Rise of CBDCs

The Rise of CBDCs And Their Anticipated Face-Off With Cryptocurrencies. What’s Happening?

The world’s major central banks are now proactively considering the issuance of their digital currencies that are known as Central Bank Digital Currencies (CBDCs). Undeniably, CBDCs have stepped into the limelight recently and are here to stay. The PwC CBDC Global Index April 2021 report which monitors the ongoing transformation going on in the CBDCs space globally strongly supports the last statement.

Retail CBDCs

This is a digital currency held by citizens. It is a form of digital cash and individuals and businesses can use retail CBDCs for payments, the way they use regular currencies (fiat) today.

The motive behind launching Retail CBDC

Financial inclusion
In emerging economies, a good percentage of citizens do not have physical access to banks or physical cash. However, they do have access to mobile devices that are sufficient to use CBDCs.

The motive behind launching Wholesale CBDC

Interbank payment settlement
The existing interbank payment settlements are vulnerable to risks like overnight batch processing and collateralization. With CBDCs, the interbank settlements will happen almost instantly.

How are CBDCs different from regular cryptos?

From a macro perspective, Central bank digital currencies (CBDCs) are cryptocurrencies with more restrictions and limitations. This is because CBDCs will always be under the control of central banks. The central banks will control how many CBDCs get printed, they will always know who owns how many CBDCs and more. This takes away the essence and advantage of the whole concept of decentralized money.

Will they influence the overall crypto market?

With cryptocurrencies gaining immense popularity, central banks are becoming nervous and accelerating their CBDC implementation plans.

Risks associated with CBDCs

Firstly, to avoid deposit base deprivation, central banks will impose caps on user balances and plan to pay no interest on CBDC. In addition to this, if an account holds CBDC beyond a certain threshold, it might even attract a penalty.

Conclusion

There’s no doubt that digital currencies issued by central banks will resolve the issues of the existing fiat money. Not only will they push the millions of people towards digitization but will also ensure swift and secure transactions. At the same time, the crypto continuum will continue and more businesses will embrace blockchain. No matter CBDCs was introduced to compete with private currencies, they are unlikely to have any direct impact. In fact, this is an exciting time for the global economy wherein multiple services (private & public) compete for the consumer’s delight.

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