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A Central Bank Digital Currency (CBDC) is essentially a regular currency but in a digital form, so it would still be highly regulated. There are three major advantages to CBDCs, the first being efficiency and governance. With digital currency, central banks don’t need to print cash or hold physical money.
Today, individual countries can print as much money as they want, leading to problems such as hyperinflation. The use of a controlled digital currency could help to eliminate this challenge. In addition, governments would be able to keep track of who has what, down to the most exact detail. Wads of cash stashed away under mattresses and forgotten would be a thing of the past, as would, coins lost down the back of the sofa. Countries would have a real measure of M1 money supply usable in the system.
This also, therefore, leads to the second main advantage: fraud detection and prevention. Indeed, it would be virtually impossible for crime such as money laundering to take place when currency can be tracked to this level.
Further, digital currencies increase convenience for consumers, making it faster and easier to transact with others. There could also be a certain level of anonymity; an individual wouldn’t need to apply their name and address for example, but could instead use an ID number so that their identity wouldn’t be revealed to the other party in the transaction.
For all the advantages there are of course disadvantages. Privacy would be a major concern for many and the idea of ‘Big Brother’ surveillance. There would also be a need for a central exchange to facilitate the conversion of different global currencies into this digital coin. Who would decide what value to attribute to digital currency? And how would it be controlled? These are all questions that would need to be answered.
Consumer banks and traditional financial services institutions would also start to be disintermediated. From the consumer perspective - why do I need to keep using a bank when I can simply store my money in the cloud? Digital currencies could also open up new ways of lending.
In addition, there is also the possibility of countries using digital currencies to circumvent sanctions from other countries specially the US or EU. They could also try to create a bloc of countries to facilitate trade and bypass the sanctions regimes.
After considering both the advantages and disadvantages of digital currencies, how fast will it take for mainstream adoption to occur? It’s up to the consumer as to how digital currencies are or aren’t adopted, and there will need to be a level of education to encourage uptake. But in my view, adoption will be much faster than most people think.
We are living in transformative times and the pandemic has accelerated the use of digital technologies and platforms. A few years ago, no one had heard of Zoom. Now it’s an essential part of our daily working lives. Younger generations will of course be early adopters for digital currency and innovation will most likely be driven by emerging markets. Developed countries will take longer to transform legacy systems and of course, there will be a huge lobby against the transition to digital currency, backed by consumer banks. But ultimately, digital currencies are the future.
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