The interest of countries willing to launch the project of Central Bank Digital Currency doubled due to several reasons. The pandemic at hand, a surge in interest from ordinary investors, and the enhanced value of Bitcoin and changed the narrative. As operated by federal banks worldwide, CBDC is launched by five countries; fourteen countries are in the pilot project scenario, and thirty-three countries are in the research stage.
A Central Bank Digital Currency is known as the virtual format of fiat money in the scope of a particular nation. Virtual money backed and issued by a central bank, CBDC is considered the electronic record of a country’s official currency. With the introduction of cryptocurrencies, a clear way was paved for central bank digital currencies.
Additionally, the government doesn’t have to print money, and the central bank can issue electronic coins and accounts fully backed by the government’s faith. Most countries are exploring its usage and studying its implications on their economy.
Attributes of CBDC
The International Monetary Fund has classified central bank digital currency as an electronic representation of sovereign currency issued by a central monetary authority. Several attributes are associated with central bank digital currency. It is essential to understand them before going any further.
The central bank backs CBDCs, and they are easily transferrable through peer-to-peer formats. Along with this, the central bank’s digital currency is pegged against fiat money. The CBDCs are programmable for any usage in the industry, and they are considered legal tender.
Advantages of CBDC
CBDCs have the potential to turn the economy and financial future of a country positively. It wouldn’t be wrong to claim that central bank digital currency is the future for this generation and the next. Following are some pros to CBDC and how it is positively bringing the anticipated change and progress.
The CBDCs simplify the implementation of monetary and fiscal policy while promoting financial inclusion. Financial inclusion means that the user doesn’t have to own a bank account to hold such currencies. They also allow the government to combat illegal activities such as payment fraud. With that being said, the central bank’s digital currency offers safer and faster transactions.
The peer-to-peer and point of sale (POS) payment have been transformed through the central bank digital currency. It also offers minimal transactional fees. Additionally, the shift to cashless systems has vanished the dependency on notes and coins.
Disadvantages of CBDC
According to the experts of BEX Bank, the central bank digital currency has its cons, and the project hasn’t reached perfection yet. Having considerable know-how of the disadvantages of CBDCs helps the countries make the right decision.
The central bank digital currency doesn’t solve the problem of centralization. They still control data and the levers of the transaction between the public and banks. Moreover, privacy is invaded through this system.
Central bank digital currency has geographical restrictions, meaning that they are only accepted by countries that issue them. They display higher price volatility and enhance the risks of system-wide bank runs. Moreover, CBDC lowers bank lending for the general economy and economic growth.
Even with its cons, a significant ratio of countries is working on central bank digital currency. However, central banks would have to dedicate many resources for its practical implementation in the long run.