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Advantages and Disadvantages of a Central Bank Digital Currency

Nowadays Central Banks are paving towards creating their own digital currencies which are diametrically different from the idealogy that drives cryptomarkets that debases the authority over money.

The central bank digital currencies endow with cash-like liquidity safety for peer-to-peer payments. The Central Bank digital currencies are traditional forms of money but will take the digital pattern. It will be issued by the relevant country’s central bank which also will be monitored by them. Like cryptocurrencies, even the CBDC’s are based on blockchain technology which is a digital ledger keeping track of all transactions in real-time.

Bitcoin is accepted as a major form of payment by many retailers but cryptocurrency is not observed as a legal tender which CBDC’s would be. Hence it would be wise to consider the pros and cons of CBDC which we will explore right here below

Pros

  • Lower transaction costs especially for institutional payments
  • It also improves access to digital payments especially to the unbanked households considering that there are many consumers who still do not possess bank accounts. 
  • If a country acts first on CBDC it will ensure they pioneer the efforts leading to them leading the market big time
  • It is also safe and cheaper as it avoids storage costs, disposal, and transportation. It is also very safe to distribute the digital currency allowing for minimized frauds. 
  • It is also technology efficient as CBDC does not rely on middle persons and also which allows for increases settlement speed and real-time payments.

Cons

  • As they are not linked to any currency the price volatility of CBDC is on the higher side as they are affected by fluctuations.
  • With this option commercial banks are likely to increase the interest rates for bank deposits that may lead to a deviation from deposit funding to wholesale funding.
  • CBDC’s also presents geographical limitations as it is only valid in the country that accepts it.
  • There also is an issue of non-reliability as they are vulnerable to electricity outages and places that suffer from poor internet connectivity may suffer.

Despite the above-mentioned Cons, CBDC’s are catching up due to the advantages it offers.

 

Image Source – Flickr

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