The Future of Digital Money

In a previous blog "What is a CBDC, and which countries are testing CBDC ", I have spoken about Central Bank Digital Currency (#cbdcs ) and the countries experimenting with CBDCs and their progress. In this blog, I will delve deeper and examine how CBDCs will influence the future of money, including their benefits for retail and wholesale payments, as well as a proposed architecture for successful implementation on Ethereum. According to a recent Bank for International Settlements – BIS study, more than 70% of institutions are actively researching and developing proofs of concept for CBDCs.

CBDC and payments

CBDC can be designed to accept retail or wholesale payments. A retail CBDC is a digital version of cash, whereas a wholesale CBDC is a new infrastructure for interbank settlements. CBDC trials by central banks have focused on fast, low-cost payments.

• Retail- Like digital bank notes, retail CBDC is used for payments between individuals and businesses. The daily volume of retail CBDC transactions is typically greater than 100,000,000.
• Wholesale- Wholesale CBDC facilitates interbank settlement, that is, payments between the few banks and other entities with accounts at the central bank. The average daily volume of wholesale CBDC is usually less than 100,000 transactions.

What Are the Advantages of CBDC?

The financial infrastructure of central banks is currently facing several challenges, ranging from costly payment settlements to the decreasing use of bank notes and a lack of financial access for citizens living far from bank branches. According to studies, the cost of clearing and settling securities for #G7 central banks is more than $50 billion per year, owing mainly to the resources required to transfer assets and reconcile accounts. Furthermore, today's cross-border payment systems require the transfer of assets and sensitive transaction data via multiple correspondent banks, exposing institutions and individuals to settlement and operational risk. In my previous blog, "What is a CBDC, and which countries are testing CBDC?" I have detailed the different types of CBDC issued around the world. Let's look at the advantages of CDBC in the next section-

The Advantages of Retail CBDC

• Encourage digital innovation- CBDC's platform-based software model lowers entry barriers for new firms in the payments sector, fostering competition and innovation and pushing financial institutions toward service globalization.
• Improve monetary policy- CBDC gives central banks direct control over the money supply, making it easier to distribute government benefits to individuals and improving transaction control for tax purposes.
• Increases accessibility- Digital currency can be distributed via mobile devices, increasing accessibility and usability for citizens who live far from bank branches and do not have access to physical cash.
• Reconciliation is simpler- A CBDC is entirely digital, eliminating the need for the costly and time-consuming reconciliation currently required for e-commerce and cross-border payments.

Benefits of Wholesale CBDC

• Improves the settlement of interbank payments- CBDC payments are settled instantly between counterparties on an individual order basis thanks to automation and decentralized netting solutions, reducing the risk of overnight batch processing and collateralization.
• Lowers counterparty risk- CBDC reduces credit risk in cross-border payments by allowing payment-versus-payment settlement for transfers in different currencies.
• Participates in digital asset markets- Tokenized payments will be required as more tokenized asset markets emerge- CBDC provides a large-scale, decentralized clearing house and asset register to aid in advancing the digital asset revolution.
• Helps maintain competitiveness- Even though centralized platforms such as SEPA in Europe have reduced the cost of real-time money transfers, most financial institutions charge customers more than the cost. CBDC enables end-users to benefit from streamlined banking infrastructure while ensuring that central banks continue to play a role in interbank settlement as stable coin technology becomes more widely adopted.

Non-custodial wallets, zero-knowledge cryptography, and decentralized finance are just a few innovative products and services developed across the blockchain ecosystem. This means that the user has to store the key securely and, by default, becomes the only person who can access the wallet. By using Web3 wallets like MetaMask to interact with permission less financial applications and protocols, A CBDC can benefit from blockchain technology in several ways. Do you believe Ethereum is the most production-ready blockchain in terms of scalability and privacy to support CBDC requirements? Can CBDC be in a layer1 like #ethereum ? What about others?

Let me know that I am eager to hear you.

#CBDC #Digital #Currency #G7 #DigitalMoney #Ethereum