The latest research, led by Prof. Ilan Alon, dean of the Israeli School of Economics (COLMAN) and editor-in-chief at the International Journal of Emerging Markets, and Orpaz Keinan, his colleague and lecturer/researcher in finance and economics at Israel College of Management, delves into how the adoption and legalization of cryptocurrencies may reshape sovereign credit ratings – the financial scorecards that determine borrowing costs for countries worldwide.
Their research is crucial at a time when the global economy, and Israel's in particular, faces significant challenges. Israel's credit rating is in a steady decline due to the tense security situation and increasing uncertainty, which threaten the country's economic stability and drive up defense expenditures.
This decrease underscores the critical importance of certainty for investors and rating agencies. While previous studies on sovereign credit ratings focused mainly on macroeconomic variables, the research by Prof. Ilan Alon and Orpaz Keinan emphasizes economic freedom and strong institutions in determining a state's creditworthiness. So, could there be a panacea for sovereign credit ratings?
The study begins with a bold effort to fill a glaring research gap: while many have discussed the pros and cons of cryptocurrencies, few have systematically investigated their impact on a country's credit score. Keinan and Alon stepped into this void with robust methodology, gathering data from 137 countries and using advanced statistical techniques to uncover trends that many had suspected but not quantified.
Their findings suggest that the adoption and legalization of cryptocurrencies generally have a positive effect on sovereign credit ratings. Countries that integrate cryptocurrencies into their legal and financial systems tend to enjoy a modest boost in how credit agencies view them. It's not magic – it's a reflection of improved economic freedom and institutional trust, hallmarks that rating agencies value highly.
However, the research serves as both a guide and a warning: the positive impact of cryptocurrencies on credit ratings is dwarfed by more traditional measures of economic health such as governance quality, economic freedom and fiscal stability. This nuanced discovery indicates that while the digital finance revolution is promising, it is not a substitute for building strong and transparent economic institutions.
In their conclusion, Keinan and Alon are both optimistic and cautious. They advocate a balanced approach that recognizes the potential of cryptocurrencies to enhance economic metrics but also calls for moderate integration, with a focus on strengthening the broader economic framework of governance and freedom.
For a country like Israel, increasing economic freedom—through measures such as reducing bureaucracy, improving regulatory quality and fostering innovation—may play a central role in stabilizing and improving its credit rating.
Israel's economy is characterized by a vibrant high-tech sector, flair for innovation and a highly skilled workforce. However, it also faces significant challenges, including heavy regulatory burdens and ongoing security concerns. These issues can negatively impact investor confidence and economic stability, making it essential to improve economic freedom to counterbalance these challenges.
Reducing bureaucratic obstacles can make it easier for businesses to operate and innovate, thus attracting more investment. By streamlining processes and cutting bureaucracy, Israel can create a business-friendly environment that encourages both local and foreign investment. Improving the quality of regulation ensures that economic policy is transparent, predictable and conducive to growth, which is essential for maintaining investor confidence. Regulatory reforms that promote efficiency and transparency can signal to credit rating agencies that Israel is committed to fostering a stable and reliable economic environment.
Prof. Ilan Alon Photo: CourtesyCultivating innovation can drive economic growth and demonstrate to credit rating agencies and investors that Israel is committed to maintaining a dynamic and sustainable economy. The technological and ecological advancements of the country's startups are already world-renowned, and further support for innovation can only enhance this reputation.
Moreover, the adoption of cryptocurrencies can further increase Israel's economic freedom. Cryptocurrencies offer a decentralized, transparent and efficient means of conducting transactions, which can lower costs and increase the ease of doing business.
By integrating cryptocurrencies into the financial system, Israel can attract tech-savvy investors and entrepreneurs who see the potential of blockchain technology. This move could signal to credit rating agencies that Israel is at the forefront of financial innovation and is improving its creditworthiness.
For countries teetering on the edge of economic reform, the message is clear: embrace the new but curtail the old.
Moshe David Rubinstein Cryptocurrencies offer an innovative means of improving economic dynamics, but they are not a stand-alone solution. As we chart our course in this brave new financial world, let's use every tool in our arsenal wisely, ensuring that in our rush to innovate, we don't ignore the bedrock of economic stability.
In this emerging era of digital currencies, the challenge for global leaders is not only to embrace technology but to adapt to it, reshaping our institutions and policies to harness the potential of crypto while protecting against its inherent risks.
The future is not only coming; it's here. Let's be ready.
Moshe David Rubinstein is a columnist for Ynetnews writing about startups and the Israeli hi-tech ecosystem. He is a British-Israeli entrepreneur, startup founder in AI, Web3 and Fintech. He is also an angel investor & advisor to early-stage startups. You can contact Moshe via his website.