What is the future of Central Bank Digital Currencies (CBDCs)

As a seasoned researcher with over two decades of experience in the ever-evolving world of finance and technology, I find myself intrigued by the rapid advancement and increasing popularity of Central Bank Digital Currencies (CBDCs). Having witnessed the rise and fall of various financial systems and technologies, I can confidently say that CBDCs are not just another passing trend but a potential game-changer in the realm of money.


Just a short while ago, Central Bank Digital Currencies (CBDCs) were more of a theoretical concept rather than a tangible reality. However, now, roughly half of the global central banks are actively working on developing CBDCs, recognizing their significance in creating a reliable digital asset.

From Nigeria’s eNaira, India’s e-rupee to China’s e-CNY, and Bahama’s sand dollars, the concept is not only gaining traction but may also be shaping the future of money, going beyond fiat currencies.  In this article, we look at what  CBDCs are; how they came into existence, their current state, and future trajectories.

What are CBDCs?

Central Bank Digital Currencies (CBDCs) represent a type of digital money that is issued directly by a nation’s central bank. These currencies share some similarities with cryptocurrencies, but there are key differences. For instance, the value of CBDCs is set and managed by a country’s central bank, making them more stable and less prone to market volatility compared to private cryptocurrencies like Bitcoin. Additionally, since they are issued and controlled by the central bank, CBDCs are generally considered more secure and trustworthy, as their prices are not influenced by market forces.

The Brief History of the CBDC

As a crypto investor, I’d like to share some insights about Central Bank Digital Currencies (CBDCs). Contrary to popular belief, CBDCs are not a novel idea; they have been under consideration for quite some time now. The roots of this concept can be traced back to 1993, making it more than three decades old. The pioneer in this digital currency realm was Finland’s Bank smart card – an electronic equivalent of cash. Although this card is no longer in circulation, it holds the distinction of being the world’s first CBDC. It leveraged the same smart card technology that underpins today’s debit and credit cards.

Current Status of CBDCs

In the rapidly digitizing world we inhabit, I find myself immersed in the exploration and development of Central Bank Digital Currencies (CBDCs) alongside numerous other researchers. As of 2022, approximately 100 CBDC projects were either in the research or development phase, with only two – Nigeria’s eNaira and the Bahamian sand dollar – having been fully launched. Fast forward to May 2024, and the number has grown significantly, as 134 countries and currency unions, accounting for 98% of global GDP, have started investigating CBDCs, according to reports by the Atlantic Council.

Why Are Countries Increasingly Interested in CBDCs?

As a financial analyst, I observe that while certain nations are driven by unique rationales and objectives to delve into Central Bank Digital Currencies (CBDCs), others find themselves taking a more cautious approach or even pausing their efforts altogether.

Reaching out to underbanked

One reason many central banks worldwide are eagerly working towards introducing their own digital currencies is to promote financial access among those who currently lack or have limited banking services, such as the unbanked and underserved segments within their respective societies.

Offering a digital version of cash, Central Bank Digital Currencies (CBDC) aim to extend financial services to populations without banks, who might have limited or no access to conventional banking systems. In regions where mobile phone usage is widespread but traditional banking infrastructure is scarce, CBDCs could be a game-changer by connecting these areas and bringing millions into the formal financial system.

Healthy Competition

In simple terms, the creation and implementation of Central Bank Digital Currencies (CBDCs) in various nations could facilitate a competitive environment among domestic payment systems. This competition would not only promote smoother financial transactions but also make it easier for people to access money, potentially reducing overall transaction costs. Additionally, these digital currencies have the potential to serve and integrate those who are currently unbanked or underbanked into the global financial system, thereby fostering financial inclusion.

Cut down operational costs

Central banks view Central Bank Digital Currencies (CBDCs) as a method to reduce the inefficiencies associated with printing and handling physical cash, which can amount to around 1.5% of a country’s GDP. By implementing CBDCs, they aim to save on these costs.

Central Bank Digital Currencies (CBDCs) enhance the clarity of financial transactions and lessen the reliance on using foreign currencies alongside or in place of domestic ones, a phenomenon known as currency substitution.

CBDCs & Cryptocurrencies: Coexisting or Competing?

Some people contend that Central Bank Digital Currencies (CBDCs) pose a direct challenge to cryptocurrencies, while others posit that they can harmoniously coexist and may even serve to strengthen digital currencies.

One perspective suggests that central bank-backed digital currencies (CBDCs) may provide greater stability and security compared to unpredictable cryptocurrencies, making them more appealing to the general public. This could potentially decrease the interest in cryptos, particularly those already acknowledged as a means of exchange.

A contrasting viewpoint argues that these two digital currencies serve distinct functions and work together harmoniously. Central Bank Digital Currencies (CBDCs), for example, are suggested for everyday transactions and as a secure storage method. Meanwhile, cryptocurrencies remain relevant for specialized uses like decentralized finance applications, international money transfers, and investment opportunities. In this scenario, users can benefit from having both CBDCs and cryptocurrencies in a versatile digital wallet, enabling effortless control over various digital assets.

Conclusion

Although CBDCs come with risks, central banks are advised to consider them carefully before rolling out their currency. However, the future of CBDCs is promising and as more and more countries explore and implement it, we can only expect a more efficient, secure, and inclusive global financial system.

In simpler terms, Central Bank Digital Currencies (CBDCs) are a new idea being explored by several nations because they’re intrigued by the growing popularity of digital money such as cryptocurrencies.

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2024-08-22 09:41