CBDCs must close the gap between old and new financial systems | Opinion

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As a researcher delving into the realm of digital currencies, I’ve noticed an intriguing fact: The idea of central bank digital currency (CBDC) has been around longer than the latest crypto market slump. Over time, its relevance has grown significantly as governments worldwide comprehend the importance of updating payment infrastructure and confronting diverse economic and technological hurdles. At present, approximately 134 nations or currency unions are investigating or actively considering CBDC implementation. Notably, Jamaica, the Bahamas, and Nigeria have already taken the plunge and launched their own CBDCs.

Different countries and monetary alliances often share distinct, yet occasionally intersecting reasons for considering the transition to digital currencies. It’s important to note that these motivations might not always align with the public’s welfare.

On a more optimistic note, numerous governments aim to enhance financial accessibility by offering unbanked individuals user-friendly digital payment solutions. This not only simplifies the process of transferring funds like welfare payments, but also enables effortless remittances and smoother international commerce. The ultimate goal is to decrease dependence on banks for transactions, making it easier and more affordable for everyday people to send money overseas, while streamlining global trade processes.

Furthermore, delving into Central Bank Digital Currencies (CBDCs) could boost economic transparency, thanks to blockchain’s unchangeable nature which helps combat illegal activities such as money laundering, tax evasion, and other financial crimes. CBDCs would also foster the growth of the fintech industry by ensuring the resilience of our economy and stimulating cutting-edge financial innovation.

In simple terms, Ethiopia, the second-largest nation in Africa and one of its five largest economies, has been generating news after the National Bank of Ethiopia approved a revised monetary policy plan. This update includes proposals for a Central Bank Digital Currency (CBDC), which economists think could significantly enhance financial inclusion and efficiency in a country that was previously recognized as a rising economic force before a recent civil war halted its progress.

Following the 2022 peace accord, the National Bank of Ethiopia perceives this period as a chance for economic liberalization and encouraging international investment. The nation anticipates revamping its economy, with significant outcomes potentially hinging on the effective deployment of a Central Bank Digital Currency (CBDC).

As a crypto investor, I wholeheartedly believe that Central Bank Digital Currencies (CBDCs) have the potential to unlock significant economic benefits, particularly for developing and underdeveloped nations, helping them strengthen their financial position and play a more prominent role globally. However, it’s crucial to recognize that no matter if a CBDC is designed for retail, wholesale, or a blend, the creation of these digital currencies could potentially give governments increased influence over their financial systems.

If central bank digital currencies (CBDCs) become widely used, they might pose a challenge to the rapidly growing decentralized finance sector. One potential impact could be that CBDCs may undermine privately issued stablecoins, which play a crucial role in supporting DeFi operations.

For nations such as Ethiopia that are contemplating the release of Central Bank Digital Currencies (CBDCs), Nigeria’s experience could offer a lesson in caution. When the Nigerian Central Bank launched the eNaira, they utilized the open-source Hyperledger Fabric protocol, known for its security and ability to process approximately 3,000 transactions per second. However, the Central Bank of Nigeria (CBN) failed to link the eNaira with existing or expanding financial infrastructure.

Essentially, Central Bank Digital Currencies (CBN) have the power to regulate all nodes and blocks, restricting access to blockchain data, which raises questions about potential centralized, authoritarian control. The eNaira, introduced at the end of 2021, has not gained significant traction and is often considered a disappointment.

As a crypto investor, I firmly believe that Central Bank Digital Currencies (CBDCs) should be designed to seamlessly integrate with all existing digital financial platforms. This includes ensuring compatibility with public blockchains and fostering interoperability across systems. The technical aspects of this can be addressed with careful planning, but the real challenge lies in the policies and vision that our financial leaders choose to embrace.

To successfully implement any Central Bank Digital Currency (CBDC) program, it’s essential to foster collaboration with every bank licensed within the nation, while also engaging fintech companies, blockchain technology providers, and digital payment platforms. This cooperation aims to make the CBDC compatible with conventional financial systems, DeFi networks, and other digital payment infrastructures.

Kima is a protocol that links cryptocurrency and traditional money systems, serving as the kind of technological foundation that could allow Central Bank Digital Currencies (CBDCs) to drive genuine economic progress. Notably, Kima took part in a trial program led by the Bank of Israel last year, aimed at exploring the practicality of adopting CBDCs. During this project, Kima successfully showed how a digital stock could be transferred using a tokenized version of the Israeli Shekel.

As a crypto investor, I’ve been closely following Kima’s progress. To demonstrate the practicality of their protocol, they’ve developed a demonstration trading platform for an instant atomic swap of tokenized stocks. Using Kima’s decentralized settlement layer, it connects a buyer eager to purchase shares using digital shekels with a seller holding the tokenized stock in a cryptocurrency wallet. The seller receives the payment directly into their bank account in traditional shekels, bypassing the need for intermediaries or smart contracts. This transaction is secured and verified through just two API calls, ensuring it happens swiftly and securely.

In order for governments to achieve the aim of any Central Bank Digital Currency (CBDC) project, they should visualize connecting a CBDC, tokenized assets, digital wallets, and bank accounts as their ultimate goal. By using CBDCs to seamlessly integrate traditional financial systems with contemporary digital financial instruments in a secure and inclusive manner, governments can ensure that their economies remain relevant in the future.

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2025-01-11 14:34