In simple words, CBDC or Central Bank Digital Currency is the digital form of the same fiat currency that we use in our regular life. This currency is established by the government regulations as money and has some authority laws to regulate it.
The most popular Cryptocurrency, Bitcoin, directly inspires the concept of CBDC. But there are some basic differences between Bitcoins and CBDCs. To know more about the difference between CBDC and Bitcoins, you can visit Pattern Trader.
5 Advantages Of CBDC Or Central Bank Digital Currencies
First, we will look out for the advantages that CBDC is offering.
Cheap, Safe, And Private
For institutional and retail payments, there is less transaction fee that you need to pay with CBDC. The production, storage, transportation, and disposal of Central Bank Digital Currency does not demand a massive amount of money. So, in terms of all these things, it is cheaper than cash. If you think about distribution, it is much safer, reducing the fraudulent activity in the payment ecosystem.
The Central Bank Digital Currency allows the Central Bank to offer liquidity assistance that is short-termed. Despite all bank holidays, this works—this way, the risk of triggering chain reactions of individual institutions is reduced systematically.
You don’t need to rely on any intermediaries for making a payment here. Central Bank Digital Currency’s efficient technology allows you to do the financial payment settlement in real-time by improving its speed.
With the benefits and advantages that Central Bank Digital Currency or CBDC is offering us, it creates competition in the market for other banks and financial institutions. And to produce innovative solutions, private actors are needed here. This can lead to increased competition between several banks that attract the deposition of assets that otherwise might migrate to CBDC.
Some consumers may not have any bank account. Central Bank Digital Currency can give them an existing digital payment tool at a zero or minimal cost. In addition to it, CBDC also can be used as a direct monetary policy tool.
5 Cons Of Central Bank Digital Currencies
Now that you know the benefits or advantages that Central Bank Digital Currency offers, here are the disadvantages.
Lower Economic Growth
With the central banks becoming the active competitors for the payment service providers. Likewise, consumer deposit demand may be reduced as a result of a new investment opportunity. This will lead to lower economic growth.
As CBDC or Central Bank Digital Currency totally depends on the internet’s availability, it is less reliable. If any electricity outages occur, this system will not work. This kind of money transaction requires a proper and speedy internet connection and can not be risked to the lousy network provider. All these reasons make it less reliable.
It increases the risk for systematic bank runs. In a financial crisis, these banks run with much faster potential without the barrier of geographical proximity and time. Additional compliances and monitoring can be required here as per the CFT or AML laws.
Challenging For Commercial Banks
As it is the nearest substitute, it can encourage the banks to raise the rates of depositions. So, the commercial banks will face several challenges here.
Apart from all the four above mentioned drawbacks, there are some limitations that CBDC or Central Bank Digital Currency. Such as, only the issuer country can accept CBDCs, and none other can accept them. As the cryptocurrency shows a high level of volatility, this can be speculated.
As everything has its negative and positive sides, this is the same for CBDC as well. The Central Bank Digital Currency has its pros and cons as well. But just because it has its negative sites, we can not totally reject it, as it offers some attractive, useful features.