CBDCs are digital versions of government-issued currencies without any relation to physical commodities. They are issued by central banks responsible for financial services, monetary policies, and currency issuance. Meanwhile, stablecoins are decentralized and stabilized cryptocurrencies tied to other monetary instruments, commodities, or currencies. The government issues and governs CBDCs.
Importance Of CBDCs For Central Bank
Central banks are believed to be interested in CBDCs due to four trends:
- Consumption of cash is declining. Will CBDC take the place of cash? Cash usage in Europe fell by one-third between 2014 and 2021. In Norway, cash is used in only 3% of payment transactions. This shift has forced central banks to rethink their role in the financial system.
- Privately issued digital assets are becoming increasingly popular. 10% of people in the United Kingdom claim to own a digital asset such as cryptocurrency. The European Central Bank estimates that up to 10% of households in six major EU countries own digital assets. Consumer use of digital assets may endanger fiat money as a unit of value measurement.
- The perception of central banks as payment innovators is fading. CBDCs provide central banks with a unique opportunity to engage in strategic public debates about cash use cases.
- Global payment networks are growing. Several central banks are attempting to gain more local control over increasingly global payment networks. CBDC is viewed as a stabilising anchor by central banks for local digital payment systems.
Central bank digital currency (CBDC) boasts potential benefits, but also poses risks. Currently, over 100 nations are exploring CBDC development, with China’s digital yuan leading the way in terms of successful transactions. While Ecuador and Denmark abandoned their CBDC plans, India’s e-rupee trial launch has garnered global attention due to the nation’s vast crypto user population. Although the Bank of England has no plans to develop a digital pound, it emphasizes the need for preparation as alternative payment methods progress and more countries adopt CBDCs.
Advocates of digital finance argue that newest digital tools, like CBDCs, can effectively tackle various challenges such as efficiency, security, and accessibility. Though the expenses required for CBDCs implementation should be cautiously weighed against potential savings. CBDCs can expedite many countries’ digital payment systems and increase their efficiency, whilst offering access to those unbanked.
However, wide-scale adoption is not a given, as many underbanked individuals may prefer cash’s anonymity. Moreover, improved security can be achieved by making sure transactions are completed and unalterable, even without a formal bank account.