Financial institutions are slowly shifting into digital operations because of technology and easy access to the internet. As a result, many banks have developed innovative ways to assist internet users by creating apps that help them quickly send and receive money. You can simply create a bank account and start transacting with these bank apps without setting foot into the bank building.
With this development, countries are exploring digital currency to promote cashless policy during economic activities. Finland was officially the first country to launch an e-currency in 1990, and its success shows that the finance industry is looking into the future of convenience and efficiency.
China, Sweden, Bahamas, Nigeria and even the European Union has joined Finland to create digital money in response to the global rise of online transactions. However, with recent developments in world finance, certainly, digital currencies are here to stay. Keep reading to know why CBDCs matter.
What is CBDC?
CBDCs stands for Central Bank Digital Currencies and is distinct from crypto assets because of their origins and nature. Unlike decentralised coins like bitcoins and ethereum, government banks issue and authorise the currency as a legal tender.
These innovations are digital tokens that hold the same monetary values as local currencies, and the free market system cannot influence their prices because they are state-controlled. Digital currencies are no different from fiat currencies, except that they are virtual. Financial experts believe that virtual and physical currencies can co-exist hand-in-hand to promote online payments.
The CBDC complements these financial innovations by creating digital money for people to use when it is necessary. Some developed countries have also witnessed a significant decrease in the use of local currencies, and because of the pandemic, more people are moving to virtual payments
It is difficult to ignore the role of cryptocurrency regarding the interest of digital payment systems. While most governments do not entirely support crypto, they are open to looking into digital currency’s prospects. Government-issued digital currency will be easier to monitor and control while breaking the financial barriers.
Importance of CBDCs in 2022
The world comes up with innovations daily, and digital currencies are the future. One of the significant importance of digital currencies is that they provide effective and efficient transactions by producers and consumers. In addition, digital currencies guarantee convenience, accessibility and financial security while providing the best service at a lower cost.
Digital currency systems also secure users’ investments because the government controls them. The government stabilises the currency through financial institutions, so its value does not fluctuate unnecessarily, making it a reliable medium of exchange and store of value.
Moreover, with central bank-issued digital currencies, people can directly access their money even when commercial banks are unavailable. This solution benefits many unbanked people who are scared of losing money to commercial banks.
Lastly, the development of CBDCs in 2022 will help the government track users who want to commit fraud and other financial crimes. Users who make transactions with digital money are not anonymous, and payment is easy to access on a digital ledger.
CBDCs vs Cryptocurrencies
Mode of Storage
The government issues, controls, and stores digital currency through the central bank, while a decentralised blockchain stores cryptocurrencies.
It is almost impossible for CBDC users to hide their identity during transactions because of the strict regulations from the centralised authority. On the other hand, cryptocurrency does not provide users’ personal information. However, blockchain records transactions using fake names that are difficult to track.
CBDCs are equivalent to local currencies, and their store of value is safe and secure. However, cryptocurrency cannot work in the traditional financial system because it lacks stability. Crypto users tend to keep crypto-assets because of their volatile nature.
2022 certainly has a lot to offer in the financial industry, even as more innovations come to light and CBDCs will have a role to play. Government issued-digital currency will bridge the gap and encourage financial inclusion, leading to accessible tax collection and access to loans and investment instruments.