So, what is Central Bank Digital Currencies(CBDC)? CDBC is a digital form of the country’s fiat currency. These are government issues digital currencies designed for eventually replacing traditional, physical forms of money. CDBC term is quite broad since its implementation involves making critical decisions on the part of the government issuing the digital currency. The vital decision while issuing a CDBC is whether the general population would use the digital currency or be available only for “wholesale” transactions, which means the CBDC would only be used for settlements between banks.
What could be the benefits of CBDCs?
Hours of operations by the bank limit its availability and speed of transactions, where CBDCs would be to transact instantly on a 24/7 basis. Relying on CBDCs can also decrease reliance on clearinghouses, which could save costs. One of the key reasons for switching to CBDCs would be that it will available for anyone who has a smartphone will be to transfer funds, even in places where the people do not have access to physical banking infrastructure such as ATMs. This improvement in financial inclusion can be seen in a country like Kenya where due to M-Pesa, a cashless payment app based on SMS, people have faster and better access to financial facilities like instant transfer of funds.
What could be the risks of CBDCs?
Along with various benefits, CBDCs also comes with considerable risks on the part of central banks, governments, and individual citizens. However, the most alarming risk would be of cyber-security. For instance, China’s effort to test a CBDC reportedly has already been hijacked by the scammers, which is more alarming since the full version of CBDCs hasn’t been officially launched.
So, although switching to digital transactions, benefits would outweigh the cons, a proper implementation would be needed so that the potential downsides of CBDCs could be eliminated.