Central Bank Digital Currency and Future of Monetary Policy – GD/WAT Topic

CENTRAL BANK DIGITAL CURRENCY

What is Central Bank Digital Currency?

With more and more countries looking to develop their own versions of digital currencies, the central bank digital currencies are growing in popularity. The Central Bank Digital Currency (CBDC) is basically a digitized version of the normal fiat currency that we use in our day to day lives.

These currencies are generally issued by the central bank of that particular nation. The central bank digital currency is also called digital fiat currencies and digital base money.

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STATISTICS – What Numbers have to Say?

1. In a survey conducted by the EU bank on Central Bank Digital Currency, 73% of people said that they have serious privacy concerns related to CBDC.
2. In a survey conducted by the central bank of Malaysia, 81% of people between the ages of 25-39 had said that they are interested in doing virtual banking using CBDC.
3. Survey figures by the central bank of Germany reveal that the younger people between the ages of 18-25 are three times more likely to own a cryptocurrency than the older people aged above 45 years.

DESCRIPTION – Let’s Take a Deep Dive

With technocrats like Elon Musk tweeting regularly about cryptocurrencies, the popularity and interest in the cryptocurrencies like Bitcoin and Dogecoin have increased multiple folds over the last few years. The major reason of these currencies being so popular is the nature of these coins. These currencies are decentralized as well as unregulated. This makes it very difficult to maintain the reserves as well as find the actual valuation of these currencies.

As these currencies may possess a possible threat to normal banking operations in the near future, the central banks of several countries have shown interest in coming up with their own version of cryptocurrencies. These cryptocurrencies will be regulated by the central bank of respective nations and thus called Central Bank Digital Currency.

Once launched, the CBCD will act as an equivalent currency to the paper version that is in rolling. People will be able to use these currencies for digital transactions at normal grocery stores, gas stations, etc. The launch of digital currencies can actually make the digitization of the nation very smooth.

As of now, no country has launched its own digital currency, but the central banks of many nations have shown active interest in launching one. However, many central banks have launched pilot projects and research projects in order to launch these currencies in future.

The Bank of England (BOE) was the pioneer to initiate the CBDC proposal. Following that, central banks of other nations, like China’s People’s Bank of China (PBoC), Bank of Canada (BoC), and central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore, among others, are looking into the possibility of introducing a central bank-issued digital currency.

The central bank of the United States, US federal announced last week that they would come up with a research paper about the development of their own digital currency. This is considered an important step in the development of CBDC. This announcement came when the cryptocurrencies like Bitcoin fell by over 25% last week and this is said to be the end of a long bull run that made the likes of Bitcoin and Ethereum this huge.

In India, the government has already presented the cryptocurrency and regulation of the official digital currency bill, 2021. This bill is supposed to prohibit all private cryptocurrencies and will lay a foundation in the launch of the new digital currency of the country. This act was presented in the last Parliament session but could not get passed as the government is still in talks with the key stakeholders at this stage.

Advantages of Central Bank Digital Currency

• It will be a decentralized currency- Unlike the other cryptocurrencies like Bitcoin which are operated via Blockchain network, the CBDC will be a state-owned and state-issued and state-controlled digital asset. As it is state-owned and controlled, it will be far more secure than normal cryptocurrencies.
• Improved speed of digital payments
• It will help economies go digital- As the CBDCs’ won’t require you to have a bank account as these can be digitally held, it increases financial inclusion.
• Stopping illegal Activities- the CBDC will allow governments to curb illegal activities like scams and thefts. This will offer people more sense of responsibility for their money.
• Effective planning of Monitory policy- Understanding the actual macroeconomics of the country may take months but CBDC offers better insights and real-time monitoring of the whole situation.

Disadvantages of Central Bank Digital Currency

• More control of the state – As the CBDC will be controlled by the state, the state will have the right to control how much currency will be there in circulation.
• Possibility of theft and scams- The news of online money scams are not new to us. As this currency will be all-digital, the chances of it getting stolen and probable scams are very high compared to the normal currencies.
• Less privacy- As the state will know where and how much a person is spending the money, the privacy of people will be at risk.
• Introduction of new currencies- As the new cryptocurrencies keep on getting introduced and crypto offering advantages like no regulation from states, people might prefer other cryptocurrencies over CBDC.

CONCLUSION

After looking at all the advantages and disadvantages, it is not hard to interpret the buzz around the central bank digital currency and also why every country is treating it with significant importance. The benefits these currencies offer are remarkable, the countries would have to pump in a lot of resources in order to develop an efficient state-backed digital currency system. When it comes to countries like India, where the population is still very young and technology-friendly, the CBDC will definitely have many long term advantages.

Author – Tanmay Laturkar (Welingkar Bangalore)