With the rise of cryptocurrency and blockchain technology, governments around the world are exploring the possibility of introducing their own digital currencies. Central Bank Digital Currencies (CBDCs) are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country’s fiat currency and would have full faith and backing from the government that issues them. CBDCs could provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security while also reducing transaction costs across borders.
Tomas Holub, a Czech National Bank board member, has said that CBDC is helicopter money. His remarks are different from other central bank spokespersons who are actively looking to experiment with central bank digital currencies. Theoretically, helicopter money is considered harmful as it can stoke unnecessary inflation. Let’s see if there’s validity in this tagging.
- Chinese firm launches stablecoin and CBDC payments system
- Central Bank of Saudi Arabia explores CBDCs for local wholesale bank settlements
- Risks Associated with CBDC Integration into DeFi Ecosystems
- Kazakhstan central bank suggests a two years stepwise CBDC launch
- Binance Changpeng Zhao believes CBDC could replace Bitcoin
- CBDC is helicopter money, says Tomas Holub of Czech central bank
Key differences between CBDCs and cryptocurrencies
Cryptocurrency and Central Bank Digital Currency (CBDC) are both digital tokens, but there are some important differences between them. Here are five key distinctions that separate crypto from CBDC:
1. Governance: Cryptocurrencies are typically decentralized and managed by the community who use them, while CBDCs are centralized and controlled by a national government.
2. Regulation: Cryptocurrencies are largely unregulated, while CBDCs will be subject to government regulation. For instance, CBDCs may have to adhere to certain regulations, such as KYC/AML laws, while cryptos do not.
3. Security: Cryptocurrencies are secured through the use of cryptography and distributed ledger technology, while CBDCs may use similar technologies but also traditional banking security measures like authentication or PIN numbers.
4. Accessibility: Cryptocurrency is currently restricted to certain countries and jurisdictions, while CBDCs will be accessible to anyone in its country of origin.
Benefits of CBDCs
Overall, CBDCs have the potential to revolutionize how money is exchanged around the world. They could provide businesses and consumers with financial security, and provide those who currently use alternative money transfer methods with lower-cost options. With the way countries continue to launch their respective CBDCs, it is clear that they will play an important role in the future of finance. Here are some of the key benefits of CBDCs:
– Increased financial inclusion for those who are currently excluded from the traditional banking system.
– Reduced transaction costs and increased speed of transactions across borders.
– Improved privacy and security for users, as well as reduced risk of fraud or theft due to the use of cryptography and distributed ledger technology.
– Greater trust in the digital financial system, allowing users to take advantage of new and innovative tools.
– Increased transparency, as all transactions are recorded on a blockchain and can be tracked by both the sender and receiver.
Role in the future of finance
Financial inclusion in the Middle East and North Africa (MENA) region remains relatively low despite the opulence of its major cities. Global Findex revealed that only 53% of adults in MENA have an account (including mobile money) as of 2021, up from 38% in 2011. By comparison, the same headline indicator for Sub-Saharan Africa in 2021 stood at 55%, 68% in South Asia, 74% in Latin America and the Caribbean, 83% in East Asia and the Pacific, and 90% in Europe and Central Asia, while the World average was 76%. MENA policymakers should realize that financial inclusion could be an untapped resource by introducing a Central Bank Digital Currency (CBDC).
CBDC could serve as a tool to facilitate financial inclusion if policymakers can guarantee that the fundamental enablers (highlighted in the Payment Aspects of Financial Inclusion guidelines) are in place. There are valid concerns about implementing CBDC, primarily that the same challenges could derail the projects similar to other approaches used to serve the unbanked customers (e.g. digital payments such as mobile money).
The bottomline is Central Bank Digital Currencies (CBDCs) have the potential to revolutionize global finance through the numerous advantages mentioned above. These digital currencies are also designed to be adequately secure as they will have access to traditional banking security features such as authentication or PIN numbers. With their robust governance, regulation, security features, and global accessibility they are sure to shape the future of finance.