Central bank digital currencies (CBDCs) are the digital form of a government-issued currency that isn’t pegged to a physical commodity. They are issued by central banks, whose role is to support financial services for a nation’s government and its commercial-banking system, set monetary policy, and issue currency. Examples of central banks include the US Federal Reserve System, the Bank of Japan, the People’s Bank of China (PBOC), and Germany’s Deutsche Bundesbank.
CBDCs are similar to—but not the same as—stablecoins. Stablecoins are a specific type of private, stabilized cryptocurrency pegged to another currency, commodity, or financial instrument with the goal of maintaining a relatively stable value over time. Unlike cryptocurrencies, which are decentralized, CBDCs are state issued and operated.Advocates of digital finance believe that new digital tools, among them CBDCs, can address many issues related to efficiency, security, and access:
Reduced costs. Financial-service providers stand to save $400 billion annually in direct costs by shifting spending away from physical infrastructure and toward digital finance. But reduced costs must be measured against the significant investments in new technology that CBDCs will require.Increased speed. CBDCs could improve the speed and efficiency of many countries’ electronic payment systems. (This argument is becoming less compelling, as we’ll see below.)Greater access for those without bank accounts.
Just under 5 percent of US adults don’t have bank accounts; in 2016, there were 1.6 billion unbanked people around the world. CBDCs accessible through mobile devices could potentially increase financial inclusion. And for providers of digital financial services, mobile money presents a gateway into untouched markets.
However, adoption isn’t a guarantee; many underbanked people may favor the total anonymity afforded by cash. Heightened security. Deploying a regulated digital currency accessible via mobile devices could potentially enhance payment security by ensuring that a transaction is finalized and unalterable—even without a formal bank account—reducing the chances of fraud. Regulated use of private-key cryptography could enable users to “sign” transactions digitally, reducing the wait time for a transaction to be irreversibly final and giving the parties greater peace of mind.
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