Over the years, we have seen how the concept of money has evolved from coins to cash to now just a mobile screen. The emergence of blockchain solutions and its decentralised networks have laid the perfect foundation for concepts like central bank digital currencies (CBDC) to emerge.
These digital currencies are marking a significant shift in the operations of traditional financial institutions. Issued by the central banks, these assets not only offer financial inclusivity but also ensure resilience as that of a central bank issued currency.
However, concerns about enterprise-wide acceptance, scalability, and its capacity to fill holes in existing finance systems remain. Unlike cryptocurrencies, which are entirely decentralized, unregulated, and volatile, CBDCs are stable and controlled by central banks..
The Code Behind the Asset
While many would believe the CBDCs are leveraging blockchain based networks and distributed ledger technologies. But only a few use them. A major factor behind the choice of which technology to depends on a central bank’s digital infrastructure. Many central banks are currently upgrading their digital infrastructures while bridging the existing gaps in the financial systems.
As of today, over 130 countries are exploring the viability of CBDCs and many of them are on in advanced development stages. The only question remains is how can CBDCs reform the present financial landscape. Here is how the CBDCs can fill the gaps
- Efficiency and Accessibility: The inclusion of digital transactions had opened the doors for cross border transactions. The slow and expensive nature of these transactions have been concerning causing delays and high fees. Through CBDCs, instant and low-cost payments will help bridge this gap while further eliminating the need of intermediaries. Many people still lack access to banks but have access to mobile phones. Through CBDC and digital wallets, CBDCs can make crucial inroads by bringing the bank to the underserved.
- Resilience: With climate changes becoming a stark reality, the rise of digital banking systems allows those affected during calamities to access banks and their accounts without going to the physical banks. Through CBDCs, institutions can ensure that they are still available and active to their customers during emergencies.
- Financial Security: The crypto ecosystem is long considered as a volatile space with unregulated digital assets causing investors to look at it with scepticism. Since CBDCs are stable and government-backed digital currencies, they offer the necessary stability to counter financial crimes such as terror funding and money laundering. The banks further are working towards creating a secure and anonymous ecosystem for small-value transactions.
The Challenges
The global economic powers are approaching CBDC developments at their own pace. With countries transitioning towards a digital economy there are unique challenges that it must address.
The digital divide between developed and developing economies being one of the biggest challenges that the ecosystem needs to overcome. While these digital assets would foster financial inclusivity and disrupt the existing financial landscape, the lack of digital literacy will pose a serious hurdle for its enterprise-wide adoption.
Another challenge is the growing privacy concerns in the evolving digital space. The banks while developing their currencies need to strike the perfect balance that not only ensure transparency of regulatory purposes but calms the claims for surveillance.
For long, CBDCs are considered as the necessary disruptors that the existing financial landscape needs. With customers and users gaining access to the central banks directly, it will cause the banking frameworks to be upgraded raising concerns about the banks being viewed as just intermediaries.
The government policymakers and technocrats need to work together with innovators and technologists to help develop robust regulatory frameworks that not only ensures in addressing the cybersecurity risks while developing accessible digital infrastructures to support CBDCs.
Conclusion
The adoption of Central Bank Digital Currencies is more than just about disrupting the status quo, it is about transforming business operations in the evolving digital landscape. Digital currencies like China’s Digital Yuan, Nigeria’s eNaira, European Digital Euro and Eastern Caribbean’s DCash provide the perfect use case on the adaptability of these assets to help cater to the local and global economic demands.
As more economies adapt to the evolving financial landscape, these digital assets are not just changing our understanding about currencies but are creating a financial future that is equitable, resilient and agile to the evolving global economy.
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