In recent news, the central bank of Japan announced that it is beginning to plan a Central Bank Digital Currencies (CBDC) experiment involving the major financial institutions of the nation. The Bank of Japan is collaborating with three megabanks and local banks in the Asian country and will test a digital version of the yen next year.
Before we get into it. Let’s get this out of the way. Are CBDC a type of cryptocurrency?
Although cryptocurrencies and blockchain technology inspired the concept of Central Bank Digital Currencies (CBDCs), CBDCs are not the same as cryptocurrencies. CBDCs are governed by a central bank, whereas cryptocurrencies are almost always decentralised, making it impossible for one organisation to regulate them.
Cryptocurrencies are also decentralised and unregulated. Their worth is determined by user interest, usage, and investor sentiment. They are speculative-oriented assets that are more prone to volatility, making them improbable choices for a financial system that demands stability. CBDCs are intended for stability and safety and reflect the value of fiat money.
Now that we are aware of what it isn’t. Let’s expand on our discussion of CBDCs.
CBDCs are being developed by numerous nations, and some have even put them into practice. Understanding digital currencies and what they mean for society is crucial as so many nations continue to investigate how to make the transition.
So, what problems do CBDCs look to solve?
Numerous people lack access to financial services both in the United States and in many other major countries. Looking into the US, 5% of adults in the U.S. do not have a bank account while another 13% of American adults still use pricey alternatives like money orders, payday loans, and check cashing services.
Providing businesses and consumers with privacy, transferability, convenience, accessibility, and financial security has always been the primary objective of CBDCs. At some point in the future CBDCs can also look to:
- Lower the cost of cross-border transactions whilst maintaining a complex financial system.
- Offer more affordable options to people who currently transfer money using other methods.
- Give the central bank of a nation the tools it needs to carry out monetary policies that promote stability, restrain economic growth, and affect inflation.
However, there are also several issues that arise with the concept of CBDCs. One of the main ones is that it is simply unknown what impact a change to CBDC might have on the stability of a financial system. For instance, during a financial crisis, there might not be sufficient central bank liquidity to enable withdrawals.
