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CBCD is an acronym that stands for Central Bank Digital Currency. It is fiat currency in a virtual form, and every currency has an official means of exchange. The CBDC is a form of electronic record for that country’s currency. It is also a kind of digital token. Therefore, they are recognized legally by the government of that country. The importance of CBDCs is that they make implementing financial and economic policies easier. They do this by bringing everyone into the financial, monetary system, improving financial inclusion within a country’s economy. However, since CBDCs are centralized, they tend to take away the privacy of those using them, i.e., the citizens of the country within which they operate. Several moves to implement and introduce CBDCs into the financial sector worldwide.
CBDC Vs. Fiat
Fiat currencies are the currencies officially issued in a country and recognized legally by the government of that country as the official means of exchange (legal tender). Central bank digital currencies are the intended digital forms of fiat currencies. Therefore, they can be used just like fiat currencies in many ways.
The central bank usually issues them under the government’s command. They aren’t being used officially in all countries, but some countries have started including them in their economy. It is important to note that the central banks are not creating CBDCs to be used interchangeably with the fiat currency of a particular nation and that they are developing different kinds of CBDCs.
Advantages Of CBDC
One significant advantage of CBDCs is that they introduce government financial policies into an economy easier. Things like tax payments, loan disbursements, and payments of benefits can be automated easily, building a direct link between the citizens and the central bank of that economy. It becomes a lot easier to keep track of transactions.
By building links between the citizens and the banks, third-party risks are eliminated, making it easier for consumers to carry out transactions without fear. The responsibility of security and taking care of risks becomes the responsibility of the government and the banks.
One major challenge governments have faced in improving financial inclusion has always been the cost required to build the necessary infrastructure. CBDCs eliminate such costs.
One more added advantage of CBDCs is that they help curb the risks of scams because it is easier to spot illegal activities. The process of tracking money and tracking transactions becomes easier for a country’s central bank.
Disadvantages Of CBDC
The introduction of CBDCs in an economy doesn’t remove the issue of centralization. At the end of the day, CBDCs are still a centralized currency because that country’s central bank still controls them.
There are a lot of privacy issues associated with CBDCs. The digital identities of the citizens are open to the providers of the CBDCs, leading to the development of privacy concerns. On The Crypto Show, My Digital Money’s Tech. Manager Nick Sexton said, “There is zero financial privacy, which means you can’t keep anything to yourself anymore because the government can just look in without warning.”
The exact roles of these digital currencies are still unclear and vague. Hence, there are a lot of regulatory concerns surrounding them. People are still skeptical as to whether they should be fully implemented.
Some are concerned that there is the possibility that a larger country’s currency could substitute a CBDC because it can be used across borders.
CBDC vs. Cryptocurrency
The origins of CBDCs come mainly from the advent of cryptocurrencies into the financial market. Cryptocurrencies are forms of digital currencies that are kept secure digitally by cryptography. The importance of this is that these currencies are practically impossible to forge. They are also decentralized currencies, and most of them use blockchain technology. They remove the need for third parties in transactions and enable direct, simplified transaction processes within an economy.
The cryptocurrency world has also made it possible for a system where transactions are made without excessive regulations. One of the most widely used cryptocurrencies in the world is Bitcoin. Cryptocurrencies eliminate the need for the physical exchange of money. All transactions made on the cryptocurrency network are stored in a digital database and can be accessed easily by anyone on the blockchain network. The government has no control over the system.
Even though the cryptocurrency market should not adversely impact more traditional financial systems, there is fear that it will simplify existing financial systems and reduce the ability to regulate and tax cryptocurrency transactions. To address these concerns, governments introduced digital currencies of their own in the form of CBDCs.
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