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How to understand Central Bank Digital Currency?

How to understand Central Bank Digital Currency?

The existence of cryptocurrency like Bitcoin challenged the traditional monetary institutions, in which these institutions are bound to respond.

Recently, the G20’s Financial Stability Board (FSB) released a global stablecoins regulation recommendations for the G20 members to consider based on the risks that may challenge their existing regulatory framework. 

Other countries like China speeding up experiments with its Central Bank Digital Currency (CBDC) to protect its fiat currency from crypto assets and safeguarding its monetary sovereignty.

Let us help you to understand CBDC while keeping it short and sweet.

What is Central Bank Digital Currency?

There is no definitive and precise description for CBDC at the moment. However, it is usually referring to the central bank digital currency of a country.

For example, the Bank of England described it as electronic money that easily accessible, with better functionalities, separate operational structure, and can bear interest. 

Why use CBDC?

The World Bank estimates there are 2 billion people without a bank account due to various reasons, such as poor access to a physical bank and lacking proper identifying information. The existence of CBDC would probably address these issues.

Apart from that, CBDC can also contribute to:-

  1. Legal public tender in a cashless society
  2. Improve payment system efficiencies
  3. Safer than non-central bank digital assets
  4. Better cross border payment

The Challenges for Central Bank

According to a paper published by The Institute and Faculty of Actuaries (IFoA), UK, if the cash usage declined significantly and society prefers to use private-issued digital currency, the Central Bank monetary policy will be severely weakened and restricted.

Several aspects that need to be review are:-

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  1. Bank interest rates
  2. Reduce the effectiveness of lower bound policy interest
  3. The stability in money inflation and growth
  4. The commercial bank financial stability

Digital Currencies will reduce the involvement of intermediary parties, which heavily will impact commercial banks.

Between CBDC and Cryptocurrencies

Currently, cryptocurrencies have shown the ability which challenges traditional money such as cross-border transfer, P2P transfer, privacy and security, and more. All are happening in a decentralized manner far from the Central Bank.

However, if a country’s Central Bank decides to issue CBDC, it will be in a centralized manner, being contrary to the usual cryptocurrency.

Studies and experiments being conducted by central banks all over the world will propel CBDC forward. If we are to compare with the current e-wallet usages, users will only need one e-wallet given the interoperability the technology offers.

So, yay or nay for CBDC?

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