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Historical Event in Financial Market: Black Wednesday, Bretton Woods, Digital Currency | Trading Cocktail

Historical Event in Financial Market

Historical Event in Financial Market, Bretton Woods, The end of Bretton Woods, Black Wednesday, Digital Currency. Financial world history key milestone is important for traders to understand. Since, these events still repeatedly referenced by the media and become vocabularies of professional traders.


Historical Event in Financial Market (1944-1971):

The Bretton Woods

In July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire. Where representative from 44 nations created a new international monetary system known as the Bretton Woods system. Most agreed that international economic instability was one of the principle causes of the war, and try to prevent it on the future.

These countries saw the opportunity for a new international system. After World War II that would draw on the lessons of the previous gold standards and the experience of the Great Depression and provide for postwar reconstruction. It was an unprecedented cooperative effort for nations that had been setting up barriers between their economies for more than a decade.

They sought to create a system that would not only avoid the rigidity of previous international monetary systems. But would also address the lack of cooperation among the countries on those systems. The classic gold standard had been abandoned after World War I. In the interwar period, governments not only undertook competitive devaluations but also set up restrictive trade policies that worsened the Great Depression.

The Fix to USD

Rather than using gold as the means the means of exchange between countries as was the case under the old gold standard. The dollar was going to be used and the dollar was chosen because at that time USD was as good as gold. Under this system countries agree to fix their currencies into the USD. And the USD would be tied to gold at the price of $35 per ounce.

This meant that the countries around the world could trade their currencies for USD, which they could then exchange for gold. This created the system where all the currencies were essentially backed by gold. When countries did exchange their currencies for gold, it was usually stored safely in the U.S. under the Brentton Woods system.

Historical Event in Financial Market Bretton Woods | Trading Cocktail
Delegations on Brentton Woods Meeting


Brenton Woods Agreement, developed by prominent economists John Maynard Keynes and Harry Dexter White, included several key points:

  1. The formation of key international authorities designed to promote fair trade and international economic harmony.
  2. The fixing of exchange rates among currencies.
  3. The convertibility between gold and the U.S. dollar, thus empowering the U.S. dollar as the reserve currency for the world.

Of those three key points, only the first one is still in existence today. Organizations formed as the direct result of Bretton Woods. Include The International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT). All still exist today and play significant role in development and regulation of international economies.

The most memorable contribution of Bretton Woods doctrine for financial world history was its role in changing the perception regarding the U.S. dollar. As it is become the world’s reserve currency of choice and making USD as the world’s most accessible and reliable currency till today.


Historical Event in Financial Market (1971):

The End of Brentton Woods

Between 1968 and 1973, the system was dismantled. President Richard Nixon of the United States announced the “temporary” suspension of the dollar’s gold convertibility in August 1971. While the dollar had battled to stay inside the Bretton Woods parity throughout much of the 1960s, this crisis signaled the end of the system. After an unsuccessful effort to reinstate fixed exchange rates, the main currencies started to float against each other in March 1973. This is the start of Fiat doctrine in financial world history.

Historical Event in Financial Market | Trading Cocktail
President Nixon suspended the convertibility of the US dollar into gold


IMF members have been free to choose any form of exchange arrangement they want (except pegging their currency to gold) since the Bretton Woods system collapsed. Allowing their currency to float freely. Pegging it to another currency or a basket of currencies, adopting another country’s currency, participating in a currency bloc, or joining a monetary union.

Oil Crisis

Many people believed that if the Bretton Woods system failed, the era of tremendous expansion would come to an end. In truth, the shift to floating exchange rates was rather painless and well-timed: flexible exchange rates made it simpler for economies to respond to higher oil prices when they abruptly began to rise in October 1973. Since then, floating rates have made it easier to adapt to external shocks.

The IMF adapted its lending tools in response to the problems posed by oil price shocks in the 1970s. It established the first of two oil facilities to assist oil importers with predicted current account deficits and inflation as a result of increasing oil prices.

Providing assistance to underdeveloped nations

From the mid-1970s, the IMF attempted to address the balance of payments problems that many of the world’s poorest nations were experiencing by providing concessional loans via the Trust Fund. The IMF established the Structural Adjustment Facility, a new concessional lending program, in March 1986. In December 1987, the SAF was replaced by the Enhanced Structural Adjustment Facility.


Historical Event in Financial Market (1995):

Plaza accord – Devaluation of U.S. Dollar

Methods of controlling the foreign exchange market, such as tying currency values to a commodity like gold or limiting exchange rate variations, have proved to be excessively inflexible at that time in financial world history. The currency market was left to the dynamics of supply and demand once regulatory institutions like as the gold standard. The Bretton Woods Accord, and the Smithsonian Agreement were no longer in operation. Economic events such as the OPEC oil crisis, stagflation in the 1970s, and significant changes in the Federal Reserve’s fiscal policy in the United States prompted the need for regulation. And here’s come the Plaza Accord.

The Plaza Accord was signed on September 22, 1985, at the Plaza hotel in New York. By finance ministers and central bank governors from the then G-5 nations: the United States, Japan, West Germany, France, and the United Kingdom.

Historical Event in Financial Market Plaza Accord | Trading Cocktail
Delegations of the five country at Plaza Accord


Inflation was low and development was quick in 1985

The background of Plaza Accord agreement. Cheap inflation allowed for low borrowing rates, but protectionist tariffs posed a danger to the economy. The US had a big and expanding trade imbalance, which was exacerbated by the rising currency. Large and increasing surpluses plagued Japan and Germany at that time in financial world history.

The foreign currency market was endangered by this mismatch. The root of the troubles was perceived as the US dollar’s 80 percent increase versus the currencies of its main trade partners. A lower-valued US dollar would assist to stabilize the global economy. By balancing the exporting and importing capacity of all nations. Depreciation of the dollar reduced the cost of US exports, encouraging other nations to purchase more American-made products and services.

The United States convinced the leaders to organize a global intervention to allow for a controlled depreciation of the dollar and appreciation of the major anti-dollar currencies on Plaza Accord agreement. Each nation pledged to alter its economic policies and interfere in currency markets if needed to drive the dollar’s value down.

The United States agreed to decrease interest rates and reduce the government deficit. Germany agreed to implement tax cuts in exchange for Japan’s pledge of looser monetary policy and financial-sector reforms. France, the United Kingdom, Germany, and Japan have all agreed to hike their interest rates.

Fail commitments in this Historical Event in Financial Market

However, not every nation followed through on their commitments of Plaza Accord. The United States failed to keep its pledge to reduce the budget deficit — Japan was severely harmed by the sharp increase in the yen. Leaving its exporters unable to compete in international markets.

The intervention had an immediate effect. With the dollar falling 46 percent against the deutsche mark (DEM) and 50 percent against the yen within two years (JPY). From its high in February 1985, the dollar had lost 54 percent versus the D-mark and the yen by the end of 1987. The US economy shifted toward exporting, while imports surged in Germany and Japan. This aided in the resolution of current account imbalances and the reduction of protectionist measures.

Following the termination of coordinated interventions in this Plaza Accord agreement, currency speculation led the dollar to continue to slide. The Louvre Accord was struck in 1987 to stop the US Dollar’s ongoing slide and to stabilize the currency. The US committed to tightening fiscal policy, while Japan promised to ease monetary policy. If major currencies went outside of a set of ranges, the participants committed to act. Shortly after the agreement was struck, the dollar climbed.


Historical Event in Financial Market (1992):

Soros steal from Bank of England

George Soros became one of the most well-known currency trader in the financial world history on a single day in 1992. All of this was made possible by his smart and courageous wager against the Bank of England on “Black Wednesday.”

With expenses of roughly 3.3 billion pounds, the Bank of England was unable to defend itself against a currency market onslaught. As a consequence, Soros earned nearly $1 billion in profit and become one of the most prominent name in financial world history.

Historical Event in Financial Market: Black Wednesday, Bretton Woods, Digital Currency | Trading Cocktail

Setting the Scene for Black Wednesday

In March of 1979, the European Exchange Rate Mechanism (ERM) was established. Its goal was to minimize exchange rate volatility. And normalize monetary policy throughout Europe prior to the introduction of a single currency. Which would later be known as the euro. Simply simply, the ERM established a range of exchange rates within which they might fluctuate. This is referred to as a semi-peg.

When the ERM was first established, Britain rejected to participate. It then adopted a semi-official stance that mirrored that of the Deutsche Mark. The government opted to join the ERM in October 1990. With the goal of limiting its currency from moving more than 6% in either direction by interfering in currency markets via countertrades.


What Was the Basis of Black Wednesday?

The rate was fixed at 2.95 Deutsche Marks per Pound Sterling when Britain entered the ERM, with a 6-percentage-point swing allowed in either direction. The issue was that the country’s inflation rate was very high, and interest rates were above 13%. The country’s economic boom has reached the point of no return. This paved the way for a downturn.

Currency traders saw the fundamental issues and started shorting the Pound Sterling. Specifically, they used the Pound Sterling to purchase one currency, such as the Deutsche Mark. As the value of the Pound Sterling declined in relation to the other currencies, they were able to benefit.  One of these bearish currency traders was George Soros. He built up a short position worth more than $10 billion pounds.


The Aftermath of Black Wednesday in this Historical Event in Financial Market

The Prime Minister of the United Kingdom and his cabinet authorized the expenditure of billions of pounds sterling. This was an effort to prevent speculators from selling short. The British government then declared that interest rates will be raised from ten percent to fifteen percent. This was done to attempt to entice currency trader seeking for a higher return on their investments.

Currency speculators, on the other hand, did not trust the government would follow through on these pledges. So they continued to short the pound. Following an emergency conference of senior authorities, the government was obliged to exit the ERM in order to allow the market to revalue its currency to more acceptable, lower values.

After it, the nation was undoubtedly plunged into a recession. The ERM was dubbed the “Eternal Recession Machine” by many British residents. While the government lost a lot of money as a result of the ERM fiasco, some lawmakers believe it was for the best since it prepared the way for more conservative policies that were eventually credited with restoring the economy.


What Can We Learn From Black Wednesday?

Black Wednesday teaches currency traders and governments a number of crucial lessons in financial world history. Some of these lessons may surprise you.

The following are some examples of government lessons:

  • Interest rates should not be dictated: The ERM interest rates were established for Germany. They should, however, have been established by Europe, for Europe.
  • Pick your battles with speculators: Taking drastic actions to resist decisive market activity may be futile, and it may also be expensive.


Final Thoughts

The day Soros broke the Bank of England and earned over $1 billion is known as Black Wednesday. The actual lessons, however, may be learned by looking at the crisis’s fundamental roots and how they soon turned into difficulties.

Central banks may prevent future crises caused by regulatory limits if they comprehend these concerns.


Historical Event in Financial Market (1999):

The Birth of Euro

On January 1, 1999, eleven European nations made a historic stride forward by joining Economic and Monetary Union Stage Three. As a result, the eleven countries’ national currencies became denominations of a unified currency. At the same time, the “Eurosystem” (comprising the European Central Bank (ECB) and the eleven national central banks of the participating Member States) took over responsibility for the euro area’s monetary policy.

The birth of Euro | trading cocktail

In retrospect, we can conclude that the technological transition to the euro was a huge success. Given the huge challenge of making changes in hundreds of computer systems and operating processes throughout the financial markets. It’s remarkable that we only had minor teething issues, which seem to have been resolved in the meanwhile.

The successful technical introduction of the euro was made possible by the project’s meticulous planning. It also demonstrated that all parties (the ECB, national central banks, governmental agencies, and, most importantly, banks and other financial institutions) were committed to the initiative and conducted their preparations professionally.

The transition to the euro, however, has not yet been completed. The euro exists exclusively in a non-tangible form, that is, as book entries in computer systems. Due to the lack of euro coins and banknotes, most people may have seen the introduction of the new currency as a relatively abstract event.

National banknotes and coins will continue to be used until the introduction of euro banknotes and coins in 2002. This “second” transition will also need extensive planning. Apart from the one-time large-scale manufacturing of banknotes and coin minting, it would need significant modifications in cash handling in the retail sector. Such as teller and vending machine adaption. I am certain that all parties involved will carry out the “second” transfer with the same professionalism as the “first” changeover earlier this year.

Clearly, the introduction of the euro was a watershed moment in history, not only because of the magnitude of the task and the meticulous planning that went into it, but also because it would have far-reaching economic and political implications for the participating countries and the international monetary system as a whole. The majority of these impacts are gradual and long-term.


Historical Event in Financial Market (1997-1998):

Asian Financial Crisis

The Asian financial crisis was a huge worldwide financial crisis that began in Asia and then spread to the rest of the globe towards the end of the 1990s.

The Asian financial crisis of 1997–98 started in Thailand and swiftly extended to neighboring countries. It started as a currency crisis when Bangkok decoupled the Thai baht from the US dollar, triggering a series of devaluations and large capital outflows. The value of the Indonesian rupiah fell by 80% in the first six months. The Thai baht by more than 50%. The South Korean won by about 50%, and the Malaysian ringgit by 45 percent. In the first year of the crisis, capital inflows to the most afflicted countries fell by more than $100 billion. When the Asian financial crisis expanded to the Russian and Brazilian economies, it became a global crisis, both in terms of volume and spread.

The Asian financial crisis has a wide range of implications. Though the crisis is often referred to as a financial or economic crisis, the events of 1997 and 1998 may also be seen as a governance crisis at all major political levels: national, global, and regional. The Asian financial crisis, in particular, exposed the state’s inability to execute its historical regulatory tasks, as well as to manage globalization processes and demands from foreign players.

Although Malaysia’s short-term capital controls were relatively effective in stemming the crisis, and Prime Minister Mahathir bin Mohamad’s ability to resist IMF-style reforms attracted much attention, most states’ inability to resist IMF pressures and reforms drew attention to the loss of government control and general erosion of state authority. The most striking scenario was that of Indonesia, where governmental failings aided in the transformation of an economic crisis into a political crisis, leading in the demise of Suharto, who had ruled Indonesian politics for more than 30 years.

May 1998 riots of Indonesia – Wikipedia

Debates concerning the origins of the financial crisis included opposing and frequently heated views from those who regarded the crisis’s roots as domestic and others who saw it as an international issue. The function of the developmental state in East Asian development has received a lot of attention since the economic crisis.

The crisis was quickly blamed on interventionist state tactics, national governance structures, and crony capitalism by proponents of neoliberalism. Who regarded the disaster as self-inflicted. All IMF assistance was contingent on the elimination of the intimate government-business linkages that had characterized East Asian growth. And the replacement of Asian capitalism with what neoliberalists considered as a more efficient and apolitical neoliberal form of development.

The widespread belief that IMF policies caused more damage than good drew special attention to the IMF and other global governance institutions. The IMF was chastised for its “one-size-fits-all” approach. Which mindlessly transplanted Latin American remedies to East Asia, as well as its invasive and demanding conditionality.

Fiscal austerity has been attacked for being particularly unsuitable in the East Asian context. As well as for extending and exacerbating economic and political problems. In addition to the technical merits of IMF programs being questioned, the IMF’s politics and overall lack of openness in its decision-making were also questioned.

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East Asian economies’ helplessness, as well as their lack of redress within current global governance frameworks, were highlighted by their lack of representation in the IMF and World Bank. The IMF’s complaints, taken together, have lowered the IMF’s reputation, if not its power, leading to increased demands for a new international framework to control the global economy.

The Asian financial crisis exposed the shortcomings of regional organizations, particularly the Asia-Pacific Economic Cooperation (APEC) and the Association of Southeast Asian Nations (ASEAN), sparking heated discussion over their futures. The unstructured, nonlegalistic institutionalism of both groups drew a lot of criticism. However, although ASEAN has shown a stronger willingness to modify its institutions, informal institutionalism remains the rule in East Asia’s regional forums.


Historical Event in Financial Market (2007-2010):

Subprime Mortgage Crisis

The expansion of mortgages to high-risk borrowers, coupled with rising house prices, contributed to a period of turmoil in financial markets that lasted from 2007 to 2010.

Historical Event in Financial Market: Black Wednesday, Bretton Woods, Digital Currency | Trading Cocktail
People lying below the iconic Wall Street bull to protest a government bailout of financial firms after 2008 crash on September 25 in New York City

How and Why the Crisis Occurred

The subprime mortgage crisis of 2007–10 stemmed from an earlier expansion of mortgage credit. Including to borrowers who previously would have had difficulty getting mortgages. Which both contributed to and was facilitated by rapidly rising home prices. Historically, potential homebuyers found it difficult to obtain mortgages if they had below average credit histories. Provided small down payments or sought high-payment loans.

Unless protected by government insurance, lenders often denied such mortgage requests. While some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA). Others, facing limited credit options, rented. In that era, homeownership fluctuated around 65 percent. Mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

In the early and mid-2000s, high-risk mortgages became available from lenders who funded mortgages. By repackaging them into pools that were sold to investors. New financial products were used to apportion these risks. With private-label mortgage-backed securities (PMBS) providing most of the funding of subprime mortgages.

The less vulnerable of these securities were viewed as having low risk. Either because they were insured with new financial instruments or because other securities would first absorb any losses on the underlying mortgages (DiMartino and Duca 2007). This enabled more first-time homebuyers to obtain mortgages (Duca, Muellbauer, and Murphy 2011), and homeownership rose.


Increasing housing demand and prices

The resulting demand bid up house prices, more so in areas where housing was in tight supply. This induced expectations of still more house price gains. Further increasing housing demand and prices (Case, Shiller, and Thompson 2012). Investors purchasing PMBS profited at first because rising house prices protected them from losses.

When high-risk mortgage borrowers could not make loan payments. They either sold their homes at a gain and paid off their mortgages, or borrowed more against higher market prices. Because such periods of rising home prices and expanded mortgage availability were relatively unprecedented. And new mortgage products’ longer-run sustainability was untested, the riskiness of PMBS may not have been well-understood. On a practical level, risk was “off the radar screen” because many gauges of mortgage loan quality available at the time were based on prime, rather than new, mortgage products.

The Bankruptcy

When house prices peaked, mortgage refinancing and selling homes became less viable means of settling mortgage debt and mortgage loss rates began rising for lenders and investors. In April 2007, New Century Financial Corp., a leading subprime mortgage lender, filed for bankruptcy. Shortly thereafter, large numbers of PMBS and PMBS-backed securities were downgraded to high risk, and several subprime lenders closed. Because the bond funding of subprime mortgages collapsed, lenders stopped making subprime and other nonprime risky mortgages. This lowered the demand for housing, leading to sliding house prices that fueled expectations of still more declines, further reducing the demand for homes. Prices fell so much that it became hard for troubled borrowers to sell their homes to fully pay off their mortgages, even if they had provided a sizable down payment.

As a result, two government-sponsored enterprises. Fannie Mae and Freddie Mac, suffered large losses and were seized by the federal government in the summer of 2008. Earlier, in order to meet federally mandated goals to increase homeownership. Fannie Mae and Freddie Mac had issued debt to fund purchases of subprime mortgage-backed securities, which later fell in value. In addition, the two government enterprises suffered losses on failing prime mortgages. Which they had earlier bought, insured, and then bundled into prime mortgage-backed securities that were sold to investors.

In response to these developments. Lenders subsequently made qualifying even more difficult for high-risk and even relatively low-risk mortgage applicants, depressing housing demand further. As foreclosures increased, repossessions multiplied, boosting the number of homes being sold into a weakened housing market. This was compounded by attempts by delinquent borrowers to try to sell their homes to avoid foreclosure, sometimes in “short sales,”. In which lenders accept limited losses if homes were sold for less than the mortgage owed.

In these ways, the collapse of subprime lending fueled a downward spiral in house prices that unwound much of the increases seen in the subprime boom.

The housing crisis provided a major impetus for the recession of 2007-09. By hurting the overall economy in four major ways. It lowered construction, reduced wealth and thereby consumer spending. Decreased the ability of financial firms to lend, and reduced the ability of firms to raise funds from securities markets (Duca and Muellbauer 2013).

Steps to Alleviate the Crisis

The government took several steps intended to lessen the damage. One set of actions was aimed at encouraging lenders to rework payments and other terms on troubled mortgages or to refinance “underwater” mortgages (loans exceeding the market value of homes) rather than aggressively seek foreclosure.

This reduced repossessions whose subsequent sale could further depress house prices. Congress also passed temporary tax credits for homebuyers that increased housing demand and eased the fall of house prices in 2009 and 2010. To buttress the funding of mortgages, the Congress greatly increased the maximum size of mortgages that FHA would insure. Because FHA loans allow for low down payments, the agency’s share of newly issued mortgages jumped from under 10 percent to over 40 percent.

Quantitative Easing

The Federal Reserve, which lowered short-term interest rates to nearly 0 percent by early 2009, took additional steps to lower longer-term interest rates and stimulate economic activity (Bernanke 2012). This included buying large quantities of long-term Treasury bonds and mortgage-backed securities that funded prime mortgages.

To further lower interest rates and to encourage confidence needed for economic recovery, the Federal Reserve committed itself to purchasing long-term securities until the job market substantially improved and to keeping short-term interest rates low until unemployment levels declined, so long as inflation remained low (Bernanke 2013; Yellen 2013).

These moves and other housing policy actions—along with a reduced backlog of unsold homes following several years of little new construction—helped stabilize housing markets by 2012 (Duca 2014). Around that time, national house prices and home construction began rising, home construction rose off its lows, and foreclosure rates resumed falling from recession highs. By mid-2013, the percent of homes entering foreclosure had declined to pre-recession levels and the long-awaited recovery in housing activity was solidly underway.


Historical Event in Financial Market (2009):

The Rise of Digital Currency, Sathoshi Era

1998 – 2009 The pre-Bitcoin years

Even though Bitcoin was the first cryptocurrency, there had been other attempts to make online currencies with encrypted ledgers. A few examples of this are B-Money and Bit Gold, both of which were ideas that didn’t work out.

2008 – The Mysterious Mr Nakamoto

A paper called Bitcoin – A Peer to Peer Electronic Cash System was sent to a cryptography mailing list. It was written by someone who claimed to be Satoshi Nakamoto, but their real identity is unknown to this day.

2009 – Bitcoin begins

The Bitcoin software is made available to the public for the first time. The process of mining, which is how new Bitcoins are made and transactions are recorded and verified on the blockchain, so now people can use it.

2010 – Bitcoin is valued for the first time

As it had never been traded, but only mined. It was impossible to put a value on the units of the new cryptocurrency. In 2010, for the first time, someone tried to sell theirs. They traded 10,000 of them for two pizzas. They would have been worth more than $100 million today if the buyer had kept them. This is the starting point for the rise of digital currency.

2011 – Rival cryptocurrencies emerge

People start to talk about Bitcoin more and more, and the idea of decentralized and encrypted currencies starts to spread. The first alternative cryptocurrencies start to show up. These are sometimes called altcoins, and they usually try to improve on the original Bitcoin design by making it faster, more anonymous, or some other way. In the beginning, Namecoin and Litecoin were two of the first to come into being. There are now more than 1,000 cryptocurrencies in use, and new ones are being added all the time.

2013 – Bitcoin price crashes.

Shortly after the price of one Bitcoin hits $1,000 for the first time, the price starts to fall quickly. Many people who invested money at this point will have lost money because the price fell to around $300. It would be more than two years before it reached $1,000 again.

2014 – Scams and theft

As the rise of digital currency become more popular. Criminals have found Bitcoin, a currency that was made with anonymity and little control in mind, to be a profitable and easy way to get money from other people. This is what happened in January 2014. The world’s biggest Bitcoin exchange Mt.Gox went down, and the owners of 850,000 Bitcoins never saw them again. A lot of people are still trying to figure out what happened, but no matter what, someone got their hands on a haul worth $450 million dollars at the time. As of today, those coins would be worth $4.4 billion.

Digital Currency | trading Cocktail
The rise of crypto economy


2016 – Ethereum and ICOs.

Some people became excited about the Ethereum platform this year, which almost took over from Bitcoin. Coins called “Ether” are used on this platform to make blockchain-based smart contracts and apps work. When Ethereum came out, Initial Coin Offerings (ICOs) began to appear (ICOs). These are crowdfunding platforms that allow investors to trade what are often called stocks or shares in new businesses. Just like they can invest and trade cryptocurrencies. They do this in the same way. People in the US were told by the SEC that because there isn’t a lot of oversight, ICOs could be scams or ponzi schemes that look like real investments. The Chinese government went a step further and banned them from the country.

2017 –Bitcoin reaches $10,000 and continues to grow

A steady rise in the places where Bitcoin could be used helped keep its popularity growing even though its value didn’t reach its previous highs. As more and more uses came up. It became clear that more and more money was coming into the Bitcoin and cryptocoin ecosystem. It rose from $11 billion to more than $300 billion during this time.

People who work for banks like Citi Bank, Deutsche Bank, and BNP Paribas are looking into ways that they might be able to work with Bitcoin. In the meantime, the technology behind Bitcoin called “blockchain” is changing the world of finance and more. It’s still very much in its infancy, though.

It doesn’t matter what you think about Bitcoin and other cryptocurrencies. Which have been called everything from the future of money to a complete scam. It looks like they will be around for a long time in financial history. Will it be able to do what many early adopters and evangelists say it will be able to do? Replace government-controlled, central money with a distributed and decentralized alternative that is controlled by nothing but market forces? But we won’t know for sure for a while. Now on 2022 the bitcoin price settle around 40k after hitting the all time high on the previous year at


Historical Event in Financial Market:

The Rise of Digital Currency, Central Bank Digital Currency (CBDC)

Central bank digital currencies (CBDCs) are a prominent issue in the financial world right now. Banks, institutions, and governments are researching and analyzing the economic and technological viability of establishing a new form of digital money. As well as the implications for monetary and fiscal policy.

According to a study by the Bank of International Settlements, over 80% of central banks are already looking at CBDC. Why are these institutions so interested with CBDCs, one could wonder? Their role in digital economies, nations studying their use cases, and the route to mainstream acceptance are all covered in this explanation.

Digital Currency | Trading Cocktail

CBDCs explained

CBDCs, which use the same underlying distributed ledger technology as cryptocurrencies. Solve these problems while employing the same underlying distributed ledger technology as cryptocurrencies. Still in the ongoing development and prepare to be written in financial history. CBDCs are legal money in the territory of the issuing central bank, which means that anybody may pay with them and merchants must accept them.

CBDC stands for Central Bank Digital Currency, which is an electronic version of central bank money that people may use to make digital payments and save money. A CBDC has three key components:

  • A digital currency

  • Issued by the central bank

  • Universally accessible

But why should a government issue a CBDC when fiat currency exists?

Why issue a CBDC?

If a nation issues a CBDC, the government will treat it as legal tender, just like fiat currencies; both CBDC and actual currency will be legally recognized as a means of payment and will serve as a claim against the central bank or government.

Both wholesale and retail payment systems benefit from the use of a central bank digital currency. A central bank digital currency promotes speedy settlement of retail payments on the wholesale side. It has the potential to increase the efficiency of payments made at the point of sale or between two parties (p2p).

Individuals in a digital society do not have access to real coins or notes, and all money is transacted digitally. If a nation wants to transition to a cashless society, a digital currency backed by the government or central bank is a viable option. The market for private digital currency is growing, putting pressure on governments to establish a CBDC. Beneficiaries will be at a disadvantage if it becomes popular. Since e-money suppliers want to maximize their profits rather than the general public’s. The issuance of a CBDC would offer governments a competitive advantage over private e-money.

Aside from domestic transactions, the present cross-jurisdiction payments paradigm is primarily reliant on central banks running the real-time gross settlement (RTGS) infrastructure, which must satisfy all local banks’ commitments. Participants in cross-border payments are susceptible to settlement and credit risk due to time gaps. A CBDC is accessible 24 hours a day, seven days a week. With privacy safeguards in place to reduce counterparty credit risk.

Different types of CBDCs

CBDCs are categorized into two different proposals based on the targeted users:

Retail Central Bank Digital Currency

Retail CBDC is traceable, anonymous, and accessible 24 hours a day, 7 days a week, thanks to distributed ledger technology. It also has the potential to be used for interest rate applications. As a result of these benefits, a retail central bank digital currency concentrates on assisting the general population. It also aids in the reduction of currency printing costs and promotes financial inclusion.

Wholesale Central Bank Digital Currency

While resolving liquidity and counterparty risk problems, wholesale CBDC improves payments and security settlement efficiency. It’s ideal for financial firms that keep their reserves with a central bank. Even central banks consider wholesale central bank digital currency a preferred option to present systems. Due to its capacity to increase the speed and security of wholesale financial systems.

Countries experimenting with CBDCs

China: Digital Yuan

One of the earliest central banks to build a CBDC was the People’s Bank of China. In 2014, they formed a special task team to study and develop their digital currency digital Yuan. When China announced the testing of a CBDC prototype in 2020, it grabbed attention. The first digital Yuan testing was conducted in Shenzhen’s Luohu area in October 2020. Suzhou City hosted the second pilot program in the start of 2021. According to projections, the Chinese digital Yuan will have an influence on China’s $27 trillion payment sector.

Sweden: e-krona

The world’s oldest bank, Swedish Riksbank, launched the digital currency e-krona CBDC initiative in 2017. A pilot was conducted in conjunction with Accenture PLC from 2020 to February 2021. And the project was extended until February 2022. E-krona aims to provide a reliable alternative in the event of an emergency or disruption of private payment service providers. Maintaining the stability of the Swedish payment system.

Bahamas: Sand Dollar

The Bahamas started their CBDC project dubbed “Sand Dollar” in 2019 and completed it in October 2020. Exuma and Abaco Islands were chosen as pilot regions for the initiative. Each Sand Dollar is a digital version currency of the Bahamian dollar, which is pegged 1:1 to the US dollar. The initiative aims to provide all people with equal access to financial services and regulated payments.

Eastern Caribbean Area: DXCD

The Eastern Caribbean Central Bank, the monetary authority for members of the Organization of Eastern Caribbean States. Started work on a CBDC initiative named DXCD to reach financially excluded sectors of the population. Antigua and Barbuda, Grenada, Saint Lucia, St. Kitts, and Nevis are all testing the prototype. DXCD’s major purpose is to be a low-cost retail payment system for people without credit cards, as well as for merchant and e-commerce purchases.

Marshall Islands: Sovereign

The Republic of the Marshall Islands announced intentions to build a CBDC named Sovereign in 2018. (SOV). The US dollar is now the island’s legal currency, owing to the island’s small population of 58,729 people. And the expense of producing money outweighed the advantages. To increase the efficiency of RMI’s present payment systems. RMI aims to implement SOV as an alternative digital money as a legal currency.

CBDC’s path to mass adoption

The current state of decentralized blockchains is “user beware”: all transactions are irreversible once completed, and assets cannot be retrieved if the transacting party refuses to comply with legal authorities. For a CBDC striving for widespread acceptance, this is not a feasible choice.

Furthermore, no existing non-banking payment method receives similar classification under current regulations. It is also impossible for legal authorities to force cooperation since the receiver may be an unknown individual from another country who is not bound by the CBDC’s rules and regulations. CBDC issuers should instead make changes to their status under banking, property, payment, and contract law. Only hybrid two-layer solutions that handle two separate difficulties are capable of doing this:

  1. A CBDC needs a proper management infrastructure, wherein transactions can be first verified and then modified under the jurisdiction’s law. A dispute resolution system has security, compliance, and auditing processes. With Hedera acting as a publicly verifiable log of transactions for CBDCs that live in permissioned blockchain frameworks, banks that layer customer services on top of the payment layer can trust and verify that transaction information is accurate.

  2. A CBDC also needs to report its state (account balances, transactions, etc.) to relevant regulatory bodies, which can be more than just the state of the transactions — this includes things like information on IP addresses or account IDs. This information is vital in dispute resolution for payment systems. Using Hedera as a public record, authorities could directly inspect a CBDC’s state, including the details of how users have interacted with it.

Closing thoughts on CBDCs

Central bank digital currencies will soon become a reality. Thanks to the significant work and attention that central banks are devoting to digital currency. People will have access to platforms to convert cryptocurrencies into legal monies. As a result of the introduction of CBDCs to the globe. Furthermore, it will aid in the financial inclusion of the unbanked people.

CBDCs will have a big impact on the future of finance, especially when it comes to buying and selling digital assets and securities. The issue is, when will it happen? This response will be built on the foundations of a specific legal framework that will make it easier for global governments to promote the transparency, distribution, and issuance of a digital form of money. The world will begin to accept digital currencies as a standard when authorities and central banks take actual moves toward creating CBDCs.

About Trading Cocktail

The team consists of Marco, Fundamental, and Technical Analyst.
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