Advantages and Downsides of Central Bank Digital Currencies

Central Bank Digital Currencies (CBDCs for short) are, in simple terms, the digital version of the same fiat currencies that people use in their daily lives.They are becoming an increasingly popular topic, with many governments looking into the development of their own CBDCs.

Just recently there has been news of how a new digital dollar prototype may be introduced in the US within the next several months.With that being said, let’s take a closer look at what pros and cons governments would have to deal with if and when they choose to introduce a CBDC. 

Unlike cryptocurrencies, like Bitcoin, that operate via blockchain networks in a decentralized way, a CBDC is, by design, a state-issued and controlled digital asset.It can offer many benefits – faster, less costly transactions and high security, for example. CBDCs can also enhance financial inclusion because there’s no need for consumers to have a bank account to hold such currencies.

The downside here - at least, to some – is the strong control that the state would retain over the blockchain network within which the digital currency would operate upon introduction. Central banks would have increased control over money issuance and greater insight into how people spend their money, potentially depriving users of their privacy.

On the other hand, a CBDC could also significantly enhance the development of monetary policies in a country. Understanding the real macroeconomic situation takes a long time for most countries – several months, at least. Which, in turn, means that planning their economies in an efficient manner becomes that much harder for governments.

Greater oversight and real-time monitoring of the situation allowed by a central bank digital currency could go a long way to boost these processes.CBDCs could also allow a government to combat illegal activities, such as payments frauds, more efficiently, offering people a greater sense of security regarding their funds. 

Between all of the above, it is not hard to see why central bank digital currencies are being treated as a significant matter by so many countries. The benefits they could offer are certainly noteworthy.Central banks would have to dedicate many resources in order to create a truly efficient state-backed digital currency system, but it could have many advantages in the long term.