Central bank digital currencies (CBDCs) are designed to mimic a nation’s local currency while incorporating the benefits of digital payment solutions. Streamlined, entirely digital, and operating 24/7, will these central bank-operated digital currencies offer greater financial inclusion or increase the digital divide? In this piece, we explore the role of CDBCs in the future of payments.

How Do CBDCs Work?

Central bank digital currencies are centralized digital currencies that utilize blockchain or DLT (digital ledger technology). Similar to cryptocurrencies, these currencies are entirely digital, however, they are managed by a central bank and backed by governments. Its price is fixed to the rate of the local currency.

For example, in the United States, a CBDC would be worth $1 and issued by the central bank. They are designed to complement and work alongside the current monetary systems as opposed to replacing them.

Since the rise in the use of electronic payments, particularly fueled by the pandemic, many countries have been exploring what impact the use of CBDCs would have on their financial systems and economies. This has led many countries to test and implement these digital forms of local currency.

The Benefits of CBDCs

The main aim of CBDCs is to provide users with convenience, improved transferability, and greater access to financial processes. Due to CBDCs being operated by blockchain technology, they also provide a heightened level of security, and operate 24 hours a day, seven days a week.

Unlike cryptocurrencies, CBDCs have governments' backing and processes in place to ensure they are secured and developed properly. With CBDCs, users can easily and instantly transfer funds without waiting for banking hours or a middleman to approve.

The idea is that these currencies will minimize the risks of using traditional cryptocurrencies and instead provide a stable means of exchanging digital currencies.

Where CBDCs Fall Short

The core concept of cryptocurrencies is that they are decentralized, meaning that no central authority is in charge. CBDCs obviously go against this nature, and in doing so are considered less secure due to governments' vulnerability to attack or corruption.

On a similar note, CBDCs should not be compared too greatly to cryptocurrencies as they will not appreciate in price. These coins are not investments, simply extensions of their current fiat holdings.

While extensions of your current fiat holdings with your bank, CBDCs will require a separate digital wallet (one that supports the technical foundations of your country’s CBDC). This adds a new platform on which you will need to manage your funds.

Countries Exploring CBDCs

In the last few years, there has been considerable uptake in countries exploring the use of CBDCs. While these range from researching the currencies to running test pilots, as of mid-2022 nine countries have successfully implemented CBDCs.

These include The Bahamas, Antigua and Barbuda, St. Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St. Vincent and the Grenadines, Grenada, and Nigeria.

Eighty other countries are in the testing phase, with the likes of India, Sweden, and Jamaica hot on the heels of the countries mentioned above. The United States, England, and Canada are also investigating the pros and cons of implementing CBDCs.

How CBDCs Can Shape The Future Of Payments

Cryptocurrencies were designed to create global financial inclusion, however, due to their volatility they are not always so celebrated in this field. CBDCs have the opportunity to build on that promise, creating greater financial inclusion and accessibility to financial services.

The use of CBDCs is believed to eradicate the time it takes to make cross-border payments and eliminate any third parties that were previously involved in the process. Not only cross-border transactions but local ones too.

Users could soon be able to make instant payments using their CBDCs, directly connected to their bank accounts. These transactions can allow for quick point-of-sale solutions without the risk of volatile price movements.

As the world moves into a largely more digital space, there is plenty of room in the financial landscape for digital currencies that offer security and convenience and are accessible to all.


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