central-bank-digital-currency

Definition & Benefits Of Central Bank Digital Currency: The New Crypto

In recent times there has been a huge hype about the Central Bank Digital Currency which is also known as CBDC. But what is CBDC and how is it different from a cryptocurrency? In this article, we will find the answers to all these questions. 

What Is A Central Bank Digital Currency?

A Central Bank Digital Currency or CBDC is an attempt to bring some of the reputed benefits of private digital currencies in the area of public money, under the protection of the central banks of the respective nations. This also implies that as per the theory, CBDCs will be secure at the times of financial crisis. So in Central Bank Digital Currency vs cryptocurrency, the basic difference is cryptos like Bitcoins and Ethereum are completely decentralized whereas CBDCs are completely centralized and will be backed up by the central banks of the respective nations. 

Comparisons are often done with digital currencies as some of the proposed Central Bank Digital Currency could avail the similar blockchain technology. However, this is not always the scenario. In fact, unlike the blockchain of Bitcoin which is completely decentralized, CBDCs are likely to use a blockchain that can be completely controlled by them. Keeping in mind the recent talks about Central Bank Digital Currency India, let us see how far the idea has been propagated globally. 

How Far Have Plans Moved?

While there are few completely deployed and developed CBDCs, several nations have made plans at advanced stages. The e-yuan CBDC of China is among the most advanced digital currencies among big economies. In February 2021, the government offered lunar new year “red packets” that had digital coins to support uptake. 

One of the few nations with a completely deployed CBDC is the Bahamas, whose Sand Dollar took off in 2019 and was released properly after one year as an association between the central bank, digital payments platform Island Pay, and payment card group Mastercard. 

Other big economies in North America and Europe are still exploring this option. In the case of Central Bank Digital Currency Bank Of England, the story goes this way. In the United Kingdom, the bank of England and Treasury declared a CBDC task force to coordinate studies of a “Britcoin” even though it has not been able to present any findings as of now. In the United States, Federal Reserve chair Jerome Powell asserted in September that the central bank of the US would soon release research on the benefits and costs of deploying a CBDC. Digital currencies have become a highly polarized topic in the US with the same division that is reported among the officials of the Fed on the concept of a public digital currency

Why Are Governments Of Every Nation Trying To Create Central Bank Digital Currency?

The impulse for Central Bank Digital Currency in the western nations has gained inspiration at least in some parts by two powerful challenges – the primary driven by fear over private entities surpassing the powers of the regulators and the second concern arising from the geopolitical issue. 

Stablecoins backed up by the US Dollars have witnessed huge uptakes over the last few years. The coin’s nominal value that is in circulation has increased from less than $30 billion to nearly $140 billion. While much of that amount is kept within the digital currency space, there are evolving attempts to employ stablecoins for cheap, quick transfer. 

Novi, which is the digital wallet from Meta which was previously known as Facebook, is giving a trial to the pax dollar stablecoin for transfers that include remittances in Guatemala and also in some parts of the US. 

Regulators have pointed out concerns about the private stablecoins on several grounds, including the problems that they might pose to financial stability and also the effectiveness of monetary policy along with consumer welfare. Some also think that an efficient CBDC may decrease the desire of the consumer to depend on stablecoins or at least offer higher protection for retailers. If you are wondering how to invest in Central Bank Digital Currency, it is similar to investing in any other digital currency. 

Concerns also arise regarding the e-yuan project of China, which is among the most advanced initiatives of CBDC. Beijing emphasizes in expanding the system ahead of the Beijing Winter Olympics in February. The US critics have voiced fears that its deployment would enable the Chinese government to block shoppers from employing the coin at the stores that fell foul of their own policies and also enable mass surveillance. 

Risks Associated With CBDC: The Bottom Line

Let us find out about the Central Bank Digital Currency and the future of monetary policy. One big risk around CBDC is the high impact on the traditional retail banks. If the users get access to the liquid cash that is completely backed by the central banks of the respective nations, CBDCs can become a safe passage in the time of financial instability. This will result in taking away all the cash from the bank and leading to a bank run. While this is a benefit of Central Bank Digital Currency, this is again a disadvantage for the traditional banks. 

In a similar line of concern, around the control of e-yuan by Beijing, there are debates revolving around the ethics of “programmable money”. If a central bank of a nation has the ability to competently control the spendings of the consumer, this could potentially weaken the fundamental rights and also the free choice.

Finally, there is an enduring concern over financial incorporation that has only evolved during the pandemic, as attempts to record money have been boosted. The Central Bank Digital Currency may be beyond the attainment of those with older devices or those without access to digital wallets, needing the care to dodge further denial of the old and vulnerable.


Frequently Asked Questions On Central Bank Digital Currency

1. Are central bank digital currencies Cryptocurrencies?

Comparisons are often done with digital currencies as some of the proposed Central Bank Digital Currency could avail the similar blockchain technology. However, this is not always the scenario. In fact, unlike the blockchain of Bitcoin which is completely decentralized, CBDCs are likely to use a blockchain that can be completely controlled by them.

2. What is the purpose of central bank digital currency?

A Central Bank Digital Currency or CBDC is an attempt to bring some of the reputed benefits of private digital currencies in the area of public money, under the protection of the central banks of the respective nations. This also implies that as per the theory, CBDCs will be secure at times of financial crisis.

3. Will digital currency replace paper money?

One big risk around CBDC is the high impact on the traditional retail banks. If the users get access to the liquid cash that is completely backed by the central banks of the respective nations, CBDCs can become a safe passage in the time of financial instability. This will result in taking away all the cash from the bank and leading to a bank run.

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