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Digital currencies issued by central banks will feature in next financial systems.

How does this benefit the central banks?

There are a number of reasons why central banks would wish to issue a CBDC, but the first is because the economy and resiliency of the country depend on a non-private payment alternative. For now, cash is used for this. Nonetheless, a lot of nations are seeing a decrease in the amount of cash that is used; in Norway and Sweden, for instance, there are progressively fewer cash transactions. If there are no other choices for payment and the payment system fails, there may be dire repercussions. Using CBDC as a substitute form of payment might lessen the effects.

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The possible operational advantages of CBDC, such as improved financial inclusion, more effective cross-border transfers, and a decrease in financial crime, are also emphasized by central banks. Through its digital renminbi program, which is presently being tested by over 100 million people, China is leading the way in the development of a CBDC. The Chinese government claims that the primary driving force behind this is the struggle against

corruption, as traceable transactions offered by a CBDC offer transparency. The negative aspects of these benefits are counterbalanced by doubts and worries about privacy, freedom, government control, and personal, national, and global security.

How may CBDCs affect nations?

We have sketched out the potential consequences of CBDCs for a European authority and discovered that there are benefits and drawbacks in the areas of geopolitics, financial inclusion, privacy, and monetary sovereignty.

For example, a digital money ledger managed by a central bank may substantially compromise privacy. In order to expose citizen behavior, the central bank would need to know who is storing or trading in the CBDC.

However, preserving monetary sovereignty could depend on a CBDC. Governments run the danger of losing control over their monetary policy if citizens use cryptocurrencies to force a move to digital currency. If regular money is not being used, the instruments that central banks employ to preserve financial stability and manage inflation will be rendered ineffective. A central bank-driven change would be aided by a CBDC, which would retain central bank authority.

Additionally, a CBDC may increase financial inclusion in underdeveloped nations. Some consumers opt not to use financial services in nations with less developed financial systems due to excessive fees and the absence of deposit insurance. Given that deposits made with CBDC have no risk and typically come with minimal or no fees, more individuals may decide to use financial services.

Lastly, CBDCs have the potential to alter geopolitics. Controlling the global payment network SWIFT, the US frequently uses it to further its own geopolitical objectives. However, the impact of US sanctions may be nullified by the emergence of digital currencies like the digital yuan. China may have a leg up on the US dollar after decades of supremacy in the financial sector thanks to its early mover advantage in the introduction of a virtual currency.

What actions are global central banks taking?

Although many are investigating, China was the first significant economy to issue a CBDC. According to a Bank of International Settlements report, 86% of central banks are investigating or testing the use of CBDCs, and in as little as three years, 25% of the global population may be utilizing them. If all goes as planned, the European Central Bank plans to introduce a digital euro by 2025. Additionally, a task team was established on April 19, 2021, by the British Treasury and the Bank of England to guarantee collaboration and a coordinated approach among UK authorities as they investigate CBDC.

Nevertheless, a few central banks have decided to give up on CBDCs entirely. Due to low transaction volumes and prevalence, Ecuador reduced its CBDC. Furthermore, the Danish Central Bank said in 2017 that the benefits of CBDCs were not greater than the drawbacks, with significant cash transaction volumes and a currency tied to the euro reducing the potential gain.

Conversely, Sweden has been experimenting with the e-krona as an additional payment method. Although The Norwegian Central Bank recently decided to look at CBDC further, including testing technological solutions and conducting consequence studies, Norway is still in a more exploratory phase.

Digital currencies issued by central banks will feature in next financial systems.

CBDC is only getting started. While private actors continue to develop and implement cutting-edge payment systems, including crypto-based ones, at breakneck pace, central banks and regulators continue to analyze and carefully examine all the social ramifications of a holistic solution. These actors won’t always have incentives to deal with social issues, but central banks will never be able to keep up with their rate of invention. The government will be able to use its regulatory trump card in these situations, much as the EU is doing with its planned cryptocurrency regulation to lower investment risks.

Central banks need to monitor the private cryptocurrency market while they take their time determining whether digital currencies are best for their own populations. Though there are worries, they won’t stop money from moving toward a digital future.