Central Bank Digital Currency ( CBDC )
The Supreme Court of India quashed the ban levied on the trading of the cryptocurrency in India. The decision overruled the 2018’s RBI ban imposed on virtual currencies like Bitcoins. The aim of the ban was to safeguard the country’s financial system from the private virtual currencies, which are deemed illegal by the government.
What Is a Central Bank Digital Currency (CBDC)?
A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
- A central bank digital currency (CBDC) utilizes technology to represent a country’s official currency in digital form.
- Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country’s monetary authority.
- While several governments are looking into the viability of creating and issuing CBDCs, no country has officially launched such money.
In simple terms, a central bank digital currency (CBDC) would be a digital banknote. It could be used by individuals to pay businesses, shops or each other (a “retail CBDC”), or between financial institutions to settle trades in financial markets (a “wholesale CBDC”).
Different Forms of CBDC
The new taxonomy of money also points out possibilities for drawing differences between two potential forms of CBDCs. The most significant traits of money, according to the new definitions, focus on the issuer, form, accessibility, and transfer mechanism. The issuer might be a central bank or any other entity.
The form in the definition of money refers to electronic and physical money. In terms of accessibility, money could take on two options, such as limited or universal access. The transfer mechanism of money could be centralized or decentralized (peer-to-peer) in nature.
As a result, the new aspects included in the definition of money provide the reliable foundation for differentiating the two forms of electronic CBDC, such as central-bank issued and the peer-to-peer variants. The retail CBDC is available for the general public, and the wholesale CBDC variant is available only for financial institutions. Now, it is important to establish the specific assumptions about CBDC for reflecting on the central bank digital currency pros and cons.
Central Bank Digital Currency Pros
Central bank digital currency or CBDC has emerged as a promising choice for central banks to compete with digital money. The recently launched initiatives in the crypto asset sector by tech giants such as Facebook paint CBDCs as favorable options. However, it is important to look at the central bank digital currency pros to find out the value they offer. Here is a look at some of the notable advantages with central bank digital currencies that you should consider.
- The foremost positive aspect in central bank digital currency refers to the lower transaction costs. CBDCs can provide the support for faster institutional and retail payments with reduced transaction costs.
- Central bank digital currency pros also focus particularly on fostering economic growth alongside digital innovation. CBDCs could offer a trustworthy digital currency jurisdiction alongside creating a very appealing crypto ecosystem. As a result, they can lead to improved economic activity alongside encouraging the spill-over effects in other technology sectors.
- CBDCs can provide a considerably cost-efficient alternative to cash for value storage. The cost factor is lower in CBDCs as it doesn’t impose burden on costs for production, storage, transportation, and disposal. At the same time, CBDCs also present safe alternatives for distribution and reduction of concerns regarding fraud in the payment ecosystem.
- Organizations could gain the reputation of a trailblazer by capitalizing on the opportunities with CBDC in the nascent stages. By expressing an active interest in CBDC in the early stages, a company can pioneer definitions of monetary policy regarding CBDCs. Subsequently, companies working on CBDC could also play a crucial role in defining the various applicable standards with CBDC.
- Liquidity is a prominent factor among central bank digital currency pros by helping central banks offer short-term liquidity support. Interestingly, users can avail the liquidity benefits with CBDC on bank holidays too. Therefore, CBDCs can be helpful for effective reduction in risks of individual institutions being involved in systemically triggering chain reactions.
- Financial inclusion comes immediately to the mind when you think of CBDCs. Central bank digital currencies could help in improving the access to digital payments for a majority of unbanked households. CBDCs can help users in accessing current digital payment tools at considerably lower or zero costs, without a bank account.
- The introduction of CBDCs could also increase competition in the payment systems landscape. Additionally, they can also foster motivation among private players for innovation. Furthermore, central bank digital currency pros can also increase competition among banks. Banks would compete for attracting bank deposits related to assets that could possibly migrate to CBDC.
- The most important benefit that you can find with CBDCs refers to the lack of involvement of intermediaries. As a result, CBDCs could play a crucial role in increasing the speed of settlement alongside support for real-time payments. As you can see there are a lot of similarities to the features of blockchain technology.
- Finally, CBDCs could also act as a direct monetary policy tool with the condition that it bears interest. Therefore, it can support improved direct control over the money supply.
- Central bank digital currency pros also point out towards better privacy levels. They can provide the assurance of better anonymity in comparison to the current commercial bank card payments.
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Central Bank Digital Currency Cons
After reflecting on the pros of central bank digital currency, let us reflect on the central bank digital currency cons. They can offer a better impression of the potential of CBDC. Here are the notable setbacks you can find with CBDCs.
- CBDCs have prominent geographic restrictions as they are accepted only in the country that issues them.
- Central banks could turn into direct competitors of payment service providers, thereby forcing banks to lose income. Furthermore, new investment opportunities with CBDC could reduce the consumer deposit demand. Subsequently, CBDCs can lower bank lending to the general economy and the economic growth.
- Crypto-based CBDCs do not have any links to conventional currency and could showcase higher price volatility.
- Central bank digital currency cons also point out the increased competition for commercial banks. The nature of CBDCs as a substitute for bank deposits can motivate banks to increase their deposit rates. Then, it can result in a transition to wholesale funding from deposit funding.
- Central bank digital currencies can also increase the risks of system-wide bank runs. Such types of bank runs could increase faster in times of financial crisis without any dependence on time and proximity.
As you can notice clearly, central bank digital currencies present different propositions for early adopters. While central bank digital currency pros present clear invitations to issue CBDCs immediately, the cons paint a completely contrasting image. However, the central bank digital currency cons provide the ideal insights for prohibited practices in CBDC implementation.
If you want to learn more about central bank digital currencies, then you need to choose 101 Blockchains. We have introduced a CBDC Masterclass recently on our platform for all aspiring learners. You can access the support of industry experts in learning about CBDCs with our masterclass. Register now and dive into the world of central bank digital currencies!
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