In recent years, there has been a massive shift from traditional methods of carrying out transactions to digital. The creation of digital currencies has caused a change in how money is sent around the world. With the widespread adoption of digital currencies, powerful banks around the world have claimed to be interested in digital currencies, thereby studying them and most have left open the possibility that they are looking into launching their own.
Central bank digital currency (CBDC, also called digital fiat currency or digital base money) is the digital form of fiat money (a currency established as money by government regulation or law). It's is a digital extension of a central bank’s medium of exchange able to permanently settle transactions between parties. The central bank digital currency is different from virtual currency and cryptocurrency, which are not issued by the state and lack the legal tender status declared by the government. The central bank is able to remove credit risk and ensure stability by guaranteeing the value of the CBDC, exactly like paper money. And any person tied to any central bank on the network can instantaneously transfer value between any other person tied to any other central bank on the network.
Central banks play an important role in the economy in the form of monetary policy. Central banks considering the implementation of CBDC can go about that in a variety of ways including; offering deposit accounts directly to the public, and possibly issuing a digital token (similar to existing cryptocurrencies) that can be deposited in digital wallets, Or, by providing reserve accounts to all financial institutions, allowing them to have a claim on and make transactions using CBDCs
Although banks have been vague about implementation of CBDC, such implementation can prove to be highly advantageous. The October 2018 Official Monetary and Financial Institutions Forum (OMFIF) report titled Central bank digital currencies notes that “The main motivations for pursuing a wholesale CBDC, according to survey respondents, lie in the potential to improve speed and cost efficiency. It may also help to overcome the limitations of existing systems, especially in system security and resilience. A wholesale CBDC can reduce operational risks and running costs due to productivity gains as more financial assets become tokenized and recorded
The main feature of using the blockchain technology for business is the ability to collaborate between networks and that is one of the defining blockchain use cases .By using blockchain technology to build upon the current framework, a central bank digital currency (CBDC) could lead to improvements on the current payments system while reducing overall costs and complexity.
Lael Brainard, a Federal Reserve Board governor is not convinced of the usefulness that a central bank based digital currency could offer even though the infrastructure is mature enough to assist its creation. Even though she praised the technology as one of the most notable recent innovations, this statement has eliminated the discussions of the possible launch of a Fedcoin.
Also, Jerome Powell (Fed Chairman) announced that the US central bank will expand the Fed's balance sheet. This means that reserves will be added. It could perhaps mean crypto. This decision is a part of inflation boosting balance sheet expansion program. According to Jerome Powell, this is an effort to avoid the recent turmoil in the money markets.
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