The coronavirus pandemic has revealed that the world needs accessible digital currencies more than ever before — and it’s not just for hygiene reasons.
Sarah Okello wipes her brow with a well worn and filthy rag. Okello is no stranger to hardship. Born to an unwed mother and growing up impoverished in the outskirts of Uganda’s capital Kampala, her husband recently lost his job as a truck driver thanks to the coronavirus which has forced lockdowns in much of the African continent.
But despite her resilience, the coronavirus pandemic that is now slowly but surely sweeping across much of Africa, has created an entirely different dimension of suffering. According to Okello,
“At least I could still rely on my eldest daughter who works in Cape Town, she used to send money, even that has stopped.”
As the coronavirus pandemic has spread across Africa, money flows have gone off a cliff.
According to one payments company, transfers from the United Kingdom to east Africa are estimated to have dropped by as much as 80%, while another estimates that flows from Italy to the continent have been cut by as much as 90%.
No Country For Cryptocurrencies
To be sure, much of the reduction in remittances has also to do with the fact that the United Kingdom and Italy were also two of the countries most badly hit by the coronavirus pandemic, but remittances from other rich countries have also fallen, and the drop in money flowing into Africa has been devastating.
But even where there’s money to be sent, the coronavirus has thrown a spanner in the works because most of these remittances start of as cash, dropped off in person, often at ubiquitous corner shops that double as remitting agents.
And with most of these shops now closed due to lockdowns, even sending what little money there is, is all but impossible.
Mobile and digital payments are an option, but make up only 15%-20% of remittances and odds are if you can afford a mobile line with data, you’re not in dire straits.
With planes grounded, bundles of banknotes are piling up in remittance shops across rich countries, waiting to be sent home and even informal avenues (think of bundles of bank notes taped to a person’s body) for money flows are also drying up.
But even when the remittances are working, they are costly and even money itself can be a vector for diseases.
Because of onerous American anti-money-laundering regulations, even where remittances are possible, flows of money from rich countries to Africa have to pass through the Middle East before going on to African remittance firms, adding a large degree of friction to what in most cases is a very small amount to be remitted.
That’s one reason why remittances to Africa are the most expensive compared to anywhere else in the world, with fees averaging around 9% of the transaction versus the global average of 5%.
And that 9% adds up, with Africans losing as much as US$1.8 billion a year through middlemen.
Cash No Longer King?
Then there’s the issue of cash itself now potentially acting as a vector for diseases such as the coronavirus.
In the early days of the coronavirus crisis, Chinese banks actually disinfected cash before issuing it to the public, and had cash removed from high-risk sites such as hospitals, and the now notorious wet markets, where the same hands that are used to slaughter live animals, are also used to handle banknotes.
Yet despite limited evidence that cash can become a disease vector, the Bank of International Settlements, a clearing bank for central banks, issued a forecast this month suggesting,
“Irrespective of whether concerns are justified or not, perceptions that cash could spread pathogens may change payment behavior by users and firms.”
The report went further to suggest that the coronavirus pandemic could actually act as a catalyst towards the development of central bank-issued digital currencies.
There is some evidence to support the view.
Whereas previously, Federal Reserve chairman Jerome Powell had dismissed central bank-issued digital currencies as a “solution in search of a problem,” initial versions of the U.S. stimulus package included language that would have provided for digital wallets for the stimulus to be issued directly to citizens via a form of central bank-issued digital currency.
And while the final stimulus bill excluded that language, evidently, the “solution” that central bank-issued digital currencies are, has now found a “problem” to solve.
The need for cross-border-capable digital currencies could not be greater, and to that end China may be edging closer to providing a solution.
While the dollar is still the undisputed king of currencies, underpinning over 80% of global supply chains, and over two-thirds of securities issuance and foreign-exchange reserves, the global reliance on the dollar also creates bottlenecks.
Last month’s global rush for dollars led to an intense liquidity crunch, with the Australian dollar, Indian rupee and even typical safe havens like the Japanese yen and Swiss franc all having tumbled against the greenback.
The 3-month “cross-currency basis” swap rate, which tracks the premium traders pay to temporarily exchange euros for dollars soared to its highest level in almost a decade.
Interbank costs of borrowing dollars skyrocketed as market participants rushed for the green stuff.
Fortunately the Federal Reserve acted swiftly and decisively, setting up currency swap lines with other rich-country central banks and creating a “repurchase” facility that allowed other central banks to temporarily swap their holdings of American Treasuries for dollars, rather than sell them into an illiquid market.
Damned by Dollar Dominance
And while the Fed’s magnanimity may entrench dollar dependence, it is also precisely why central banks should start to consider alternatives and diversify out of the dollar.
The Fed’s “repurchase” facility does not help nations with few reserve assets — in particular African nations.
And what the Fed giveth, the Fed can also taketh away.
For some central bankers, particularly from countries with flaky relationships with Washington, fearing being left out of the dollar party at the drop of a hat is an ever-present danger.
Another reason for diversification is that while the world may use the dollar, often their largest trading counterparty is China — whose yuan (now digitized!) is waiting in the wings as a contender.
To be sure, the yuan is a far way off from mounting a serious challenge to the dollar, making up a paltry 2% of payments and global reserves.
But there are three factors that could emerge from the coronavirus pandemic that would give the yuan a stronger hand — the increasing attractiveness of Chinese government bonds, Beijing’s role as a creditor and its digital currency.
China’s Cryptocurrency Call to The World
For the most part, life in China generally doesn’t revolve around cash anymore — with even cab drivers giving you an unwelcome grunt, when you try to pay them using anything other than the ubiquitous digital wallets provided by Alipay and WeChat Pay.
With over 1 billion users in China alone, Alipay and WeChat Pay are already mounting a campaign to roll out their digital wallet technology to countries across Asia, but Africa could be the lower-hanging fruit.
Because China is Africa’s largest single creditor, it can place more than just subtle pressure, on the continent’s many debtor nations to adopt the digital yuan, as part of the loan-servicing process or for more favorable repayment terms.
And with the possibility that a digital yuan could facilitate far more frictionless cross-border payments, the value proposition of using a digital yuan as an intermediary currency instead of the dollar is obvious — lower fees and the ability to circumvent the chokepoint of New York’s banking system.
Whether or not China’s push into central bank-issued digital currencies will entice other countries to consider launching their own remains to be seen.
But given the clunky way that stimulus checks have (not) been issued in the United States, a fair case for at least moving beyond the exploratory stage can be made for central bank-issued digital currencies.
Fortunately, some of the technologies that would support central bank-issued digital currencies, even on non-smart phones, already exists.
Consider the massive success of M-Pesa, a mobile phone-based money transfer and micro-financing service launched initially in Kenya and Tanzania, which works on even the most basic phones, and it’s clear that the infrastructure to support central bank-issued digital currencies already exists.
The coronavirus could be just the push that gets central banks need, to actually issue them.
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