What is a Central Bank Digital Currency, and Why is it Important Today?
Over the years, traditional banking regulatory authorities worldwide have been struggling to control the clout of ethereum and bitcoin, which are popular cryptocurencies, working on the Blockchain network. Due to their regulation-free and decentralized nature., these cryptocurrencies have gained a lot of popularity. The traditional banking systems which operate under the control of the country's regulatory authority like a central bank feel threatened by their presence. One is not aware if there is any suitable reserve maintenance for the cryptocurrencies' backup. Moreover, newly launched cryptocurrencies also raise concerns related to the possibility of thefts, hacks and scams.
Unable to control such cryptocurrencies' growth and influence, many leading central banks across the globe are working on or contemplating launching their cryptocurrencies' different versions. The central bank digital currencies are regulated cryptocurrencies and are operated by central banks or the respective monetary authorities or of that country.
CBDC, also known as digital base money or digital fiat currencies, will act as a digital representation of a country's fiat currency and is backed by monetary reserves like foreign currency reserves or gold.
One CBDC unit acts as a secure digital instrument which is equivalent to a paper bill and can be used as store of value, a payment mode, and an official unit of account. Each CBDC unit is also distinguishable to prevent imitation just like a paper-based currency note bearing a unique serial number. Being a part of the central bank's money supply, it will work along other regulated money forms including bonds, bills, coins, and notes. The best of both the worlds can be achieved with CBDC. One can get the regulated reserved-backed money circulation of the traditional banking system and convenience and security of digital forms like cryptocurrencies. The country's competent monetary authority or particular central bank will be solely liable for its operations.
Importance of CBDC in Current Scenario
The potential benefits of a CBDC can be summarised as follows:
Lower transaction costs: it could lead to a reduction of transaction costs for retail and institutional payments.
Economic growth and digital innovation: becoming a favorable digital currency jurisdiction and creating an attractive crypto ecosystem does not only lead to enhanced economic activity but could also create spill-over effects into other technology sectors.
Financial inclusion: it could improve access to digital payments for unbanked households. Given that some consumers do not have a bank account – a precondition for using existing digital payment tools – a CBDC could access these tools at minimal or zero cost.
Trailblazer position: acting swiftly on a CBDC could position a country as a pioneer in defining monetary policy on CBDCs and setting applicable standards for the years to come.
Cheap, safe value storage: a CBDC is potentially cheaper than cash as it avoids production and storage costs, transportation, disposal, etc. Equally, it is safer to distribute and could minimize fraud in the payment ecosystem.
Technology efficiency: not relying on intermediaries such as banks and a CBDC could improve settlement speed and allow for real-time payments.
Promoting competition: it could boost competition in payment systems and require private actors to innovate; simultaneously, it could lead to increased competition between banks to attract bank deposits regarding assets that might otherwise migrate to CBDC.
Monetary policy transmission: CBDC could be used as a direct monetary policy tool if it was interest-bearing, which would allow for more direct control of the money supply.
Liquidity: it allows Central Banks to provide short-term liquidity assistance, even on bank holidays; this effectively lowers the risk of individual institutions systemically triggering chain reactions. Increased privacy: a conventional digital currency could offer more anonymity than existing commercial bank card payments.
Go for 101 Blockchains Central Bank Digital Currency (CBDC) Masterclass to better understand the concept.
101 Blockchains Central Bank Digital Currency (CBDC) Masterclass is an ideal course for people who may be interested in understanding the potential future of money and its impact on all of us. Whether you are a business owner, consumer, or software developer, everyone is affected by the various available forms of money. This course will lay the groundwork for a better understanding of the current research and activity around CBDC. You will also learn how the Blockchain technology operates.
The technology powering CBDC allows the money to be "programmed" in ways that are not possible with the cash we currently possess. This programmable nature could allow people to access financial services with a smartphone, anywhere in the world, closing the gap that has excluded more than 1.7 billion people from traditional financial services. It is perfect for financial contractors, counselors, consultants, and companies' advisors.
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