Digital currencies like Bitcoin may be the way forward for nations with small or weak economies.
Many major banks have been withdrawing their Correspondent Banking Relationships (CBRs) across geographies in the recent days as the global economy slows down. A recent action report by the International Monetary Fund titled ‘The Withdrawal of Correspondent Banking Relationships: A Case for Policy Action‘ discusses this emerging trend, its effects and ways to avoid it.
The current fiat based economy is built on a network of banks and financial institutions in both domestic and international levels working together to enable transactions between accounts. As most of the banks operate with profitability in mind, the economic conditions of the markets play an important role in their continued operations in any region.
The global financial crisis caused by the economic slowdown, wars, geopolitical developments like international sanctions, Brexit etc. has got many banks terminating their CBRs across the world. However, the most affected are the emerging markets and developing economies in Africa, the Caribbean, Central Asia, Europe, and the Pacific, states the report. While the risk assessment and cost-benefit analysis conducted by these banking institutions dictate their operating decisions, such a move during a crucial time may spell doom for the troubled and growing economies.
The withdrawal of CBRs will disrupt the financial services and cross-border flow of money, which will lead to financial exclusion of the region unless alternative methods are identified and put in place. The IMF report shows that the recent incident involving Citibank and the Central Bank of Venezuela is not an isolated case but such incidents are quite prevalent across the world. According to the data gathered by the report, Caribbean is the worst affected, with over 75 percent of large global banks, especially the ones from US and UK withdrawing from CBRs in the region. These actions have affected US Dollar wire transfers, remittances, trade finance, money and value transfer services.
When it comes to alternative services, the countries aren’t left with many options as most of the international trade still happens in US Dollars and the CBRs between US banks is crucial. However, there is a viable alternative in the form of digital currencies which do not depend on CBRs for cross-border transactions. But the use of such an alternative also requires the governments to make some fundamental changes to their existing monetary policies, to include digital currencies as recognized legal tender.
With digital currencies like Bitcoin, a direct relation can be struck between the parties to a transaction, or even between two banks. The mode of transmission of value can happen over the blockchain instead of conventional banking channel that requires CBRs. Such applications will create a huge market for Bitcoin and blockchain based companies to fill in the void created by banking majors.
However, in order to implement such systems, it is important for the central banks in the affected regions to get involved in the process, which is highly unlikely at the moment.
Read full report here
Ref: IMF Report | Image: ZDNet