Kamal Swami

Central Bank Digital Currency: A New Approach To Finance

In recent years, the concept of Central Bank Digital Currencies (CBDCs) has created a huge buzz in the financial world. With the increasing practice of digital payments, governments and central banks across the world are looking for the introduction of new innovations in the form of Central Bank Digital Currencies (CBDCs). The use of CBDCs can be a game-changer in the way money is issued, regulated, and used. But what exactly are CBDCs, and why are they getting so much attention?

Every nation has its individual national currency that is issued by its central banking authority. Central Bank Digital Currencies (CBDCs) are the digital version of a nation’s fiat currency, issued and managed by the country’s central bank. CBDCs are state-backed and centralised, holding the same value as traditional currency, and different from decentralised cryptocurrencies such as Bitcoin or Ethereum.

Several central banks, including the US Federal Reserve System, the Bank of Japan, the People’s Bank of China (PBOC), and Germany’s Deutsche Bundesbank, are currently working on the introduction of CBDCs and finding the methods for their introduction.

As the concept of CBDCs is still in the primary phase, there is no single model designed for their implementation. Countries throughout the world are experimenting with different approaches to bring them into practice. At present, the experimenting countries are working on two approaches.

• Account-based models: For example, DCash in the Eastern Caribbean allows consumers to hold deposit accounts directly with the central bank.
• Intermediated models: China’s e-CNY relies on commercial banks and financial institutions to distribute and maintain digital accounts for customers.

At present, more than 87 countries, playing a major role in global GDP, are investigating CBDCs —ranging from research to pilot projects.

Why Are Central Banks Interested?

Central banks globally are interested in the introduction of CBDCs due to the following reasons.

• Decline in the use of cash: The increasing digitalisation has significantly increased the practice of digital payments for everyday transactions.
• The rise of private digital assets: In recent years, there has been a dynamic increase in the use of cryptocurrencies and stablecoins.
• Shifts in the payments landscape: With the introduction of CBDCs, central banks want to retain their role as innovators.
• Global financial integration: The global investors are always in search of payment methods that are faster, safer, and more transparent.

In short, CBDCs could serve as a stable foundation for modern digital economies.

Benefits of CBDCs

The successful implementation of CBDCs will offer a range of advantages to both individuals and economies at large:

• Efficiency & Cost Reduction: Shifting from physical infrastructure could minimise the operational costs for both banks and governments.
• Faster Payments: Digital currencies will ensure instant payment for transactions.
• Financial Inclusion: As transactions from these currencies can also be performed through mobile, it can be helpful even for people with no bank account.
• Enhanced Security: It is not possible to edit or change the record of transactions performed through CBDCs. This reduces the chances of deleting or editing any record.
Concerns and Challenges

Despite various strengths, there are some factors related to the implementation of CBDCs that cannot be ignored:

• Privacy and Traceability: As it is easier to track digital transactions, users may be concerned about their transactions being recorded by the government.
• Technological Stability: With continuous technical changes, it is difficult to ensure that CBDCs will be secure and scalable.
• Hesitation in Adoption: The trust and belief of the public in using the digital currency issued by the government will play a major role in the success of CBDCs.
Final Thoughts

CBDCs represent a revolutionary step in the world of currencies. Although these currencies can play a vital role in reshaping the way we perform financial transactions, it is essential to pay attention to privacy, technology, and the trust of citizens. As central banks continue testing and refining models, it is speculated that CBDCs could soon come into practice and transform how we think about and use money in everyday life.