This year will be remembered as one of reckoning for digital assets. After years of slushy and speculative asset price growth and the spread of numerous junk cryptocurrencies, with at best dubious value, the rapid collapse of the crypto world is something many economists had expected for a long time. Yet, amid such dynamics is also an opportunity for the best innovations in cryptocurrencies and digital assets to distinguish themselves.
This was a key story in OMFIF’s 2022 reports, which showed that financial institutions have been reconciling a general wariness of many products in the digital asset space alongside a clear recognition of the benefits of digital assets for their goals, including stamping out illicit markets, improved financial inclusion and introducing more efficient payments systems. Such benefits appeared to be particularly pronounced among developing countries.
As revealed in OMFIF’s Global Public Investor 2022 report, central bank reserves managers were averse to wading into digital asset classes in their portfolio investment. However, in our ‘Digital assets’, ‘Future of payments’ and ‘Africa Financial Markets’ reports, survey respondents and interviewees expressed optimism about the potential for digital assets to improve the mainstream financial system, including through a central bank digital currency.
The ‘Digital assets’ report focused on how countries and regulatory systems are reckoning with the broad issues around cryptocurrency regulation and implementation. This includes both the challenges of classifying digital assets for purposes of taxation as well as the know-your-customer and anti-money laundering regulations necessary to ensure the security and value of these products. OMFIF also produced a digital asset regulation tracker, which underscores the rules, guidelines and regulatory developments in major global economies. The results suggest a continued tentativeness in delivering a tailored digital asset regulatory system, though regulatory regimes are becoming more and more elaborate. It will be updated on a quarterly basis.
A key area of growing development, however, is in the space of CBDCs, particularly in developing countries — the Bahamas, Nigeria and eastern Caribbean states have already implemented a CBDC, and there is growing interest in implementing others. The ‘Future of payments’ report noted central banks were increasingly shifting towards exploring a CBDC. Most respondents indicated that they expected to issue a CBDC currency — either in a pilot or diffuse form — within the next 10 years.
Two-thirds of central banks expect to issue a CBDC within 10 years
When do you expect to issue a central bank digital currency? Share of respondents, %
Source: Future of payments 2022
This year we noted developments in digital assets and financial technology beyond cryptocurrency and CBDCs. Our work in the ‘Africa financial markets’ report underscores some of the other digital tools countries are deploying to strengthen and digitalise their financial systems. This includes the Lusaka Securities Exchange’s unveiling of a digital platform to provide financing to Zambian small- and medium-sized enterprises. Moreover, Cameroon’s government implemented a National Digital Payment Switch, in order to connect digital service providers.
Looking forward to 2023, that these trends are expected to continue. As a growing number of countries wrestle with regulations for digital assets, economies are increasingly welcoming digital strategies into their financial system. This includes CBDCs and it extends to other digital financial tools and payments system. In other words, our results suggest that the crypto crash may be precipitating a medium-term boom in other digital asset activity. We may see the start of this in 2023.
Julian Jacobs is Economist at OMFIF.