Context: 

Recently,  the International Monetary Fund (IMF) issued a statement on the use of cryptocurrency in the Latin American and Caribbean market, and about the rising interest in blockchain based central bank digital currencies (CBDCs). 

More on the News:

• The IMF noted that a ban on crypto may not be effective in the long run in the region.
• This is a reversal of its earlier stand which was against El Salvador’s move to adopt Bitcoin as its legal tender. 
• Earlier, IMF’s executive directors, citing fiscal risks and consumer protection issues,  urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.
• El Salvador is the first country in the world to adopt Bitcoin — the largest cryptocurrency by market capitalisation — as its legal tender.

Why is Latin America’s Crypto economy so significant? 

• Countries like Argentina, Chile, and Columbia have experienced devaluation of their currency against the U.S. dollar. 
• To preserve the value of their savings, some residents have explored converting their funds to U.S. dollars. and into stablecoins i.e. the cryptocurrencies designed to reflect the value of fiat currencies such as the U.S dollar. 
• Brazil, Argentina, Colombia, and Ecuador are among the top 20 in Chainalysis’ 2022 Global Crypto Adoption Index. 
• Separately, a number of central banks in the Latin American market are considering CBDCs, meaning that more people could soon be exposed to blockchain based infrastructure.

What is a Cryptocurrency?

• Definition: A cryptocurrency is a medium of exchange, such as the rupee or the US dollar, but is digital in format and uses encryption techniques to both control the creation of monetary units and to verify the exchange of money. For Example: Bitcoin,  Ethereum.
• Cryptocurrency works upon the principle of  ‘blockchain’ technology.

Central Bank Digital Currencies:

• A central bank digital currency (CBDC) is the digital form of a country’s fiat currency.
• A nation’s monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies implementing monetary and fiscal policy.
• CBDC, being a sovereign currency, holds unique advantages of central bank money viz. trust, safety, liquidity, settlement finality and integrity. 
• Motivations for exploring the issuance of CBDC in India:
  • reduction in operational costs involved in physical cash management
  • fostering financial inclusion
  • bringing resilience, efficiency, and innovation in the payments system
  • adding efficiency to the settlement system
  • boosting innovation in cross-border payments space
  • providing the public with uses that any private virtual currencies can provide, without the associated risks. 

Difference between Cryptocurrency and CBDCs:

News Source: Indian Express

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