Central Bank Digital Currencies (CBDCs) are now quickly transitioning from a theoretical idea to real-life applications as more countries step up their CBDC development and adoption strategies. The emergence of state-issued digital currencies is a new stage in the development of money and carries vast potential for the development of the financial system, monetary regulation, and world trade.
There has been a surge in the past few months to issue the CBDCs, with several global economies either announcing pilot projects or setting timelines to roll out their digital currencies.
China is again on the forefront with its digital Yuan which has been piloted in several cities and is now gradually being extended across the different segments of the economy. This has led to other countries to accelerate their CBDC projects, fearing that they will be left out in this new digital currency environment propelled by China’s success in their trials.
The European Central Bank has set a relatively aggressive schedule for the digital euro with sights on a full-scale launch in the next couple of years. In the same regard, the United States Federal Reserve has increased its investment on research and development to embrace the need for a digital dollar so as to sustain the USD as the world’s reserve currency.
Another factor that is motivating the introduction of CBDCs is the opportunity to enhance the level of inclusion. Since CBDCs can be in the form of central bank electronic money, they can increase the ability of the unbanked and underbanked population to access financial services. This is more so in the developing nations since they may not have well-developed banking systems to support such structures.
Several African countries have shown an interest in CBDCs as a way of bypassing the conventional financial systems and offer their people efficient means of payments.
CBDCs also bring new possibilities for strengthening the potential of monetary policy in its implementation. Central banks could potentially do negative interest rates better or send out stimulus cheques to people’s digital wallets. However, these capabilities also have a number of negative implications for privacy and for the potential for the government to gain more control over people’s money.
Perhaps the most significant issue that CBDC designers have to solve is how to achieve the optimal level of both practical use and protection of people’s privacy. Other important consideration is the compatibility of different CBDCs, that is, their ability to work with each other. With more countries coming up with their own forms of digital currencies, it becomes crucial to have efficient international transactions and also stability in the global economy. For example, BIS is developing frameworks and technical standards for interoperability of CBDCs.
CBDCs are also bringing changes to the functions of commercial banks in the financial system as well. One of the risks that are associated with the implementation of CBDCs is that it may result in disintermediation of banks if people decide to hold money directly with the central bank. To this end, the distribution of CBDCs has been conceptualised in a two-tier model where commercial banks are key in this process and in serving customers.
With the CBDCs already in the process of being adopted in many countries, their influence on the overall crypto industry is still widely debated. Some people look at CBDCs as competitive to decentralized cryptocurrencies such as Bitcoin, while others see it as an enabler that will increase the adoption of digital currencies. CBDCs’ potential alongside private cryptocurrencies may define the future of money and finance in ways that are yet to be discovered.
Pilot implementations have been launched and launch dates are set for Central Bank Digital Currencies are already on the horizon. As these new forms of money are being developed, they hold the potential of revolutionizing the monetary system and providing new means of controlling the economy and inclusion of the populace into the monetary system while at the same time posing questions on privacy, sovereignty, and the future of the monetary system.
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