Central Bank Digital Currencies: A New Era Begins with CBDC

CBDC is something that every central bank is looking at closely

The way we saw making payments a decade ago is different from today. Fast-forward to 2021; new technologies have utterly transformed the payments space. We swapped cash for cards. Payment service providers such as Visa and Mastercard have become an integral part of our daily lives. We are shopping online and paying electronically. We discovered PayPal, Apple Pay, and Alipay on our phones. When was the last time you paid using cash? Not sure? It’s totally fine!

From Cryptocurrency and DLT to CDBCs

We are in the era of digital payments and cryptocurrencies. A step forward, now we hear CBDC — central bank digital currency. CBDC is evolving every day. From decentralized digital currencies such as Bitcoin (BTC) and Ethereum (ETH), central bank digital currencies began to play a crucial role in the digital currency world. The advent of distributed ledger technology, short for DLT, spurred a wave of research on introducing central bank digital currencies. All eyes on it!

Like other forms of cryptocurrency, CBDCs are also the virtual currency that uses an electronic record to represent a physical currency. Unlike cryptocurrencies, CBDCs are issued and regulated by a country’s monetary authority. In contrast, cryptocurrencies are decentralized and unregulated. The new, non-traditional digital currency innovation from central banks seems to transform financial transactions. Not sure when!

CBDC represents a new era for the traditional central bank money exchanges. It is a significant move from metallic coins, banknotes to money on mobile. The central banks are looking at expanding the CBDC projects that eventually contributed to the digital economy. It is mostly about unifying digital assets and funds. CBDCs enable easy and simple token swaps to allow instant and atomic transactions that eliminate the trading risks.

Privacy and security are the primary concerns

“In the US and Germany, over 70% of respondents prioritized privacy as the essential feature of a putative CBDC.”

So, since it is a customer-oriented market economy and the customer is always right, CBDC would have to replicate cash? If this being a fundamental objective to a CBDC project, then how is it to be accepted? Citizens are usually concerned with tax evasion, money laundering, or terrorist financing. At times, honest taxpayers may also feel hard on why is it to be shown on how they’ve spent their hard-earned money to the government or a central bank? “Give me liberty.” However, CBDCs might also create immense opportunities by bringing innovations to the table. But the major challenge is to convince the citizens to switch from physical cash to electronic cash. There are complexities, questions, and challenges for CBDCs. The existence of cash might also remain a big question.

Countries and CBDCs

Well, the growing interest in CBDC appears to be the first step to advance in emerging economies. While China, Cambodia, and The Bahamas are leading in the project, the UK, Europe, and the USA also show a keen interest in developing their own CBDC.

China is at the forefront of becoming the first major economy to launch CBDC. It had filed more than 120 patent applications for its official digital currency, more than any other country. Pilots began regionally, and rumors spread across on the national launch of its digital currency by 2022. The Bahamas is also in a fast-paced race, closely followed by Cambodia.

“No wholesale CBDC projects have launched yet, but nearly 70% are running pilots. Only 23% retail projects have reached this stage.”

CBDC: Pros or Cons?

A citizen doesn’t need to be a part of the banking ecosystem. Unlike traditional banking with a bank account, debit, or credit cards, citizens with the phone on them can actively participate in the CBDC revolution.

The best argument is that CBDC will help prevent illicit or fraudulent activities by making it easier to track the exact location of a unit of currency. But there’s a question of one’s privacy as the government could obtain private individual spending data.

The other drawback is that CBDC could harm the poor, rural and elderly communities due to its cashless society. These communities dependent on cash and might not be able to access digital currencies quickly.

The primary question arises when CBDC is live, what would happen to the commercial banks? Will, they still hold power, and what would be the interest rate adjustments? These are yet to be answered or addressed by the governments before switching to a cashless society.

Creating a dedicated ecosystem for payments and financing by establishing concrete trust and ensuring full security.