Over time, this new digital currency may grow more than a cryptocurrency
While the cryptocurrency hype shows no signs of death, CBDCs make the headlines next big. This is an acronym for ‘Central Bank Digital Currencies’, this is a new form of digital currency being designed by monetary authorities such as central banks. The legality of encryption currency is an open debate where traditional financial institutions oppose cryptocurrencies. Financial authorities hope to use unregulated cryptocurrency to lead speculation leading to global financial catastrophe blockchain technology for their benefit while maintaining the regulatory authority and stability through the CBDC.
Traditional currencies issued by central banks, such as the dollar, euro, rupee, etc., work in the same way, in principle, with each country’s unique monetary policy. The central bank’s digital currencies also work in the same way. Ideally, the CBDC is a digital symbol that represents the virtual form of the fiat currency of a particular country. The main difference between the cryptocurrency and the CBDC is that these banknotes issued by central banks have some concentration, so that central banks can manage cash flow to achieve economic growth and stability. To back up the value of the CBDC, it is tied to an appropriate cash value, such as gold.
Regular payment methods such as cash, cards and bank transfers serve a purpose in our society. Although the cryptocurrency was originally created as a new form of legal payment, by removing the former, it is so far only considered an investment option. So how does CBDC respond to different requirements?
According to the International Central Bank (BIS), there are two types of CBDCs, wholesale and retail CBDCs. Only a pre-defined group of people can access the wholesaler, while the retail variant is universal.
Development of the CBDC so far
Most central banks operating in the wholesale market are limited to financial institutions so that they can be used for interbank payments. On the other hand, retail CBDCs are the ones that citizens can hold and use for digital payments. According to reports, retail CBDC projects are accelerating in emerging economies.
China’s CBDC project has been the most exploited. Founded in April 2020, China has made concrete progress with its digital yuan. Estimates suggest that there is currently a digital yuan worth about $ 23 million in circulation. By the time the 2022 Winter Olympics begin in Beijing, China’s central bank will work to increase domestic use of its CBDC.
The United States is not lagging behind in this race. The Digital Dollar Project (DDP) is a non-profit partnership between Accenture and the Digital Dollar Foundation, and plans to launch five pilot programs within a year. The situation with this project is that the authorities are currently testing whether the digital dollar will survive in an advanced economy where high-speed digital payment methods already exist. However, the United States is launching the digital dollar at the right time to become the world’s reserve currency.
The pros and cons
As with the cryptocurrency, one of the significant advantages of CBDC is that the evolving method reduces the high cost of cash transfers. In emerging economies, CBDCs also give people who do not have access to banks easier and safer money.
However, the disadvantages outweigh the advantages. The authorities are already at the receiving end when it comes to legalizing cryptocurrencies. The same may be the case with CBDC, as it involves other cyber security risks. Some central banks may even lack the technology to handle the new currency.
While central banks have much to invent to launch their own CBDCs, it still has the potential to kill cryptocurrencies. China has already imposed a cryptocurrency and investment ban to promote the use of the digital yuan. As other governments follow suit, the current cryptocurrency mix may weaken.
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