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The interest in national digital currencies or central bank digital currencies as they are formally called is increasing. Let’s examine what they are, and weigh their advantages and risks.
There are two types of digital currencies: decentralized and still quite unregulated digital currencies – cryptocurrencies – and centralized and regulated systems – central bank-issued digital currencies (CBDCs). More than 100 of the world’s central banks are actively researching CBDCs, with a majority in the research and development phase, the digital currency tracker of the Atlantic Council show.
“Many of our jurisdictions are examining whether there is a need to ensure ongoing retail access to central bank money at a time of profound, ongoing changes across finance, technology and society. The motivation for introducing a retail CBDC may rest primarily on the role of central bank money as a public good,” the Bank of International Settlements, said in a report issued in May 2023. The BIS is owned by 63 central banks that represent 95 percent of world GDP.
Advantages of CBDCs
There are a number of advantages to CBDCs. They can offer households and businesses a convenient electronic form of money, with the associated safety, reliability and liquidity, as well as provide entrepreneurs with a platform to develop new financial products and services.
Digital currencies also support faster and cheaper payments, including cross-border payments. They can be used for online or offline transactions and integrated into existing payment systems.
CBDCs can expand consumer access to the financial system, particularly in developing countries where access to banking services is limited. So, they could improve financial inclusion.
Risks linked to CBDs
It’s still unclear how digital currencies might affect the market structure of the financial sector. One perceived drawback raised is that CBDCs could lead to increase surveillance of financial transactions.
The integration of CBDCs into the existing payment systems could be both costly and highly complex. The cost of credits could increase as traditional banks face stiffer competition, which in turn dents their profits and reduces the availability of credits.
CBDCs are also cited as a risk to the safety and stability of the financial system.The use of digital currencies make it tougher for central banks to implement monetary policy. This could potentially fuel inflation or lead to other economic problems.