The baseline forecast is for growth to decline from 3.4 percent in 2022 to 2.8 percent in 2023, before settling at 3.0 percent in 2024. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. In a plausible alternative scenario with further financial sector stress, global growth declines to about 2.5 percent in 2023 with advanced economy growth falling below 1 percent. Global headline inflation in the baseline is set to fall from 8.7 percent in 2022 to 7.0 percent in 2023. This is on the back of lower commodity prices. However, underlying (core) inflation is likely to decline slower. Inflation’s return to target is unlikely before 2025 in most cases.
The natural interest rate is critical for monetary and fiscal policy. It is a reference level to gauge monetary policy stance and a key determinant of public debt sustainability. Chapter 2 studies the evolution of the natural interest rate across several large advanced and emerging market economies. Public debt as a ratio to GDP soared across the world during COVID-19 and is expected to remain elevated. Chapter 3 examines the effectiveness of different approaches to reducing debt-to-GDP ratios. Supply-chain disruptions and rising geopolitical tensions have brought the risks and potential benefits and costs of geoeconomic fragmentation to the centre of the policy debate. This chapter examines how fragmentation can reshape the geography of foreign direct investment FDI and its implications for the global economy.
Due to economic conditions, BitcoCrypto assets have been more of a disappointment than a revolution for many users, and global bodies like the IMF and the Financial Stability Board urge tighter regulation.
Some rapidly evolving crypto technology may ultimately hold great promise. The private sector innovates and customizes financial services.
But the public sector too should leverage technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance. This is as we noted in a recent working paper: A Multi-Currency Exchange and Contracting Platform. Others are also advancing similar views.
Technology has jumped ahead
New payment technologies include tokenization, encryption, and programmability.
- Tokenization means representing property rights to an asset, such as money, on an electronic ledger—a database held by all market participants, optimized to be widely accessible, synchronized, easily updatable, and tamper-proof. Anonymity of token balances and transactions is not required (and in fact undermines financial integrity).
- Encryption helps decouple compliance checks from transactions so only authorized parties access sensitive information. This facilitates transparency while promoting trust.
- Programmability allows financial contracts to be more easily written and automatically executed, such as with “smart contracts,” without relying on a trusted third party.
Private Sector Innovation
With these new tools in hand, the private sector is innovating in ways that may be more transformative than the initial wave of crypto assets: tokenization of financial assets, tokenization of money, and automation.
The tokenization of stocks, bonds, and other assets may cut trading costs, integrate markets, and enlarge access. But such assets require money on a compatible ledger. One example is stablecoins, to the extent they comply with regulation. More importantly, banks are testing tokenized checking accounts. And automation is widespread, allowing third parties to program functionality much as developers build smartphone apps.
While the private sector pushes the boundaries of innovation and customization, it will not ensure safe, efficient, and interoperable systems, even if well regulated. Rather, the private sector is likely to create client-only networks for trading assets and paying. Open ledgers may emerge to bridge public networks, but they are likely to lack standardization and sufficient investment given limited profit potential. And using private money forms to settle transactions would put counterparties at risk.
Central Bank Role
Central bank digital currencies can help because of their dual nature as both a monetary instrument—a store of value and a means of payment—but also as infrastructure essential to clear and settle transactions. Policy discussions mostly focus on the first aspect, but we believe the second should receive just as much attention.
As a monetary instrument, CBDC provides safety; it alleviates counterparty risks and provides liquidity in payments. But as an infrastructure, CBDC could bring interoperability and efficiency among private networks for digital money and assets.
Payments could be made from private money to another, through the CBDC ledger or platform. Money could be escrowed on the CBDC platform, then released when certain conditions are met, such as when a tokenized asset is received. And the CBDC platform could offer a basic programming language to ensure smart contracts are trusted and compatible with one another. That too will become a public good in tomorrow’s digital world.
Cross-Border Payments
The same vision applies to cross-border payments, although governance gets more complicated.
A public platform could allow banks and other regulated financial institutions to trade digital representations of domestic central bank reserves across borders. This is suggested in our working paper.
Participants could trade safe central bank reserves without being formally regulated by each central bank, nor requiring major changes to national payment systems.
Transactions require more than funds movement. Risk-sharing, currency exchange, liquidity management—all are part of the package.
Thanks to the single ledger and programmability, currencies could be exchanged simultaneously, so one party does not risk the other walking away. More generally, risk-sharing contracts can be written, auctions can support thinly traded currency markets, and limits on capital flows (which exist in many countries) can be automated.
Importantly, the platform would minimize the risks inherent in such contracts. It would ensure that contracts were fully backed by escrow money, automatically executed to avoid failed trades, and consistent with one another. For instance, a contract to receive a payment tomorrow could be pledged as collateral today, lowering idle funds costs.
Beyond value transfer, encryption can help manage information transfer. For instance, the platform could check that participants comply with anti-money laundering requirements, but allow them to bid anonymously on the platform for, say, foreign exchange, while still seeing the aggregate balance between bids and asks.
Technology can thus support key public policy objectives:
- Interoperability among national currencies;
- Safety thanks to escrowed central bank reserves, settlement finality, and automatic contract execution;
- Efficiency from low transaction costs, open participation, contract consistency, and transparency.
Much remains to be explored, and this vision is still evolving. Crypto was fuelled by an attempt to circumvent intermediaries and public oversight. However, its real value may come from its ability to enable the public sector to upgrade payments and financial infrastructure for the public good, thereby infusing safety, efficiency, and interoperability into private sector innovation and customization.
Taking a bite out of bitcoin
Today, a software developer can order video games from overseas and have them delivered to his home. That’s because he earned bitcoins teaching Kannada over Skype to someone in the Americas. He is going to spend the bitcoins on an apartment in Rio De Janeiro after selling his car for bitcoins.
People are increasingly betting on novel currencies as a response to the financial crisis that severely affects southern Europe. Millions now use the bitcoins for buying practically anything – ranging from art to home appliances to consumables to entertainment.
The bitcoin is stronger than the dollar as of today. It is for real, yet virtual and is the most popular currency of its kind. This is because of the decentralized nature of the currency, which allows for increased privacy and security, as well as low transaction costs compared to traditional currencies. Additionally, its scarcity makes it a desirable asset to many, as the number of bitcoins in circulation is limited. For people who feel seeing is believing when it comes to money, the Bitcoin even has a physical manifestation that you can use. Virtual currency like Liberty Reserve and e-gold have long co-existed with fiat currency, which is the national currency of the state. But the soaring rise in the usage of the bitcoin has now forced governments to understand and want to identify it.
A virtual currency is an unregulated currency created by developers and used as a medium of exchange for goods and/or services. Bitcoin was put forth by a developer with the pseudonym of Satoshi Nakamoto in 2009. It is based on a concept called crypto-currency. Cryptographic techniques are used to create and control bitcoin transaction. A quick look at the bitcoin site, bitcoin.org, tells you how it works.
You need to install a wallet which will download onto your computer or iPhone. Upon installation, the wallet gives you an address. You let your friend know your address and voila, he can send you some bitcoins. It’s as easy as sending an email. A bitcoin can be exchanged for real currency and vice versa at bitcoin exchanges like Mt.Gox.
If you have enough “mining hardware” on your computer, you can become a miner and be compensated for that effort in bitcoins. Mining is a process of spending computational resources to create new bitcoins and to secure bitcoin transactions against reversals. It is easy to think of it as renting out your computer’s resources for some bitcoins if you choose to become a “miner”. It’s like being a farmer where you plant the seeds (investment in resources) and harvest the crop (earn bitcoins). You need the right equipment and environment (computational resources) for the crop to grow, and you have to be willing to work hard to cultivate it (secure the transactions). The more effort you put in, the more your harvest will be.
Getting bitcoins through mining is certainly not quick or easy. But you can make bitcoins for services like filling out surveys, which is easy and now comes paid-for.
A key feature of the bitcoin economy is that it is decentralised. This means that all transactions are between the two parties involved, without a third central authority like a bank. The obvious benefit of this to the user is that there is mostly zero or sometimes a very low transaction fee.
The Bitcoin system’s money supply is distributed evenly throughout the network and programmatically created at a rate known to all parties in advance. So, the Bitcoin grows at a predetermined fixed rate.
The number of bitcoins in circulation is predetermined and there will never be more bitcoins than that. On an economic level, this means that the bitcoins cannot be manipulated by governments and political bodies – it cannot be inflated or deflated artificially.
These features of bitcoins are very akin to the features of the now extinct gold standard. Historically, the gold standard was a means of setting exchange rates of different currencies. Under the gold standard, a country freely allowed its currency to be measured by converting it to the price of gold of a fixed amount. This meant that the governments had to back up their supply of currency by gold.
Manipulation of currency by a central authority arbitrarily was not possible in theory. Also, the gold standard had other benefits like price stability. However, the gold standard was abandoned by everybody by the year 1971 for a lot of other economic and political reasons.
One obvious defect of the gold standard was the natural unequal distribution of gold on earth. Also, the mining activity was expensive. The Bitcoin takes on many features from the gold standard. Except, in this case, the mining of bitcoins in virtual thereby avoiding many perils of the gold standard.
The Bitcoin is not backed by any commodity nor is it pegged to any currency. It derives its value from demand and supply economics. We can liken this to the value of the “first currency”, when human civilisation moved on from barter to IOU/money. People relied on their inherent understanding of the price of goods according to its value. For instance, a cow might have been used as a medium of exchange, and its value is determined by how much it can be used for, such as providing milk and meat. The first bitcoins needed the market makers’ intrinsic trade knowledge for price discovery. It is to be noted that while you can make a profit on the float of a bitcoin (buy and sell a bitcoin with respect to a currency) the value of a bitcoin against a dollar fluctuates.
While the Bitcoin is still a popular alternative currency and does not offer all the features of a real-world banking system, its future curve seems very promising. Whilst there are theoretical suppositions and speculations in place for whether bitcoins can replace fiat currencies – the future of the world economy and bitcoins is still an open book. With its soaring popularity, especially in times of real-cash illiquidity – we might be on the threshold of a new kind of economics.
The demand for bitcoins was comparable with the demand for other monetary units issued by the government in 2018, as estimated from its market funding. Only six monetary units issued by the government, of which the data are easily available, received the market funding (in bil. USD) larger that the average bitcoin market funding: American Dollar (3411.50), Russian Ruble (256.33), Hong-Kong Dollar (217.71), Brazilian Real (195.91), South-Korean Won (156.61) and Czech Crown (144.40). On its minimum, the bitcoin market funding outpaced all but 18 currencies with accessible data, which equals 83rd percentile of the money at issue. On the other hand, the maximum amount of market funding exceeded all but the American Dollar, reaching 98th percentile.
The bitcoin market funding is available on website CoinMarketCap.com. To facilitate the comparison with the above-mentioned base money issued by the government, we first focus on the bitcoin market funding in 2018. As of 1st January 2018, until 31st December 2018 the bitcoin market funding ranged between the minimum 56.40 (15th December) and maximum 294.22 (6th January) bil. USD. The average market funding equalled 129.27 bil. USD, whereas the median was at 117.51 bil. USD (7th July), with standard deviation 40.54 bil. USD.
We used the bitcoin market funding financed by government money as an estimate of its specific requirements, showing that a similar demand for bitcoins is comparable with the demand for lots of government monetary units. Actually, only six out of one hundred and six currencies issued by the government, with easily available data, had been better funded than an average bitcoin market funding in 2018. All the same, we cannot identify to which extent we deal with the transaction demand for bitcoins rather than speculations. Therefore, we cannot safely conclude whether bitcoins are broadly accepted, or will rather be negotiated in the future. However, we confirm that a routine use of bitcoins as a means of exchange has met requirements for being called money among certain transaction instruments, although only within a limited domain (Hazlett and Luther, 2020).
A specific algorithm determined 21 mil. bitcoins to go into circulation. This digital unit constitutes an autonomous decentralized currency, completely independent from traditional currencies such as crown, euro etc.
Conclusion
The results show that bitcoin is closely related to other financial assets, thus giving space for further research aimed at better understanding and modelling the interaction between bitcoin and other financial assets. As the situation on financial and cryptocurrency markets is subject to a continual change, our results can be somehow “obsolete”. It is thereby necessary to carry out up-to-date analyses with the view to the economic expectation from bitcoin.
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