CBDCs – Might Be an Alternative to the Current Monetary System
In today’s world, where everything is changing at high speed, it is a thoughtful question of what the future of cash or the current monetary system is. Because cryptocurrency and digital assets are conquering the cashless financial market constantly and at a very rapid pace. The phenomena of digital currency are considered to be the next replacement for paper money in may coming next 5 to 8 years, which will then become an entirely new wave of innovation all around the world.
The blockchain-based cryptocurrency has now been in our financial ecosystem for over a decade, but its adoption process has been terribly slow until a few months back. Previously, people were more skeptical of this particular technology and concept overall. Traditional thinking and reluctance to accept technological changes were only a few of the main reasons for this. The financial ecosystem around the world has had one-sided phases with the barter system staring at then – gold, silver, metal coins – cash and coins – debit and credit card – online payment and now – digital or cryptocurrency and now maybe to CBDCs.
This development from barter to crypto has one thing in common: the exchange or the tradable value. Of these finance modes, cash (paper, cash, and coins) has been the most prevalent in the financial ecosystem, and even to this day, it has more value than any other mode in the system. Now, especially, post this Pandemic where ‘Cashless’ has become a new norm and need of an hour. With this, the Central Banks are intimidated by a digital currency’s possibilities replacing fiat currency. They are currently exploring the idea of a central bank governed digital currency called “CBDC”; This way, nothing prevents it from replacing cash, although it will take a few more years to do so.
CBDC is a digital currency secured or guaranteed by a central bank and can be used as a means of payment and a unit of account. Central bank digital currency is managed on a digital ledger, which results in increasing the payment security between individuals, institutions, and banks. However, as per the Global Monetary Governing Authority and the major global banks involved in this have decided to base CBDC’s on these following three principles:
- CBDC’s should not adversely affect to monetary & financial stability of the concerning country.
- It should coincide with cash with flexibility.
- CBDC should promote broader innovation and efficiency of a Jurisdiction’s payment system.
Further, these three principles can be considered a common ground amongst the central banks worldwide present in this group to decide upon the core features of any future CBDC model.
Features of CBDC
There are a few aspects or features that define a central bank digital currency considering the above-mentioned principles such as:
- They are digital form currencies that are dealing with digital ledger, which can act as a source of evidence.
- It can claim against the central bank like Fiat banknotes.
- The supply of CBDC is entirely governed by the central bank.
- It can be universal or restricted to a particular set of users.
- It can be anonymous (like cash) or identified (like current accounts).
- It can be easily convertible, i.e., CBDC’s can be exchanged at par with Fiat money to maintain currency’s uniformity.
- CBDC instruments can be more convenient (cashless) to use and can be made easily acceptable and available to everyone.
CBDC’s Opportunities and Challenges
Introduction of the CBDC’s in existing Monetary or Financial Ecosystem can, on the one hand, open up many opportunities, but similarly, on the other hand, it can also give rise to new challenges to overcome. Let us have an overview of some of such opportunities and challenges in the Issuance of CBDC’s :
- CBDC mitigates credit risk in cross-border payment transactions by enabling payment-vs-payment settlement for transfers in different currencies.
- Usually, low commission or no transaction fees for trading or transacting cryptocurrencies or CBDC’s.
- Fast transfers and instant processing of payments for types of transactions such as real estate, purchase of goods, etc.
- Digital currency can be easily accessible and has immense usability & availability for people who don’t have access to bank or physical cash.
- CBDC’s is a platform-based model that lowers hurdles to entry for new businesses in the payments sector.
- CBDC can improve controlling over transactions for Taxation.
- CBDC provides Improved interbank payment settlement through automated and decentralized netting solutions.
- CBDC could have financial stability issues that should be assessed and managed to have the least effect on the current financial system.
- With the wide availability of CBDC, it could be resulting in the events like digital runs frequently towards the central bank at a greater speed than cash.
- The introduction of a CBDC could affect banks’ retail deposits, resulting in less stability in terms of funding.
- The design of each CBDC and the structure of the concerning financial system will differ by jurisdiction, consecutively, resulting in the broad financial system structural effects and risks of these digital currencies.
In light of the above, it can be seen that the trend towards cashless payment or cashless economy is becoming increasingly popular worldwide for many reasons. Again, this is a positive sign for the Crypto or digital currency market. Thus, according to Capitalbay, there are high possibilities that CBDCs might overtake traditional cash markets around the financial ecosystem soon. However, to even start with the issuance of these CBDC’s, the central banks worldwide should take a joint initiative so that these banks analyse the opportunities and challenges and the advantages and disadvantages. As a result of these initiatives, there is a better and more constructive will prevail CBDC’s Model in the Financial Ecosystem.