World of CBDC

Money isn’t what it used to be. I mean, it’s not just dollar notes and small change anymore. As a matter of fact, when was the last time you paid for something using cash? Most of us don’t carry cash anymore. Despite the widespread use of physical currency, the world is becoming digital.

The spread of paper money has significantly decreased in many countries, particularly since the pandemic.

As more people move away from using cash, they are turning to digital transactions. Banks and financial institutions worldwide process a lot more financial transactions digitally than they do in brick-and-mortar branches. This slump could account for bank closures in your city, and because of this, central banks are thinking about creating their own digital currencies.

What is a Central Bank Digital Currency?

Digital currency is simply the electronic transfer of money rather than physical. Their value is linked to the issuing country’s official currency, according to McKinsey & Company.

“Central bank digital currencies are digital versions of a country’s physical currency.” For example, “£10 of a UK digital currency would always be worth the same as a £10 note,” explains the Bank of England in the United Kingdom.

Central banks issue digital currencies known as CBDCs. The central banks managing and issuing these digital currencies are the national financial regulators in charge of money supply, monetary policy, and cash-on-hand, which includes setting interest rates that affect borrowing costs.

What Prompted Central Banks to Take an Interest in CBDCs?

The interest in CBDC by central banks has most likely been because of these four trends:

Declining use of money. Between 2014 and 2021, Europe experienced a decrease in cash used by one-third, and only 3% of transactions in Norway were cash. The central banks are reconsidering their place in the monetary system.

Rising demand for digital assets issued by private companies. 10% of adults in the United Kingdom say they own or have owned a digital asset like a cryptocurrency. According to the European Central Bank, up to 10% of households in six significant EU member states are digital asset owners.

The decreasing interpretation of central banks as innovators. CBDCs give central banks a chance to encourage discussions on cash use publicly.

Global payment systems are growing. Central banks may impose more local control over the increasingly international payment systems.

CBDCs have potential advantages, but there are risks. Learn more by reading on.

What are The Potential Benefits of CBDCs?

Advocates of digital finance think that by using new digital tools, including CBDCs, they can address several issues with access, efficiency, and security.

Reduced costs. Financial-service providers could save $400 billion a year in direct costs. However, they must entertain the reduced costs against significant investments in new technology.

Pace Increase. CBDCs could improve the speed and efficiency of electronic payment systems.

Are Central Bank Digital Currencies Safe?

The European Central Bank (ECB), which plans to introduce a digital euro across its 27 member states by mid-decade, describes central bank money as “a risk-free form of money that is guaranteed by the state”.

The Bank of England explains that CBDCs don’t have the volatility of privately issued digital currencies like Bitcoin, Ether (Ethereum), and XRP.

The Federal Reserve says that if it introduced a CBDC, it would be “the safest digital asset available to the general public, with no associated credit or liquidity risk”.