Trading Digital Currencies..Opportunity or Risk
The world is witnessing a huge digital and economic revolution, especially at the level of the global monetary system, and these developments have accelerated in particular after the Corona pandemic, which imposed a new reality on the world level, requiring reducing reliance on traditional cash currencies, and promoting the use of electronic methods.
Digital currencies are one of the most controversial economic topics, especially since they have been associated by people and governments with money laundering, human trafficking, drugs and the financing of terrorist operations, but there are some opinions that the use of digital currencies is inevitably coming and that banking institutions in all countries of the world should prepare for this development and deal with it.
When considering the current reality that dominates the financial scene, the transformation of traditional currencies (paper and metal) into digital currencies commensurate with technological development has become possible, while maintaining its main fixed goals as a unit of account, a store of value, and a means of exchange, and for this transformation to gain public trust and acceptance
In this context, this research paper defines the concept of digital currencies, the pros and cons of dealing with them, and reviews the reality of the Egyptian state’s dealings with them and the attitudes of young people regarding them, with a presentation of the most important recommendations for safe trading in digital currencies. The paper addresses the reality of digital currencies through several axes, including the following:
First: Definition of digital currencies
Second: The pros and cons of digital currencies
Third: Global indicators on digital currency trading
Fourth: Digital currencies in Egypt
Fifth: Steps towards safe trading of digital currencies
First: the concept of digital currencies
Many economic writings have discussed the definition of digital or virtual currencies or cryptocurrencies, but the European Banking Authority defined its as “a digital representation of a value that is not issued by the central bank or by public authorities and is not necessarily related to paper currencies such as the dollar and the euro. Ordinary and legal persons accept its as a means of payment and can be transferred or exchanged ,” Store or circulate electronically.”
Digital currencies are also described as virtual fictitious currencies consisting of digital codes that can be stored on hard disks or the Internet, and their value is subject to supply and demand. It is also difficult to track the buying and selling operations that take place in them or even know the owners of these currencies.
The value of digital currencies is determined by the law of supply and demand, such as commodities such as gold and oil (the greater the demand for them, the higher their price), but their intrinsic value is non-existent, and their value is derived from individuals’ acceptance of them as a medium of exchange and payment, in addition to their lack of reliance on any central authority.
The Central Bank of Egypt law defines cryptocurrencies as “currencies stored electronically that are not denominated in any of the currencies issued by official monetary issuing authorities, and are traded over the Internet.”
Second : the pros and cons of digital currencies
A- Positives:
1- There are no intermediaries or third parties in transactions, which makes its easy and fast.
2- Digital currencies such as Bitcoin provide a much cheaper and faster alternative to cash transactions, especially for companies or consumers.
3- Transactions can be carried out easily by anyone who has a mobile phone or is connected to the Internet.
4- Transaction fees through cryptocurrencies are very low compared to credit card transaction fees.
B- Negatives:
1- Threat to economic security: Some recent studies believe that digital currencies pose a threat to central banks and the banking system in controlling the issuance of currency and official money.
2-the absence of regulatory regulations as a large number of countries have not regulated the digital currency market, if the investor is defrauded or swindled in this market, it is quite possible that the culprit will not be held accountable for this, there is no international law that recognizes digital currencies.
3- Limited commercial use of digital currencies.
4- Liquidity risk: It appears in the inability of the digital currency organization to provide sufficient liquidity for the requirements of customers, because it operates independently of the economic department.
5- An ideal environment to facilitate corruption, money laundering and terrorist financing operations. Once this money is purchased, its owners can transfer it anywhere in the world without monitoring or follow-up, so that it can be converted back into regular money in countries that allow this.
Third: Global indicators on digital currency trading
The World Bank and a number of economic studies issued a number of indicators about the spread of digital currencies in the world:
1- Increasing the spread of digital currencies:
Recent years have witnessed a significant increase in research and development activities for central bank digital currencies (15 currencies have been tested globally, while 15 others have reached an advanced research stage).
2- Development of digital currencies for central banks: Central banks are going through different stages of development to evaluate the advantages and risks of the digital currencies they issue and study the best ways to use them.
As of July 2022, there are approximately 100 central bank digital currencies in research or development, and two have been fully issued, namely the eNaira in Nigeria, which was issued in October 2021, and the sand dollar in the Bahamas, which debuted in October 2020. As the following figure shows:
3- The development of the use of digital currencies:
Bitcoin leads the digital currencies, followed by Binance Coin, then Ethereum, then Ripple, and this is increasing annually at the level of countries around the world.
4- On March 3, 2023, the Central Bank of the Emirates announced the start of implementing the Digital Dirham Strategy, a step through which it aimed to strengthen the payment infrastructure in the country by providing additional channels, enhancing financial inclusion, and addressing “weak points” related to local and cross-border payments. And moving towards a cashless society.
5-In 2022, China launched the digital yuan, also known as E-CNY, after its government, through its central bank (the People’s Bank of China), entered into a partnership with major commercial banks and technology companies such as “Alibaba” and “Tencent” in order to develop and test the digital yuan.
6- The total market value of the 10 largest virtual currencies in November 2020
It is noted from the previous figure that Bitcoin dominated the digital currency market with more than 254.75 billion US dollars, compared to 43.3 billion US dollars for Ethereum.
Fourth: Digital currencies in Egypt
A large number of young people in Egypt have become interested in digital currencies over the past few years as an easy way to get rich quickly. They have resorted to mining Bitcoin and speculating in its market, and unfortunately most of them have achieved huge losses. The Egyptian state has become aware of this danger and has criminalized dealing in digital currencies and taken all possible measures:
1-the central bank issued Law No. 194 of 2020, which imposes strict penalties on issuing, trading, promoting, creating or operating platforms for trading cryptocurrencies or electronic money, or carrying out activities related to its without obtaining a license.
Dar Al-Iftaa explained through a statement that “trading these currencies and dealing in buying and selling through them is forbidden according to Sharia law.” Because of its negative effects on the economy, its disruption of market balance and the concept of work, and the loss of those dealing in it with the required legal protection and financial control.
However, despite this, this article in the law allowed Egypt the possibility of entering into this field when it linked the practice of this activity to obtaining a permit from the Central Bank. Recently, the intention was announced to allow banks to offer the electronic pound on the condition that the bank maintains cash deposits whose value is not less than the units. Issued electronically.
Fifth: Steps towards safe trading of digital currencies
Recommendations can be made to make the trading of these currencies more stable and to protect national and banking security:
– Strengthening international coordination and cooperation at the legislative level, as countries must work together to establish legal frameworks to protect those dealing with digital currencies.
-Continuous updating of electronic systems to protect platforms and means of dealing with digital currencies to eliminate theft and piracy.
-Educating young people about the risks of using cryptocurrencies and how to trade them responsibly.
-Establishing strict controls on the trading of digital currencies and preventing their use to finance illegal activities, terrorist operations, money laundering, and drugs.
