Central Bank Digital Currencies: Pros & Cons

Countries having their own digital coin is none other than a central bank digital currency which is a digital token or e-money of the official currency of the country. Central bank digital currencies are another liability of the central bank issuing them. They are not interchangeable with the national currency, —fiat or otherwise—of a country or region. The inclusion of cryptocurrency into the global society has paved the way for the individual central digital currency of countries. The invention of a decentralized ledger able to track all transactions without any intermediaries along with easy digital transfer allows the implementation of monetary policy in a country.

Central bank digital currencies

The idea of simplified money transfer transactions without any borderline intervention and not regulated by a single authority allows non-bank individuals to enjoy such facilities and facilitates the development of an alternate payment system after a decline in the use of cash in the country.

A higher number of countries establishing their own central cryptocurrencies can impose a threat on the current ongoing crypto coins such as Bitcoin and Ethereum.

Advantages:

  • Simplifies the monetary policy of the country and automates the process of distribution of money removing all intermediaries such as commercial and retail banks. They form a direct connection between consumers and central banks.
  • Digital currencies eliminate third-party risk. Any residual risk that remains in the system rests with the central bank. 
  • They can also provide support for faster institutional and retail payments with reduced transaction costs. 
  • Can simplify government functions. They can promote financial inclusion by simplifying the process to disburse money, and can also minimize effort and processes for other government functions, such as distribution of benefits or calculation and collection of taxes. 
  • The digital currency process prevents illicit activity because they exist in a digital format and do not require serial numbers for tracking. Cryptography and a public ledger make it easy for a central bank to track money throughout its jurisdiction, thereby preventing illicit activity and illegal transactions 
  • Easy and fast access to digital money at every point of time as they work 24/7 always making faster and easier access to money.

Disadvantages:

  • Do not solve the problem of centralization. A central authority, in this case, a reserve bank, is still responsible for and invested with the authority to conduct transactions. Not a completely decentralized process.
  • Prominent geographic restrictions as they are accepted only in the country that issues them. 
  • Questions like What will be the role of such currencies in an economy, and who will regulate them? Considering their benefits in cross-border transfers, should they be regulated across borders? are still unanswered. 
  • Central banks could turn into direct competitors of payment service providers, thereby forcing banks to lose income. Furthermore, can lower bank lending to the general economy and economic growth. 

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