The human race has witnessed the evolution of money from barter to commodity Money, to metallic money, to paper Money, to Credit Money and now electronic money.
When we hear electronic money, what comes to our mind? Possibly our use of debit and credit cards with which we spend money without physical cash, or maybe it’s cryptocurrencies like Bitcoin, Ethereum, Dogecoin and other cryptocurrencies.
What are CBDCs? According to Investopedia, a Central Bank Digital Currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). To understand this, let’s use an example;
When a purchase is made with card, what is being transferred is not physical cash but just digits, in this form of transaction the value of the electronic money is credited to the vendor’s account while the buyers account is debited. The vendor can then withdraw physical cash from his account whenever he deems fit.
CBDC is just a digital form of a fiat currency. CBDC gives us the feel of blockchain technology while maintaining the features of fiat currency.
Though CBDCs are built on blockchain technology, they are controlled by a centralized authority, which is the country’s monetary authority.
This means the regulator, in this case the Central Bank can approve or override a transaction if they so wish.
Another thing we need to know about CBDCs is that it is not one size fit. They can have different features depending on the Central Bank issuing it. no CBDC of one country is exactly alike to CBDC of another country. CBDC can be wholesale, which means limited access to a predefined group of users like banks and companies that makes transactions in the millions, or general purpose CBDC which is widely accessible to all citizens.
POSITIVE EFFECTS OF CBDCs
• Financial Inclusion: It is a known fact that there are some towns or localities without banks. Payments can be made to people dwelling in such areas as they do not need to have a bank account to receive these digital currencies since payment is made via blockchain technology.
• Lower costs associated with providing a national means of payment as it is more expensive to print and manage physical cash
• Fast and Efficient Payment: payments can be made straight to civil servants by government without going through banks thereby saving cost incurred in using these commercial banks.
• Enhanced methods of payments and lower risk Since there would be no visible form of cash, payment and disbursement of the fund is swift, easy and more secure.
THE NEGATIVE EFFECTS OF CBDCs
• Centralized and government controlled: unlike other form of cryptocurrencies that are decentralized and operates purely on blockchain network, CBDC are issued by state and can easily be controlled since there are just a digital representation of the fiat.
• Commercial Banks losing their customers as more citizens adopt digital currency which seems to be safer and more liquid.
• Many jobs will be lost as the services of those directly and indirectly employed by the banking sector will be diminishing as the country’s citizens adopts it’s CBDC.
