We are now off and running in 2020. With the start of the new year comes plenty of exciting news in the cryptocurrency world. Everywhere you turn, people are talking about crypto in one form or another. Government regulators and central bank authorities are talking too, having finally come to the understanding that cryptocurrency is a legitimate financial force to be reckoned with.
No one knows what 2020 will bring. But that's okay. One of the more interesting aspects of being involved in cryptocurrency is watching it emerge and evolve. To that end, our perusal of cryptocurrency news has revealed three developments from around the world that are well worth watching in 2020.
None of these three developments will, by itself, turn cryptocurrency on its head. But all three will contribute to the overall direction of the crypto space over the next 12 months. Keep an eye on them. The first development is from the Bahamas, the second from South Korea, and the third from Germany.
1. A Bahamian digital currency
At present, the crypto community is having a bit of trouble defining some of the new projects now emerging around the world. They may get some help from the Bahamas, thanks to their launch of a new digital currency project known as 'Project Sand Dollar'. The project was officially launched on December 27.
So what is Project Sand Dollar? It is a central bank project aimed at making the transition from fiat to an eventual central bank digital currency (CBDC). The project is a continuation of the Bahamian Payments System Modernization Initiative (PSMI) that began more than a decade ago. Both projects are designed to make the entire Bahamian financial system digital.
The Bahamas' new digital currency will have limited use for now. The project was first launched in Exuma; it will be expanded to Abaco sometime during the first half of 2020. If all goes well, the Bahamas central bank will expand the project nationwide as it continues to get ready for its official CBDC.
Defining the differences
If you are wondering why any of this matters, it boils down to defining both digital fiats and genuine CBDCs. The new digital currency that residents of Exuma and Abaco will have access to is no different, at least in function, to the nation's minted and printed cash. It is simply a digital representation of that cash.
Residents who use the currency will not be handling minted coins or printed bills. They will transact business using digital credits that represent fiat. Nothing will change in terms of record-keeping, bank payments, settlements, etc. However, things will change once the Bahamian CBDC is ready to go.
A CBDC is a digital currency created by a central bank and government partners and administered the same way fiat is. What makes it different is that it is blockchain based. The Bahamas digital fiat is not based on blockchain. It is based in current banking technologies with the digital currency being nothing more than an electronic representation of fiat.
The differences here are more than just semantics; they are also technological as well. As such, they draw a clear line of delineation between digital fiats and genuine CBDCs. In a broader sense, what the Bahamian government is doing with digital currency may offer an example for other countries hoping to eventually deploy CBDCs of their own.
Expected benefits of the system
Whether or not the Bahamian system proves a fruitful model for other countries relies solely on its success or failure. Some of the expected benefits of the system would appeal to other countries. For example, the Bahamas is a nation of multiple islands. As such, cash is a highly inefficient system for conducting business from island to island. A CBDC would make intra-island transactions more efficient.
The system is also expected to make tax collections more consistent and efficient. By digitizing everything and unifying it with a CBDC, Bahamian tax authorities will have an easier time doing what they do. And of course, the same holds true for the banking system. Converting to a CBDC just makes it easier to do business across all of the islands in the Bahamas.
2. Investigating CBDCs in South Korea
The second development to watch in 2020 comes from South Korea, where central banking authorities will be paying close attention to cryptocurrency and CBDC developments in other countries. In a report released in late December, the Bank of Korea announced it would be hiring experts to study all things cryptocurrency with an eye on potentially developing a CBDC at some point in the future.
South Korea's 'Monetary Policy' for 2020 report says that the task force assigned to carry out the cryptocurrency study could be formed sometime in January. Task force members will be studying distributed ledgers, cryptocurrency, etc. and the effect such technologies have on settlements and institutional security. They will place a special emphasis on understanding how cryptocurrency technologies affect domestic financial conditions and the ability of the government to continue practicing oversight of payment systems and settlements.
In plain English, South Korean central bank officials want to know how crypto technologies might be put to use in their country. They see what other countries are doing with CBDCs and want to know if they can do the same things. Furthermore, they are being influenced by China and its digital yuan project. South Korea does not want to be left behind if China succeeds in its stated goals.
A regulatory shift
The happenings in South Korea are important when you consider the country's regulatory environment over the last several years. Government officials have shown themselves very friendly to blockchain technology, though not necessarily cryptocurrency itself. In fact, regulators have taken a strong stand against allowing cryptocurrencies to flourish in South Korea without strong government oversight.
That much has not changed. Still, central bank authorities showing an interest in a CBDC is a strong indication that the government is not against digital currencies in principle. They see the benefits of such occurrences as a more efficient way to transact business.
A successful study may lead to South Korean government officials taking a more relaxed stand in relation to cryptocurrencies in general. The study is also likely to lead to a formally recognized CBDC project down the road. South Korea developing a CBDC seems inevitable at this point. It is the task force's job to figure out how to make it happen.
3. Germany's new licensing scheme
Half a world away, digital asset custodians in Germany must now be licensed. Under a brand-new law that took effect on January 1, custodians must declare their intent to be licensed by April 1. They must then apply for a license by November 1. BaFin, the German agency with authority over the financial sector, will issue the licenses.
It is interesting to note that Germany's official regulations regarding digital asset custody have not been finalized. This explains why custodians are being given so much leeway under the new law. BaFin has already said it will make no attempts to enforce the law until the final rules are adopted. Thus, custodians can continue operating without being penalized as long as they declare the intent to eventually be licensed.
There is some speculation that Germany's new requirements for custodians could have a significant impact on cryptocurrency there. But in all likelihood, any impact will be minor. Licensing may weed out smaller companies that act as digital asset custodians without being full-fledged banks. But larger companies and the banks themselves should have no trouble continuing to do business as usual.
Recognition of cryptocurrency
This development is an important one to watch for the simple fact that requiring custodians to be licensed is a strong indication that the German government now recognizes the legitimacy of cryptocurrencies. Like so many other countries, Germany has long viewed crypto as a passing fad for hobbyists. That is no more.
The moment the government starts issuing licenses to digital asset custodians, they are recognizing that said custodians are dealing with a legitimate asset with legitimate value. This is good in the sense that it forces the government to recognize cryptocurrencies and other digital assets as being on the same plane as traditional securities.
Germany's new law, coupled with its hard-line stand against Facebook's Libra, makes it clear that the country recognizes cryptocurrency as a legitimate competitor in the financial marketplace. It stands to reason that Germany will be one of the countries leading the charge to develop an EU CBDC down the road. Neither Germany nor the EU wants to find itself lagging behind as CBDCs emerge around the world.
Summarizing all of the information contained in this post is a simple as saying that world governments have finally awoken to the reality that is cryptocurrency. They may not be on board with private crypto like Bitcoin and Litecoin, but they understand that the future of currency is digital. One way or another, every country with its own fiat is eventually going to find its way to a CBDC.