1 August 2020

What is the Central Bank Digital Currency (CBDC)?

CBDC stands for ‘Central Bank Digital Currency,’ which symbolizes the electronic form of fiat money of a specific country or region. The most notable part of CBDC is that it is regulated and issued by the monetary authority or law of the nation.

While CBDC is under legal regulation of the state and possesses legal value, the same is not the case with cryptocurrencies. Both of them are electronic forms of money, but Bitcoins or any other cryptocurrency like Ethereum is not issued or declared by the state and government authorities.

But the question is, why was there a need for CBDC if cryptocurrency was already around? What is the logic behind the concept of CBDC? The answer is that it was implemented to defend and protect the traditional banking system, i.e. Central Banks that function under the scope of legal authority.

Cryptocurrencies like Bitcoin and Ethereum have started to gain massive popularity in the past few years. But because of their decentralized and regulation-free characteristic, there was a considerable probability that it would become a threat to the operations of Central Banks. Many events have happened in the recent past that have justified how cryptocurrencies have promoted illegal exchanges, scams, cyber-attacks, thefts, and much more. So, in order to control this powerful influence, the leading Global Central Banks started working on the development and release of their own legal version cryptocurrencies, which is known as CBDC today.

Now let’s understand whether the United States is lagging behind other countries regarding CBDC or not. The former commissioner at the United States CFTC (Commodity Futures Trading Commission), Sharon Bowen, has said that the United States is behind in comparison to the other countries across the globe that are working on CBDC. This statement arrived during a webinar session that was conducted by the consultancy organization, Accenture, where Sharon pointed out that central-bank digital currency is capable of helping the American dollar maintain its supremacy and importance in the global economy for years to come.

She also stressed that if America does not want any other nations to intimidate or harm the value of its dollar, then it is necessary to consider the prospects of new technologies.

What Can Be Done?

It was made very clear by Sharon that it is necessary to bring various stakeholders together to provide a diversified viewpoint on the development of this digital currency. The participation of multiple stakeholders will allow the pooling of various resources together for the successful execution of the project.

In her exact words-

“It’s really important that we decide how that technology would operate alongside our existing and future financial systems… We need to ensure that these markets are free from operational risk and system outages and, you know, to make sure that we continue to have a resilient financial system.”

 

Implications of the Proposed Solution?

Sharon Bowen has shared a constructive viewpoint over the importance of CBDC that can serve as an advantage to the existing financial infrastructure of the United States. It is necessary to blend technology to favour the supply of money and monetary policy in the long run.

However, it also becomes vital to recognize the loopholes and limitations in the digital currency system to eliminate any kind of risk that would prevent the incorporation of a seamless financial administration. If done correctly, it will not just help the financial reserves of the government but also open a lot of opportunities for business organizations to boost their reach.

Are We Late to the Game?

Sheila Warren, the director of the blockchain at WEF (World Economic Forum), has added to what Sharon Bowen has said. She said that there is no doubt that the United States is indeed late to the game.

Warren has also added that it has been quite easy for developing countries to experiment around CBDC and see the opportunities that the digital currency can bring because the scope of exploration is limited to the domestic level only. The use cases for CBDC have not gone beyond the borders of these developing countries. From the very beginning, the developing countries never set the table or objective to implement digital currency for the entire global economy.

Sheila Warren has also explained that if the United States wants to build a digital fiat currency, then a lot would need to be done, like first analyzing priorities. Assessment of the priorities will help to establish a more sufficient and foolproof plan. Apart from this, identifying the problems and classifying them will also become an important task.

The Bottom Line

CBDC possesses enough potential to help the American financial system maintain its dominance and boost it, as long as the proper steps have been taken. The opinion and statements shared by Sharon Bowen can help to proceed in the forward direction. The proposed solution by Sheila Warren is yet another useful perspective that can be implemented to achieve expectations. To be ahead of the pack, it is necessary to take initiative as soon as possible.

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Edmund McCormack
Tech industry veteran and blockchain technology investor. Simplifying cryptocurrency for almost a decade.

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