Central Bank Digital Currency (CBDC): What Is It and How Can You Benefit from It?

CBDCs is a new form of currency in digital form, it will have the same primary functions and value as traditional bank notes, fiat currency, and coins in general, like being a store of value, a unit of account, and a medium for exchange. However, CBDC will also bring new functionality, like making money programmable through smart contracts. That makes it possible to automate payments based on particular conditions—constrain the validity of the funds and add interest rates.?

?What is CBDC?

A CBDC is the digital form of a country’s fiat currency—electronic tokens whose value is supported by the central bank. The majority of CBDCs are created to run on a distributed ledger or blockchain. Compared to decentralized cryptocurrencies like Bitcoin that depend on a public Blockchain, Central Banks will issue their token on a private or public Blockchain network.?

?What’s the Difference between CBDC and Cryptocurrency?

Theoretically, it’s simple to see similarities between these two. The common traits of cryptocurrencies are:

• Decentralized clearing without a trusted counterparty.
• Ownership-based on cryptographic keys instead of accounts.
• The opportunity to change validity through smart contracts.

It is possible to create a CBDC with all such qualifies, making the two remarkably similar.?

However, there are differences as well. The main differentiator is that the value of CBDCs is often pegged to a currency’s value. Meanwhile, cryptocurrencies identify their value by supply and demand, which then results in high volatility.?

Further, the mining associated with cryptocurrencies will not be part of CBDCs. The solving of complicated mathematical equations is vital to producing and distributing crypto tokens and enabling transactions. However, Central Banks can resolve CBDC transactions and allocate the currency to the public. For instance, these transactions include exchanging physical money for digital money.?

?The Potentials Benefits of CBDCs

Take note that a CBDC makes the entire process of transferring money across national boundaries and banks more straightforward, eliminating the need for bank systems to engage with one another. As a low-cost and fast medium of exchange, CBDC can enhance the efficiency and liquidity of payment systems.?

Other promising benefits of CBDCs include:

• Contestability in transactional services.
• Support for financial inclusion efforts, particularly in emerging economies.
• Enhanced consumer security and protection.
• Transparent traceability to fight fraud and money laundering.

?Challenges and Implications of Adopting a CBDC

There are implications for the financial sector in general. Financial institutions and banks will be affected by a Central Bank decision to issuing CBDCs. That’s because deposits will be transferred from commercial to central banks. Thus, it lowers the aggregate size of balance sheets within the banking industry.

Further, commercial banks will be obliged to innovate to stay competitive. They might prefer to provide competitive interest rates or bank deposits, resulting in increased lending rates that affect individuals and SMEs with low price sensitivity.

It’s also more likely that commercial banks will prefer to borrow from international countries to fund their operations. That will expose the banking industry within their jurisdiction to external factors.

Other nations have already taken the lead in choosing different technology solutions to experiment with CBDCs —whether using distributed ledger technology or a centralized database. Banks are yet to determine how to adapt the existing infrastructure to digital currencies.?

?What Does Central Banks around the World Doing??

China was the first major economy to issue a CBDC, but most other countries are considering it. A?survey?conducted by the Bank of International Settlements discovered that 86% of central banks are experimenting and researching with CBDCs. A fifth of the globe’s population may be using CBDCs in as little as three years.

The European Central Bank plans to launch a?digital euro by 2025. In April, the British Treasury and Bank of England recently launched a task force to guarantee a strategic approach and coordination between UK authorities as they discover CBDC.

Other Central Banks have preferred to abandon CBDCs altogether. For instance, Ecuador cut its CBDC because of low transaction volumes and prevalence. Danish central bank also mentioned in 2017 that the benefits of CBDCs did not outweigh its drawbacks—significant levels of cash transactions and a currency pegged to the euro minimize the potential advantage.?

Sweden started testing their e-krona as a supplemental payment. On the other hand, Norway is still in the explorative stage, together with the Norwegian Central Bank, recently considering studying CBDC further, which includes running consequence analyses and testing technical solutions.

?CBDCs as Part of Financial Systems in the Future

While CBDCs are in their infancy phase, Central Banks and authorities thoroughly evaluate the societal consequences of a comprehensive solution. Meanwhile, the private sectors continue to design and launch advanced payment solutions, such as crypto-based ones.?

So what could the key players in the banking system do to realize the potential opportunity of transformation this technology is creating? How could they evaluate the possible consequences, anticipate potential disruptions, and discover what role they like to play in the future to make the most out of the value of CBDCs and digital currencies?

Share your views below and let’s explore!?

?