All You Need To Know About Central Bank Digital Currencies (CBDCs)

  • September 26, 2019

It is vividly clear that central banks all around the world have a major role to play in the world’s economy and this role is actualized in the form of the monetary policies they implement.

However, so many people have differing opinions about the extent central banks can go when influencing the market. This is because the issue of policy control is gradually becoming complex because the monetary market is difficult as well.

Even academics have given their stern warning on this issue. According to them, the credit demand, as well as the facilitation of risks, has resulted in society and businesses become more leveraged.

And, the commercial banks have turned out to be too big to experience failure. Furthermore, a lot of central banks are highly concerned with the current unpredictability of the United States.

Nevertheless, we are here to analyze the central bank currency which is known as the CBDC; Central bank digital currency.

What Is CBDC?

The central bank digital currency is referred to as most times as digital fiat currency or you can call it digital base money. Nonetheless, wherever you see these terms, you should know that they are referring to CBDC.

As it stands, central bank digital currency is the virtual form of fiat money. This means that it is a currency that has been founded as money by the law or even government regulation.

Bear in mind that, central bank digital currency is way different from the normal virtual or Cryptocurrencies that you know. Cryptocurrencies are not being issued by the government and they also lack the legal tender status that has been declared by the state.

In essence, the CBDC is issued by the state and even has a legal tender which makes it different from virtual currencies.

Due to their decentralization, the common virtual currencies are capable of competing with the commercial bank deposits and even go further to challenge the status quo of the most recent fractional reserve banking system.

A little history down the line has it that, the Bank of England was actually among the first central bank to initiate a universal discussion on the potentials of introducing a CBDC.

They were followed by the Central Bank of Sweden, who also considered the implementation of a central bank digital currency.

As of 2017, November, the central bank situated at Uruguay made announcements that it has started carrying a test to issue virtual Uruguayan Pesos.

Going further to the Eurozone, the previous governor of the Bank of Spain, known as Miguel Angel Fernandez Ordonez called for an introduction of the Virtual Euro.

However, reports have it that the European Central Bank has denied the possibility as far as they are concerned. The stance of central banks has changed with the introduction of Libra whitepaper, which encouraged banks to dive deep into virtual currencies and started to contemplate the blockchain technology for a “centralized use”.

Benefits And Impact Of Central Bank Digital Currency

From what can be gathered so far, virtual fiat currency is being researched upon and even tested by both the central banks and government. This is being done in a bid to know the diverse positive effects it can contribute to:

  • Monetary inclusion
  • Growth of the economy
  • High transaction efficiencies, and;
  • Technology developments

Some benefits, as well as impacts of the central bank digital currency, include:

  • Payment system safety

When a standard and highly secure interoperable virtual payment tool are being distributed and governed by the Central bank and even used in the form of a national virtual payment tool, it tends to boost confidence.

This confidence booster is evident in those privately managed financial systems and not to forget, it goes further to increase trust in the whole national payment system. At the same time, it also boasts a healthy competition in all payment systems.

  • The security of fiat currency as a public utility

The virtual currencies that are being distributed by central banks will offer a modern option to the usual physical fiat currency like the dollar, pound, euro, etc. Besides, the abolition of these fiat currencies is greatly envisaged lately.

  • Seigniorage Income Preservation

With the CBDC being put in place, public virtual currency issuance will avoid a highly predictable decrease of seigniorage income for the government should physical fiat currency disappear.

This disappearance will be as a result of virtual currencies or the central bank digital currency taking over.

  • Monetary inclusion

All the safe money accounts available at the central banks can join hands to be a powerful tool of monetary inclusion. Therefore, it will enable any legal citizen or resident to be offered either a reduced cost or a free bank account.

  • Efficiency in technology

Rather than depend on intermediaries like clearinghouses or even banks, payments and also money transfers can be made in actual time, and gotten directly from payers and straight to the payee.

As for the impact of central bank digital currency, it includes:

  • Competition in banking

The offering of free bank accounts at the central bank which consists of total safety of all money deposits can aid in strengthening healthy competitions between various banks. This will practically attract things like bank deposits.

  • Transmission in monetary policies

The distribution and issuance of money based on the central bank via transfers to the general public will result in a new channel for transmissions in monetary policies.

Furthermore, this will enable more direct management of the money being supplied than indirect instruments like interest rates and even quantitative easing. Also, this will likely lead the way going towards a complete reserve banking system.

  • Monetary safety

Central bank digital currency will place restrictions on the practice of fractional reserve banking and prospectively make things like deposit guarantee schemes less needful.

The Risks Associated With CBDC

As it currently stands, the general risk or concerns about the central bank digital currency is that it may likely precipitate prospective bank operations. This will result in the banks’ funding position being made weak.

Nonetheless, the central bank of England has emerged with news which suggests that if the emergence of CBDC goes through with a series of major principles, the risk of a vast system operated from bank deposits to the CBDC will be addressed.

To Wrap It Up

Even though risks are being involved in things like these, the CBDC is an interesting step towards the mass acceptance of virtual currencies.

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