Cross-border payments play an important role in the global economy. According to the World Bank, in 2017, global remittances increased by 7% to $617 billion. Based on the same report, sending just $200 costs 7.1% of the value, double the 3% sustainability goal. Even in developed countries, it is significantly cheaper to deposit cash than to send digital currency. But the subsidies of a formal financial institution do not suffice for the 2.5 billion unbanked people in the world, not only because of poverty, but also because of the cost, distance, and paperwork. involve.
What is CBDC?
CBDC (Central Bank Digital Currency) is a digital currency that is issued, controlled and guaranteed by the Central Bank of a country or territory that has a central bank. sovereign (similar to fiat money). Theoretically, CBDC creates a new digital mechanism to solve the real time of money transfer between two parties and make cross-border transactions easy, eliminating the payment intermediaries of commercial banks. commercial as it is now.
CBDCs are intended to be 1:1 exchangeable with other forms of money (like banknotes, coins, and bank deposits). They can be issued as an exchangeable alternative to fiat currency held by a central bank and payable on demand to the holder. CBDCs can also be issued as a new form of money supply in addition to the issuance of traditional central bank notes.
One of the main purposes of CBDCs is to expand access to central bank debt in digital form. In addition to extending this access, a CBDC system must also be designed to work practically (e.g. not accessible through proprietary networks like SWIFT or Fedwire).
The core concept behind digital currencies has been around since 1983 when David Chaum came up with the idea of digital currency (Digicash). Digital means of exchange are extremely popular around the world and range widely from virtual currencies like Fortnite’s V-Bucks to cryptocurrencies like Bitcoin. These currencies can often be used in the real world in exchange for physical goods and services, much like paper money, but are often restricted to specific communities as is often the case with cryptocurrencies. Records of funds available to consumers are stored on an electronic device for use over a computer network and are typically limited to specific networks such as Visa, Mastercard, and others.
But what if every single person in every country had an immutable, digital financial record with them at all times? A profile where they can debit and credit between parties in seconds without limitation with the network provider and any party on the blockchain network, regardless of geography, can transfer funds instantly.
A CBDC is a digital extension of the central bank’s medium of exchange that can permanently settle transactions between parties. Central banks can eliminate credit risk and ensure stability by guaranteeing the value of CBDCs, just like fiat money. And anyone tied to any central bank on the network can instantly transfer value between any other person tied to any other central bank on the network. The defining value of blockchain for business is the ability to collaborate between networks, and that is one of the defining blockchain use cases.
What are the benefits of CBDCs?
As noted by the October 2018 OMFIF report titled “Central Bank Digital Currency“, the main drivers for pursuing a large-scale CBDC, according to survey respondents, lie in potential for improved speed and cost effectiveness. It can also help overcome limitations of existing systems, especially in terms of system security and resiliency. A large-scale CBDC can reduce operational risks and operational costs by increasing productivity as more financial assets become tokenized and recorded on a distributed ledger.”
What are the risks of CBDC?
One of the main risks is outlined in “Monetary Policy and Digital Currency: Nothing Grows Up?” by Banque de France Deputy General Manager Christian Pfister reinforced in the article Fintech and “The Future of Retail Banking” by Jan Smets, Governor of the National Bank of Belgium, around digital assets owned by the bank. There is a concern that a central bank issuer is concerned that a CBDC will facilitate spikes in the withdrawal of deposits or a large number of customers withdrawing their funds in an emergency when they are concerned about the future of a financial institution. main. However, this primary concern is addressed in the Bank of England staff working document, central bank digital currency – principle design and balance sheet in relation to the third core principle. their three for a CBDC. By not forcing banks to convert their deposits into CBDCs on demand, they can protect the banking system.
What will the future of CBDC look like?
As noted in the IBM Corporate Value study, Graph Analysis of the Evolution of Programmed Money, despite strong objections from some commercial banks, the interest of Central banks to digital currencies do not diminish. In fact, it is still emerging. Understanding that they may need to regulate some cryptocurrencies, central banks have quietly but proactively assessed their merits and tested their own version, called digital currencies. of the central bank. In 2019, the Bank for International Settlements published a survey of central banks and CBDCs that found that while 85% of central banks said they were unlikely to issue a CBDC within three years. Going forward, about a quarter of central banks say they already have the authority to issue a CBDC or will soon have it. And 70% admit they’re working on it.”
Because of the benefits CBDCs offer, policymakers at central banks estimate that at least one consumer-ready CBDC will launch within the next five years, according to a new study by IBM. and OMFIF, an independent think tank. The study, based on survey data from 23 large and small central banks, determined that the first central bank digital currency would be in a small country and adopt a narrow use case, for example such as facilitating remittances or promoting financial inclusion in regions where physical banking is scarce.
But while it is possible that private banking will always play a role – central banks surveyed by OMFIF almost unanimously said CBDCs will be implemented through a public-private partnership – once The first CBDC was launched, many more CBDCs are likely to follow.
According to AZCoin News
Follow the Twitter page | Subscribe to Telegram channel | Follow the Facebook page