Central Bank Digital Currency ( CBDC) is continuously being implemented by countries despite the huge criticism it has received. It was meant to be an alternative to cryptocurrency but one to be regulated by the central banks of countries. A clear analysis shows that it is not in a way comparable to Cryptocurrency outside the fact that both are digital forms of money.
In this blog, we will look at the merits and demerits of CBDC and the problem the new digital money will face.
In What Ways Is CBDC Good?
Even though the new digital money may not be different from the old system, especially for countries that won't use Blockchain technology for their CBDC. This however doesn't invalidate the possible benefits that will come from it.
CBDC will help to improve the overall financial system of a country. It can help address issues related to financial inclusion by providing access to financial services for individuals who are currently underserved by traditional banking systems. It will also allow people to have a digital payment method, even without a traditional bank account, potentially reducing the reliance on cash.
There will be improved transparency in countries that will build their own CBDC using Blockchain. Transactions will be faster and traceable in cases of theft. Money laundering will be reduced. Kidnappers who usually hide their identity through cash demand will be limited to options.
CBDC will also reduce the cost of handling paper money. Printing money won't cost anything from the government, and businessmen do not need to worry about theft as they won't be handling cash anymore.
Now, what are the demerits of CBDC?
First, we must understand that CBDC as digital money is still under the control of the government. It is just a digital version of the Fiat currency. So, technically, there is not much improvement in terms of centralization.
Monitoring accounts is mostly by governments and not individuals, so it will be difficult to know when governments officially launder money. It won't be like cryptocurrency where you will just use Explorers to see transactions; No government will make its financial system open to the world. So, the transparency it will offer will be limited; one will only get to track an account if he has the account details. For the government, getting the account details of citizens is easy. This is not the case with citizens getting to know the transactions of the government.
Of course, CBDC won't be volatile, and as such people won't be able to grow their finances. They will end up relying on savings offered by the banking sector. This is while it will be difficult to push citizens to CBDC when there is a better earning opportunity with Cryptocurrency.
The poor masses and the uneducated will have challenges adapting to the new digital money. They can be scammed easily or underpaid without them being aware.
Finally, as CBDC is still in development, here are some of the challenges it is going to face.
1. Interoperability: CBDCs from different countries may have varying technical standards, protocols, and regulatory frameworks, which could hinder their interoperability and compatibility. This will delay cross-border transactions. Furthermore, Cross-border payments involve complying with various regulations, including anti-money laundering (AML) requirements. Harmonizing these regulations across different jurisdictions and integrating them with CBDC systems can be complex and time-consuming. There will also be scalability issues for cross-border payment.
2. CBDC raises concerns about privacy and data security. As digital transactions can be tracked and recorded, Striking the right balance between transparency and privacy is a challenge that requires careful consideration. Users may endanger themselves when they make transactions with the CBDC since it can be tracked.
3. Issues such as access to technology, digital literacy, and connectivity in remote areas are going to be a hard nut to crack. It will take years for this to be achieved, especially because most governments planning CBDC have not looked into this direction.
Countries may implement CBDC but I believe they will have more issues getting their citizens to use it.
