Many countries are finding ways to transition to digital currencies, so it’s imperative to understand what they are and what they mean to society
A central bank digital currency (CBDC) is a digital version of cash issued by the central bank of a country. Digital forms of currency are already in use today. When you use a debit or credit card instead of cash, the connected financial institution is required to digitally record the transaction and update your account balance. So isn’t money already digital? CBDCs are different in one important respect. Today’s money is essentially the liabilities of a commercial bank or other financial institution, making it sensitive to the company’s financial health and government actions. CBDCs, like physical currency, are direct liabilities of the central bank, but in a different form.
A CBDC would allow a central bank to transfer currency directly to the digital wallet of an individual or corporation without needing any other bank or intermediary. Governments will be able to easily track the movement of central bank digital currencies. This will provide policymakers with a better understanding of how the economy works.
CBDCs will move towards real-time transactions and a worldwide, cost-effective payment settlement mechanism. For instance, importers can pay an American exporter on a real-time basis in digital dollars without an intermediary. It would not even be necessary that the U.S. Federal Reserve system is open for settlement. Time zone differences would no longer affect currency settlements. This transaction would be final as CBDCs will be as good as the printed currencies. In the near future, a pragmatic move to a cashless economy may be possible.
CBDCs have emerged amid the rise of thousands of cryptocurrencies. Cryptocurrencies are very volatile, with their value shifting all the time. This volatility may generate significant financial hardship for many people and jeopardize an economy’s overall stability. As a result, the situation is forcing central bankers to innovate in order to compete.
- CBDCs seek to make payment systems more secure, quicker, less expensive, and more dependable.
- CBDC can minimize money laundering, terror financing, and tax evasion cases.
- It will lead to lower transaction costs and make the flow of money easier.
- CBDCs, which are backed by the government and administered by a central bank, would provide a reliable way of exchanging digital money for households, consumers, and companies.
But could it also mean surveillance of citizens?
According to the World Bank, the introduction of CBDC could potentially pose risks to financial stability, financial integrity, data protection, privacy, and cyber resilience. It can also lead to currency substitution through cross-border transactions.
According to a survey conducted by the Bank of International Settlements (BIS) in 2021, 86 percent of central banks are investigating the possibilities of CBDCs, and around 15 percent of governments are planning to begin pilot trials. CBDC has already been established in the Bahamas and Nigeria.
- In February 2022, India’s central bank announced that it would introduce a digital rupee by the end of 2023.
- The Bank of England (BoE) is still investigating integrating CBDC into its financial system.
- The Bank of Canada (BOC) continues to research implementing CDBC.
- And in March 2022, President Biden directed federal agencies to evaluate the infrastructure needed to issue a U.S. CBDC.
Source: Financial Express