Everything You Need to Know About Central Bank Digital Currency

What are Central Bank Digital Currencies?

A central bank digital currency or CBDC isn’t necessarily a cryptocurrency, but it looks quite a bit like one. It uses electronic records and/or digital tokens to create a representation of the virtual fiat currency in a specific region or country. Central bank digital currencies are centralized, unlike Bitcoin, and are regulated by the monetary authority in the currency’s respective nation.

As a response to the uncontrollable nature of cryptocurrencies, some banks around the world are looking into the prospect of creating their own “versions” of cryptocurrencies. This lead to the development of the central bank digital currency concept. This type of currency will use technology to represent the established currency of a country in a fully digital form. A CBDC is meant to be centralized and fully controlled and regulated by the country it is a part of. A few different governments are exploring the effectiveness of building and releasing CBDCs, but there is much debate about how widespread the adoption of CBDCs will actually be.

Why Are Central Bank Digital Currencies Such a Big Deal?

To put it simply, the introduction of these currencies could significantly disrupt existing financial systems. As attempts to introduce CBDCs gain more attention, over 86% of central banks around the globe are looking into the prospect of creating their own. With this much attention, it’s clear that CBDCs could be a big deal.

To start, there is much concern over how central bank digital currencies can be implemented. Advocates for CBDCs note a few key advantages. To start, CBDCs, much like cryptocurrency, could make it possible to give the unbanked or unbankable better access to major financial systems. The remittance industry is a complex and expensive one. With a majority of the world’s population bankless, it certainly makes sense how a dependable centralized digital currency could make the process of sending money between countries without the need for a specific bank easier.

Just as well, there’s the need for speedier transfers that continues to increase in demand among consumers. Transferring payments could become easier and substantially faster if money could be put into digital wallets. This includes government-level payments to citizens. If CBDCs were implemented and widespread during the COVID-19 pandemic, millions of people could have received stimulus checks in a timely manner.

Many unbanked people reside in poor and developing countries. The implementation of digital currency could help vulnerable people receive smaller remittances for very little in terms of fees and time.

However, there are a few concerns surrounding central bank digital currencies. As vulnerable people could benefit the most from CBDCs, financial institutions could lose out on deposits due to the fact that people will be putting cash into central bank accounts, rather than traditional bank accounts. This presents an economic worry. However, it certainly seems inevitable that physical cash is due for extinction and more focus is put on digital exchanges and transactions.

Regardless, it’s clear that the rise of CBDCs is inevitable. They simply offer the kind of benefits needed to revolutionize the financial industry. They could improve transactions on a digital level without many of the downsides of cryptocurrency. It’s simply a matter of time before we see even more major countries, even the U.S., begin the process of implementing CBDCs. It’s very possible that the remittance world could be disrupted significantly.

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