What are CBDCs?
Central Bank Digital Currencies (CBDCs) are the digital equivalents of the fiat currencies that people use in their daily lives. They are becoming a hot topic, with many governments considering the creation of their own CBDCs.
Although the topic is hot right now, CBDCs are not that new. Accordingly to Wikipedia, “one of the earliest examples of retail CBDC was in Ecuador from 2014-2018 when the central bank created a broadly accessible pilot retail CBDC that operated through citizens’ mobile phones (it did not employ blockchain technology). The program closed in part due to low citizen adoption.”
Recently, it was reported that a new digital dollar prototype could be introduced in the United States within the next few months. With that said, let’s take a closer look at the benefits and drawbacks that governments will face if and when they decide to implement a CBDC.
What are the pros and cons of introducing the CBDC?
Unlike cryptocurrencies such as Bitcoin, which operate on decentralized blockchain networks, a CBDC is a state-issued and controlled digital asset. It can provide numerous advantages, such as faster, less expensive transactions and enhanced security. CBDCs can also improve financial inclusion because they do not require consumers to have a bank account to hold them.
The disadvantage here – at least to some – is the state’s strong control over the blockchain network within which the digital currency would operate upon its introduction. Central banks would have greater control over money creation and greater insight into how people spend their money, potentially invading users’ privacy.
A CBDC, on the other hand, could significantly improve a country’s monetary policy development. Understanding the true macroeconomic situation takes a long time in most countries – at least several months. As a result, governments will find it more difficult to plan their economies in an efficient manner.
Greater oversight and real-time monitoring of the situation, made possible by a central bank digital currency, could significantly improve these processes. CBDCs may also enable a government to more effectively combat illegal activities such as payment fraud, providing people with a greater sense of security over their funds.
With all of this in mind, it is easy to see why central bank digital currencies are being treated as a serious matter by so many countries. The advantages they could provide are undeniably significant. Central banks would have to devote significant resources to developing a truly efficient state-backed digital currency system, but the benefits could be substantial in the long run.
Why Are World Governments Interested in CBDC?
Governments are constantly looking for ways to improve the efficiency of their economies. And, as the cryptocurrency market grew rapidly, they turned their attention to it in search of new solutions.
With the continued advancement of crypto acceptance by traditional businesses, we can now see a trend in which central banks all over the world are becoming more interested in the issue of digital currencies backed by a state.
Many of them are trying to figure out how central bank digital currencies can influence their economies, assisting them to transform and progress. What are the advantages of using CBDCs?
Unlike cryptocurrencies, which operate decentralized on a blockchain, a CBDC is a digital representation of a country’s fiat currency.
CBDCs have many of the same advantages as cryptocurrencies, such as faster and cheaper transactions compared to traditional money, greater transparency, high security, and so on. However, because they are issued by the government, CBDCs are designed in such a way that the government retains control over them.
The ability to observe the real-time macroeconomic situation in a country, thus creating avenues for more effective implementation of monetary policies, is a significant advantage that CBDCs can provide to a government.
The disadvantage is that users of CBDCs may experience a loss of privacy, given that such currency is much more controlled than cash and provides real-time insight into people’s personal finances.
Having said that, the world is increasingly moving toward digitalization, and cash will almost certainly be phased out of use one way or another. Greater oversight would, in turn, allow governments to use CBDCs more effectively to combat illegal activities such as money laundering and fraud, giving people a better chance of keeping their money out of the hands of criminals.
Furthermore, CBDCs represent a viable financial solution for the unbanked and have the potential to greatly improve cross-border transfers, as the use of DLT technology would eliminate the need for intermediaries, allowing transactions to be completed much faster and at a lower cost.
Of course, all of these benefits will be available only if a government decides to issue a CBDC and distribute it to its citizens. And, while many ideas are being considered around the world, this is not yet a definite possibility.
Central bank digital currencies could potentially rebuild a new global financial infrastructure, but for the time being, all we can do is wait and see which path governments choose.