Finance / Economics
What is a Central Bank Digital Currency?
Central bank digital currencies (CBDCs)
are a form of digital currency issued by a country's central bank. Countries
like the USA are developing CBDCs and looking to provide legislation so as to
help regulate these digital currencies.
Although CBDC’s are similar to
cryptocurrencies which have gained popularity in the recent years, the
difference is that CBDC’s would be set by the Country’s Central Bank and their
value is fixed to the equivalent of the country’s fiat currency. Cryptocurrencies
as they are decentralized are not as reliable as they are highly volatile.
The benefits of CBDC’s would be to provide
businesses and consumers with privacy, convenience, accessibility and financial
security. Many US households up through 2020 did not even have bank accounts or
access to financial services. Benefits would also include lower risk of money
laundering and financial crimes as the consumers would be dealing directly with
Central Bank rather than private banks.
This would also reduce the costs of having expensive infrastructure and the
need to have multiple banks in each country.
As of this year, approximately 11
countries/territories that have already implemented CBDCs. Approximately 130
other countries have pilot programs in place and are performing the necessary
studies as the implementation of CBDCs would require stability in the market
and not the constant fluctuation similar to the cryptocurrency market.
China’s pilot, which currently reaches 260
million people, is being tested over 200 scenarios including payment in the
public transit and e-commerce to name a few. Since Russia’s invasion of Ukraine
and the G7 sanctions response, wholesale CBDC developments have doubled.
In conclusion, cryptocurrencies have
gained a lot of momentum over the years due to convenience, privacy and
accessibility and ability to deal in cross border transactions without any
additional hassles. Given the emergence of Artificial Intelligence, the more
extensive use of technology in society as a whole, the movement towards a
cashless society seems inevitable.
Given de-dollarization and the impact of
many countries trying to do business with countries like Iran, Russia
(especially after the Russia/Ukraine war and Russia being a key exporter of
oil, gas and wheat to the world) and others, cryptocurrencies have been a
popular alternative which has been a big indication in the market globally that
people are ready to rely on digital currencies.
CBDCs will ultimately come into place
within the next 10-15 years once proper regulation/legislation and testing has
been completed to ensure a proper transition into a cashless society. CBDCs
will help reduce overall costs in dealing with banks and cross border
transactions and reduce risks of money laundering financial crimes amongst