Central Bank Digital Currencies (CBDCs) are digital currencies established and regulated by a country’s central bank.
While they have some characteristics in common with cryptocurrencies such as Bitcoin, the main difference is that their value is fixed and managed by the central bank, reflecting the country’s conventional currency.
With an increasing number of countries actively creating or currently utilizing CBDCs, it is critical that we understand what they are and how they may affect our lives and society as a whole.
What is Central Bank Digital Currency (CBDC)?
CBDC is a digital form of a country’s currency that is administered by the central bank. It lives solely as numbers on a computer or other electronic device, as opposed to actual cash.
In the United Kingdom, the Bank of England is collaborating with HM Treasury to investigate the feasibility of creating a Central Bank Digital Currency. If approved, this new form of money would be known as the “digital pound.”
What Distinguishes a CBDC From a Cryptocurrency?
You’ve certainly heard of Bitcoin, Ether, and ADA—these are privately issued digital assets known as cryptoassets or cryptocurrencies. However, they differ significantly from Central Bank Digital Currencies (CBDCs) in several key areas.
To begin with, cryptocurrencies are created by private organizations rather than by governments or central banks. So, if something goes wrong with a cryptocurrency, there is no higher authority to intervene or remedy the problem, such as a central bank.
Second, cryptocurrency prices are notoriously volatile. Their value can rise or drop in a matter of minutes, making them untrustworthy for daily transactions. On the other hand, if the UK introduced a digital pound, its value would be fixed and managed throughout time, making it a more practical payment option.
Advantages of CBDCs
Central Bank Digital Currencies (CBDCs) supporters argue that these digital currencies have the potential to change national payment systems by lowering costs, boosting transparency, and improving efficiency. They could also be a game changer for increasing financial inclusion, particularly in areas where traditional banking services are scarce or unreliable.
CBDCs, from the standpoint of central banks, represent new monetary policy levers. They could be used to kick-start a lagging economy or to control inflation. The benefits for the common user could include low to free fees for fast money transfers. Furthermore, governments might quickly distribute and reliably track economic stimulus funds by depositing them directly into citizens’ digital wallets.
Disadvantages of CBDCs
While there is much excitement surrounding the possibilities of Central Bank Digital Currencies (CBDCs), there are also substantial issues to consider. One source of concern is that because digital money is easily traceable, it is also easily taxable.
Furthermore, others question whether the business case for CBDCs is compelling enough to justify the time and money invested. Creating the infrastructure for a digital currency may require more resources from central banks than the potential benefits justified.
Furthermore, the promised increases in transaction speed may not occur; numerous developed countries have already deployed instant payment systems that do not rely on blockchain technology. Indeed, some central banks, notably those in Canada and Singapore, have concluded that, for the time being, the rationale for shifting to digital money isn’t especially compelling.
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