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Digital Currency: Why Do Central Banks Want to Launch CBDC?

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Many analysts have been drawn to cryptocurrencies because of the hype around a new technology known as Blockchain, which has the potential to solve some economic development issues and power decentralized payment networks. Officials in Europe hope to introduce a digital euro by 2025. The Federal Reserve Bank of the United States is debating whether to follow suit. The "e-yuan" has begun large-scale trials in China. The digital version of a country's fiat currency that is also a claim on the central bank is known as a Central Bank Digital Currency (CBDC). Rather than printing currency, the central bank issues electronic coins or accounts backed by the government's full faith and credit. The digital representation of a country's physical currency is known as a digital currency. Transactions and other services that would usually be carried out with physical money can now be carried out with digital currency. They are governed by the government and can be paid for with debit/credit cards or via the internet.

Digital Currency: Why Do Central Banks Want to Launch CBDC?

Efficiency of payment systems

 

Both retail and large-value payment systems may benefit from the development of a CBDC. On the retail side, the emphasis is on how a digital currency can boost payment efficiency-for example, at the point of sale (POS), online, and peer-to-peer transactions (P2P). There may be other advantages of using a CBDC for wholesale and interbank payments, such as quicker settlement and longer settlement hours.

The transition towards a less-cash society

The developing world seems to be heading toward a less-cash society. Any cryptocurrency that has the potential to transform the payment system is likely to be regulated by the government. In such a case, a digital currency backed by a central bank might be a viable option.

Cross border payments

The existing cross-border payment model relies on commercial banks (CBs) running the RTGS infrastructure, which must settle commercial interbank obligations. This method has drawbacks, such as time lags for cross-jurisdictional transfers, which expose counterparties to credit and settlement risk from their correspondents.

List of Countries That May Launch CBDC;

  • Russia- Digital Rubble
  • Japan- Digital Yen
  • China- Digital Yuan
  • India- Digital Rupee

The most obvious advantage of a CBDC as a digital currency is quicker, cheaper, and more profitable payments, both domestically and internationally. A CBDC also lowers the cost of producing physical money. A CBDC is more difficult to counterfeit than paper notes and coins because it is assisted by blockchain technology. CBDC also aids government agencies in combating illegal activities such as tax evasion and bribery.

 

It is just a matter of time when these ongoing pilot projects to shape into reality. CBDC can be a game-changer promoting payment mechanism. While there are still many aspects that need to be considered and implemented

Features of CBDC

  • To promote adoption and usability, CBDC payments should be as simple as using cash, tapping a card, or scanning a mobile phone.
  • End users should be able to receive CBDC payments at a very low or no cost, with the only limited technical investment required.
  • A CBDC system's infrastructure and participants should be highly immune to cyber attacks and other threats. This should also involve ensuring good counterfeiting security.
  • A CBDC system should be highly resistant to operational failures and delays, natural disasters, power outages, and other problems. If network services are inaccessible, end-users should be able to make payments offline.

Countries like Australia, Bahamas, Egypt, Mauritius, and South Africa have already started the CBDC projects.

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