How are Central Banks Exploring Central Bank Digital Currencies?

At a time when enterprises are moving fast toward the adoption of blockchain technologies, central banks are exploring digital currencies as an alternative to replace their cash in circulation. A Central Bank Digital Currency (CBDC) is the digital form of fiat currency. Not to be confused with cryptocurrency, CBDCs are different in many ways as they are regulated by the government, monetary authority, or law. As it is backed by the government, a central bank can establish a CBDC account instead of printing the money.

Implementation of CBDCs By Central Banks

There is an ongoing argument over cryptocurrency regulations, given that central banks need to develop their own digital currencies. Central banks are now assessing their strategy of testing and implementing CBDCs using the distributed ledger technology. As a result, the central banks have accelerated pilot testing, and research and development worldwide.

Pros & Cons of CBDCs

There is no denying that we are living in a world where electronic transactions are taking over the cash usage. Additionally, several possible threats involved with electronic transactions and global crisis like the Covid-19 pandemic have pushed central banks to develop their own digital currencies. We will discuss the pros and cons of CBDCs one-by-one.

Pros

1. It will help central banks accelerate cash circulation amid financial crises.
2. It will enable central banks to deal with the threats or challenges posed by cryptocurrency.
3. It has the potential for becoming a fast and more efficient method of payment.
4. It will enhance financial inclusion and transmission of monetary policy.
5. CBDCs will allow central banks to retain complete monetary control.
6. CBDCs will provide greater security due to its functioning on blockchain technology.
7. It will enhance safety and stability of financial institutions.

Cons

1. It will lead to disintermediation of commercial banks in case customers choose to move from bank account to CBDC account.
2. It will increase competition between central banks and commercial banks in terms of deposits, interest rates, and loans.
3. High demand for CBDCs will force central banks to provide additional liquidity to banks.
4. Threats like cyberattacks could pose reputational risk for a central bank.
5. CBDCs will endanger financial stability with high inflation and volatile exchange rates.
6. CBDC could create privacy issues with a traceable digital footprint.

CBDCs As a Future of Payments

Technological advancement has given rise to the acceptance and adoption of digital currencies as payments method. Central banks are showing keen interest toward the adoption of CBDCs and so are actively pursuing a range of policies to implement them. What makes CBDC stand apart from other traditional payments system, is its ability to simplify and expedite the transactions greatly.

CBDCs could emerge as a next wave of payments system with individual privacy, greater monetary control, and enhanced security, unlike cryptocurrency and cash. This could not only reduce the incidents of financial crimes but also mitigate counterfeiting and tax evasion.

After a customer creates or switches to a CBDC account, they can track the performance of their digital currencies as well as earn profits from the volatility of their digital currencies by using the-crypt-ex.com, an automated digital currency trading software which uses cutting-edge technologies.

Central Banks Exploring CBDCs

From the initial response it is getting, it would not be wrong to say that CBDC holds the potential to change the electronic transaction methods. According to the Bank for International Settlements survey, almost 80% of central banks globally are exploring CBDCs at some level. This can be understood as follows:

1. National Bank of Cambodia has piloted a quasi-form of CBDC for its national payments system.
2. Central Bank of Uruguay and the Bank of Thailand are into their CBDC evaluation process.
3. People’s Bank of China and the Eastern Caribbean Central Bank have decided to replace their cash in circulation with CBDC.

Conclusion

Central Banks have recognized the need for developing their own CBDCs with the changing payments landscape. Multiple central banks are exploring the financial and economic effects of implementing CBDCs on their monetary policy. Though implementing CBDC would have a profound impact on the banking industry, it will provide customers with an alternative and safer solution of depositing and transacting money.

Central banks have been embracing digital innovation to secure the payments system. With CBDCs, central banks will be able to continue their pivotal role in maintaining the safety, risk management, and integrity of the high-quality payments system.