates will still exist to serve as the basis for operations. Many use digital currencies to accumulate fiat money. Here we can also see a specific problem as regards ways to restrict its use for unjust enrichment, tax evasion, for money laundering.
In many states, the efforts to introduce digital currencies are still at the experimental stage.
– What are the advantages of digital over fiat?
– It is cheaper and easier to use. Can you possibly compare those? You can use a mobile phone without having to visit the bank. Any process involving digital currencies is easier and faster, while certain transactions related to fiat money take quite a while.
Yet, digital means less secure, that’s true – particularly as regards cryptocurrencies as compared to central bank currencies.
– As I understand, the countries are advancing towards this at the state level?
– The newly elected US President Donald Trump has stated that his presidential term would be the dawn of a new era of digital currency. This will definitely affect the global developments, with the share of the fiat dollar in international settlements in trade and other transactions across the globe of about 40% and more. Just to remind, the Americans once banned the circulation of “personalized” digital currencies.
Obviously, China will boost its digital expansion as well. Other countries will decide which global digital financial system to join. This is challenging as the global fragmentation increases and new blocs grow and develop. Indeed, is Russia prepared to turn, say, to the Chinese digital yuan or will it develop its own digital currency? This question has yet to be answered. Furthermore, the “digital accession” would mean greater risk of losing control over one’s financial system as well as diminished financial sovereignty.
– Yet, the process is inevitable, isn’t it?
– One way or another, the actions taken by the United States will ultimately speed up the adoption of digital currencies. Russian Minister of Finance Anton Siluanov, whom we mentioned at the beginning of our conversation, also noted the prospects of this monetary circulation type.
Interestingly, we see a contradiction here: the Ministry of Finance lobbies for digital currencies, while the Central Bank deems it necessary to be very cautious in this regard as it is responsible for monetary policy as well as the stability of the national currency.
– Will digital assets absolutely dominate the future global financial system or will fiat continue to exist?
– I believe that fiat money will still be in use. Achieving the high global internet penetration rate is still an unfulfilled goal. Also, we see a substantial disparity in the financial literacy levels among the population, both within a single country and across states in Asia, Africa, and Latin America.
Additionally, substantial trust should be built in digital currencies, particularly as a means of payment, savings, and investment. With the current level of mistrust, I personally cannot say how long it will take for digital rubles or dollars to be recognized as a commonly accepted currency.