During the COVID-19 pandemic, the world has been introduced to a digital universe. People started using those digital supports in the comfort of their homes. The financial-service industry has been affected by these recent digital changes, such as the emergence of cryptocurrencies and blockchain technology.
The digital scenario that emerged during the pandemic includes the digital currencies introduced by the central banks. A government-issued currency that is not bound to a commodity is known as Central Bank Digital Currency (CBDC).
Learn more about the government issuing Central Bank Digital Currency (CBDC)
What Is Central Bank Digital Currency (CBDC)?
A Central Bank Digital Currency (CBDC) is a digital currency issued by a central bank rather than a commercial bank. It is also known as digital fiat currency or digital base money. It is also liable to the central bank and valued in the national currency the same way as physical banknotes and coins are.
CBDC is a type of electronic money issued by the central bank that can be used by individuals, businesses, and the government as means of payment as opposed to a new form of money. The CBDC resembles cryptocurrencies with the exception that the central bank sets their value, which is equal to the nation’s fiat currency.
What Are The Characteristics Of Central Bank Digital Currency?
Like physical banknotes, a CBDC is a high-security digital instrument used as a store of value, a means of exchange, and a unit of account. Each unit is individually recognizable to combat currency fraud, just like physical money.
Due to higher funding costs for banks, CBDC will likely have an impact on commercial banks in areas of reducing commissions, preventing the sale of customer data, and collecting deposits, deposit policies, and credit policies.
The core money supply includes digital fiat money and other types of currencies. CBDC is liable to the central bank in the same way that physical cash is.
It is a digital carrier that may be used with several digital payment services and systems to store, transfer, and send payments.
How Is Central Bank Digital Currency Implemented?
Implementing a CBDC would involve the usage of a database managed by the central bank, the government, or authorized private-sector organizations. The database would maintain a record of the amount of money held by each entity, including people and corporations, with the required privacy and cryptography protections.
A blockchain or other distributed ledger would likely not be required or beneficial for a central bank digital currency because it would be centrally regulated, even though they were the concept’s original inspiration.
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What Are The Benefits Of Central Bank Digital Currency?
Governments and central banks are still studying the CBDC to understand the benefits that it might bring to financial services, economic growth, technological innovation, and improved transaction efficiency.
Here’s a list of possible benefits of CBDC.
- Technology Efficiency: Payments and money transfers might be made in real-time, without the need for intermediates like banks and clearing agencies.
- Financial Inclusion: Safe money accounts at central banks could be a powerful tool toward this goal, enabling any citizen of legal age to receive a basic account for free or at a minimal cost.
- Less Cost: by shifting spending away from physical facilities and towards digital banking, financial service providers may save $400 billion yearly in direct costs.
- Reduce illicit activity: keeping track of the whereabouts of each unit of cash is made possible by CBDC, which helps the central bank prevent illegal activities.
- Increased speed: The speed and effectiveness of electronic systems of many nations could be increased through CBDCs.
- Proof of transactions: With digital records proving the transactions between two parties, issues with cash like shortchanging, money theft, and disputed testimony are avoided.
- Preservation of money as a public good: Central banks might create digital currencies as a modern replacement for paper money, which is currently being considered for extinction.
What Are The Risks Involved In Central Bank Digital Currency?
- Disintermediation of the financial system: One concern is that depositors may leave the banking system if a country can distribute digital currency to its citizens directly.
- Centralization: since most central bank digital currencies are centralized rather than decentralized, the controllers of the issuance of CBDs can add or remove money from anyone’s account within split seconds.
- Lack of Privacy because the government has direct visibility of the transactions.
- High chances of social manipulation.
- Risks in attaining widespread implementation.
Which Are The Countries That Have Already Launched Central Bank Digital Currencies?
Several central banks ate conducting research and running tests to see if a CBDC might work in their economy. The nations that had already established the CBDC so far are listed below:
- The Central Bank of Bahamas (Sand Dollar)
- The Eastern Caribbean Central Bank (DCash)
- The Central Bank of Nigeria (e-Naira)
- The Bank of Jamaica (JamDex)
- Reserve Bank of India (Digital Rupee)
- Central Bank of China (digital RMB)
The Bank of England, Bank of Canada, Riksbank Sweden, and the United States are investigating CBDs to improve their domestic payment system. Hopefully, in the coming years, these nations might implement the CBDCs are a mode of financial services in their country.
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